A look into the music streaming business model

The advent of the Internet produced plenty of digital wonders, but it also put many businesses at major risk—including the music industry. Gone are the days when enjoying music can only be done by purchasing a CD (physical or downloaded) of your favorite artist or listening to the radio whenever top hits are randomly played. Illegal downloads through file-sharing sites dramatically reduced sales and many record labels, artists, and songwriters lost huge potential income. But then, Spotify and Apple Music (and a few other similar services) came into the picture and ‘saved’ the industry by creating a new business model that may actually address issues on piracy as well as help the business return to its glorious form.

Image source: softonic.com

Music streaming is a relatively new form of accessing music services, which was previously dominated by radio playlists and album purchases. In this type of service, customers use the Internet to play songs based on their personal preference without the need to download the entire material. It is effectively music-on-demand, and can be played using computers or mobile devices. Of such type of business, Swedish company Spotify, seemed to have successfully built a strong following around it.

Image source: yologadget.com

The Spotify revenue model is based on advertising (free music streaming limited to 20 hours per month supported by advertisements) as well as paid monthly subscriptions (unlimited streaming to PC without ads or unlimited streaming to PC and mobile without ads with additional off-line listening on mobile phone). The company has signed deals with various music giants, including the Universal Music Group, Warner Music Group, and Sony Music Entertainment to fill up its library and attract more customers. Music owners earn based on their market share from total streams.

Image source: le-vpn.com

While many customers are still considered passive listeners and mainly access Spotify under its ads-supported service, sales of paid subscriptions are growing and may soon outpace the declining purchases of music, whether downloaded or on a CD. Physical sales went downhill to 14 percent while downloads also plummeted by a double-digit percentage. Streaming offers a reliable future because the cost of a year-long subscription—around $120—is much higher than what an average consumer would spend on CDs.