Streaming music surges, turns tables on recording industry

Michael Castellanos walked past two downtown Berkeley record stores. He had no plans to shop in either: A streaming music service subscription gave him all the songs he wanted.

“There’s a very, very wide range of music,” the 21-year-old UC Berkeley student said of the service he uses, Spotify. “I can find almost anything.”

Convenience and instant gratification are winning the music wars. Streaming services, enthusiastically embraced by fans such as Castellanos, represent more than half of the U.S. recording industry’s revenue, according to a recent report by the Recording Industry Association of America. It has fueled the music industry’s biggest revenue gain in nearly two decades, since a technology revolution began to tear the industry asunder — though there are still plenty of casualties, including record stores.

“We’ve got a completely new day with the music industry,” said Chris Phillips, chief product officer with Oakland’s Pandora, a pioneering Internet music company that once teetered on the verge of bankruptcy but recently started a $10 per month streaming service.

It’s been a long and winding road for the music industry since 1999, when the CD was king and U.S. revenue hit a record $14.6 billion.

Yet the undertow had already begun as tech-savvy music fans discovered the wonders of MP3s, which broke songs out of the rigid physical album CD format. Rogue San Mateo startup Napster then made sharing MP3s a worldwide phenomenon, shoving music and other forms of mass media unwillingly into the Internet age.

The recording industry eventually prevailed in court, proving that Napster violated copyright laws by illegally sharing songs. Napster shut down in 2002, but the name lives on as a legal streaming service formerly called Rhapsody.

Industry revenue never fully recovered, because CD sales plummeted. Sales of downloaded songs, led by Apple’s iTunes, took up some of the slack for a while. Yet by 2015, industry revenue dropped to $6.9 billion, the lowest since 1989, when cassette tapes still topped the charts.

Revenue bounced back last year to $7.65 billion, the biggest gain since 1998, according to the recording association. That was fueled by a doubling of streaming subscriptions to the paid versions of Spotify, Tidal and Apple Music, and money from ad-supported services like Pandora and YouTube, the association said. It’s a change that’s mirrored in the video industry, where videocassette and DVD ownership have gradually given way to streaming.

Streamers generated 51.4 percent of music industry revenue last year, a jump from 34 percent in 2015. Artists like Kanye West are making history with “The Life of Pablo,” the first streaming-only album to be certified as a platinum hit.

Hannu Verkasalo, CEO of the New York research firm Verto Analytics, said streaming is expected to account for 60 to 65 percent of total music revenue in the U.S. next year.

When services like Pandora were smaller, they were unable to pay as much as the record labels wanted, especially to help make up for the disruption of the old business model of people buying CDs. Pandora, one of the first companies to offer streaming and personal song selections, “used to be a thorn in our side,” said Cary Sherman, CEO of the Recording Industry Association of America, which represents major music companies.

Now that the services are established, with advertising and paid subscriptions bringing in revenue, that hostility has largely subsided.

An October report from Goldman Sachs called streaming the industry’s “stairway to heaven,” projecting global revenues to hit $100 billion by 2030.

“We’re very heartened by the growth that we’re seeing that’s all been driven by subscription services,” Sherman said. “But we really don’t know how much this growth will continue. All of us in the entertainment space are competing for the attention of consumers. A ‘Pokémon Go’ can suddenly come along and eat up some of that mindshare.”

Downloaded music dropped to 24 percent of the revenue last year, while CDs and vinyl records made up 21.8 percent and continued to “decline significantly,” the association said.

Could the industry be further along if it had embraced streaming from the start, including accepting a $1 billion, five-year licensing deal Napster once offered as a peace settlement? Sherman said the answer is complicated for many reasons, especially because of how music delivery technologies have evolved.

“You just can’t go back to year 2000 and say, ‘Well, if they’d just licensed Napster, it would all be OK,’” Sherman said. “It’s been a very long road to get to the point where the market is beginning to turn around. There were a lot of lessons along the way we didn’t expect.”

Russ Crupnick, managing partner of the music and entertainment industry research firm MusicWatch, said no one could have fully predicted how technology would change.

“It wasn’t that long ago when we were talking about the whole iTunes-iPod revolution,” he said. “I don’t think anyone would have guessed that era wouldn’t really last that long in the scheme of things.”

Apple’s 2007 introduction of the iPhone spawned the smartphone era and pushed streaming to the forefront, making music accessible anywhere through a mobile wireless or a Wi-Fi connection. It also saved Pandora, which “was about a whisker from bankruptcy,” Crupnick said. Pandora still struggles against Spotify and Apple Music, and in January it announced it was cutting 7 percent of its workforce.

The biggest catalyst for streaming’s strength is Apple Music, which started in June 2015. It’s grabbed about 19 percent of the U.S. audience because it was tightly integrated with the iPhone lineup, Verkasalo said. Pandora is second with about 15 percent and Spotify is third with 14 percent, but the overall market is growing, Verkasalo said.

New York resident Michaela Foti, 23, said she doesn’t mind subscribing to two or more streaming services, but won’t buy any more CDs.

“The music industry is moving so fast, new genres are popping up, new artists are exposed, and CDs and downloads don’t move fast enough,” she said.

Castellanos, a UC Berkeley business major, enjoys sampling a wide variety of genres with Spotify’s $5-per-month student rate. That’s another industry change — streamers easily move between rock, country, R&B, jazz and classic songs.

In the past, “You had to go to a record store, buy and listen to one album,” Castellanos said. “Only if you had a lot of money and a lot of time on your hands could you listen to a variety of music. Now, with so many options, my generation’s tastes are very diverse.”

Musicians have still complained that streaming services don’t compensate artists enough. Taylor Swift pulled her catalog from Spotify in 2014 and openly complained about Apple Music’s royalties in 2015. Jay Z pulled most of his catalog from Spotify this month, although he is a co-owner of the artist-owned streaming service Tidal.

Independent San Francisco musician Robert James Nicol, who performs as Robb James, said streaming hasn’t filled his bank account enough for him to quit his day job.

“As far as streaming services go, you need to be getting hundreds or millions of plays to make any money,” said Nicol, 27. “We’re at the small-business end of the spectrum. Most of us are in it for the love of the game at this point. We’re not making a ton of money off it.”

Even when money was flowing from CDs, relatively few struck it rich, said MusicWatch’s Crupnick.

“It’s always been a tough business,” he said. “There’s this myth that artists were just sitting back and living off CD royalties. There were some who were doing that, but not a whole lot.”

However, he said, streaming offers musicians a better chance to gain attention.

“You have a lot better chance of getting onto a Spotify playlist than a radio station playlist,” Crupnick said.

Streaming has been bad news for record stores, which have been disappearing since 2000. CD sales have suffered a lot, not least because some artists release an album online a few weeks before the CD, said Rochelle Lunsford, manager of the Rasputin Music & Movies store on Telegraph Avenue in Berkeley. “So it’s way easier and more convenient just to go online and get it there.”

Still, a resurgence in interest in vinyl records has helped bring in customers, and there are loyal ones who “just don’t like streaming for whatever reason,” she said.

One is Berkeley’s James Branch, who said he’s “around 55.” He drops by once a week to shop for CDs and Blu-ray movies. “I’m not that much a streamer,” he said. “I still like CDs. They sound better.”