Music Makeover

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SummaryThe music industry is shifting from downloads to streaming—but not too many users are paying

The shift to the digital format has meant that the music industry has gone through substantial changes in the way users purchase music. Earlier, consumers had to buy entire albums even if they wanted to listen to a few songs. Now, with the likes of Apple’s iTunes and Amazon’s MP3 store, users can buy single tracks at pretty reasonable prices. This was a concept wholeheartedly embraced by consumers—digital paid downloads saw continuous growth over the last decade. But technology is yet again forcing the music industry to adapt. According to various reports, it looks like music downloads are slowing. Nielsen recently released figures showing that paid downloads this year were lower than they were last year—682 million in June 2013 compared with 698 million in June 2012. The Annual Music Study released by NPD also confirms a trend of flattening growth rates. The culprits for this slowdown are companies like YouTube, Spotify, Pandora and iTunes Radio. Users increasingly prefer to stream their music online rather than download it, and these companies are capitalising on that trend. Indeed, this ongoing shift to streaming is one of the reasons Apple decided to introduce its radio service despite having more than 60% market share of paid music downloads. These companies allow customers to listen to huge catalogues of music for as little as $3 a month, and have been seeing their subscriber numbers growing tremendously. Spotify, for example, grew its paid user base from around 2 million in September 2011 to almost 6 million in March 2013.

But there is a problem here. Of the total user base, paid users account for a tiny percentage. Pandora, for example, has over 70 million users, but only 3 million of them reportedly pay. One of the benefits of online streaming is that it is reducing music piracy, but what good is that if on-the-book revenues start to take a hit?

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