With yesterday’s release of music industry revenue for the first half of 2015 (see our coverage of the RIAA release here), a stark and definitive picture of how the market is crossing over from an old product paradigm (CDs) to a new one (streaming) over three years:
The RIAA helpfully breaks out streaming revenues into three buckets:
- Subscription revenue: This number represents monthly memberships in Rhapsody, Spotify, and other interactive music library platforms.
- SoundExchange distributions: This revenue comes from non-interactive Internet radio services, of which Pandora is the market leader. Royalty rates for music licensing which flows into the recording industry are set by the U.S. government.
- On-demand streaming which is ad-supported: This is where money is accounted from interactive service that also operate non-subscription listening plans monetized by advertising. Spotify Free is the leading example. This break-out is meaningful because the royalty rates are not government regulated, but set by direct negotiation.
A great deal of media swirl is focused on the growth of music subscriptions. Lost in that swirl is a key fact of the streaming audio industry: Ad-supported listening is big business. A close look at RIAA figures for the past three years shows that ad-supported streaming is bigger revenue business than subscriptions streaming:
In the chart above, non-subscription streaming combines SoundExchange distributions and on-demand streaming which is ad-supported.
The importance of ad-supported streaming is being emphasized this week by a couple of industry leaders. For Pandora, CEO Brian McAndrews placed an OpEd in Billboard in which he emphasized a key reminder: “Just because a service doesn’t require a subscription fee doesn’t mean the music is free,” McAndrews said. He noted that Pandora has paid more than $1.5-billion to rights-holders, 80% of which has come from advertising revenue. (Pandora also operates a $5/month payment plan for ad-free listening.)
Also this week, Spotify released a research report on a large-scale survey of European consumers, which illustrates how Spotify Free (the ad-supported listening plan) extends the reach of traditional radio to both new audiences, and duplicated audiences in new dayparts. The Spotify/TNS study is not a revenue report, but is clearly a pitch to marketers for realizing the audience value of “free” listening.