The U.S. music industry just reached a milestone that really should have been true all along: Americans are now more likely to listen to music than watch it on YouTube—but that doesn’t necessarily mean that musicians will make more money this year.
According to mid-year reports from leading media analytics firms Nielsen NLSN +0.13% and BuzzAngle, audio has officially surpassed video as the leading on-demand music streaming format. Audio streaming volume saw year-over-year (YOY) growth as high as 108%, reaching 114 billion streams to date in 2016 and now taking up a record 54.6% share of the entire streaming market. In comparison, video streaming volume increased by 28% YOY, reaching 95.2 billion streams to date this year. As a whole, the on-demand music streaming market saw YOY growth of 58%—reaffirming a growing sentiment in the industry that streaming is here to stay, and that the music economy must adapt accordingly.
Why is audio in particular doing so well? The answer is not simply because there are more users. Spotify did manage to grow its paying subscriber base from 10 million in May 2014 to 35 million as of this month, but the total number of audio streams grew at a much faster rate over the same time period. While Apple AAPL +0.41% Music has over 15 million subscribers, it also has a user churn rate of 6.4% each month—nearly three times that of Spotify, according to recent research by Cowen Group. Tidal, which has built its business model largely on high audio fidelity, currently has only 4.2 million paying subscribers, and acquisition rumors may dismantle its slow yet steady independent growth strategy. Pandora had just 3.9 million paying subscribers as of last quarter, a meager 4% YOY increase (it is worth noting that, as an internet radio service, Pandora falls out of the on-demand space that Nielsen and BuzzAngle are tracking).
The more appropriate answer is that existing users are now listening to even more music. In spite of their struggles to turn a profit, audio streaming services excel at designing incentives to keep users returning to their platforms. Apple Music and Tidal focus on securing high-profile content exclusives and unconventional curators such as Alexander Wang; Spotify rolls out new automated recommendation experiences such as Discover Weekly and Fresh Finds on a regular basis. Moreover, audio is fundamentally more portable and versatile than video—it is much easier to stream audio while jogging or cooking than it is to watch a video at the same time—and features such as Spotify Running are responding to this trend and expanding the number of mobile touch points for engaging with music.
Some have interpreted this news as a sign of video’s declining influence in the music industry, but that sector is still seeing impressive growth—dominated by YouTube and Vevo, and now joined even by Spotify, Tidal and Apple Music themselves as they venture into original video content. The launch of platforms like YouTube Red also points to this inevitable convergence between audio and video online. As a result, BuzzAngle CEO Jim Lidestri told Forbes that “the audio streaming sector most likely will not be able to replicate such impressive year-over-year growth in the future.”
The reports from Nielsen and BuzzAngle also reveal our increasingly bite-sized digital consumption habits, which both feed and derive fuel from streaming’s rise. While sales across all digital formats continue to decline, digital album sales are actually decreasing at a faster rate with each calendar half-year (9.2% decline in the second half of 2015 and a 9.4% decline in the first half of 2016, according to BuzzAngle). Furthermore, revenue from digital song sales so far in 2016 still outnumbers digital album sales by nearly a 9-to-1 margin ($410.5 million versus $45.9 million, respectively).
As these music sales are plummeting, an even more pressing question looms ahead: what does the surge in streaming activity really mean for the financial future of the music business? The answer is unclear in part because neither Nielsen nor BuzzAngle provides a breakdown of streaming activity from paying subscribers versus from ad-supported free users. The Recording Industry Association of America (RIAA) usually provides this breakdown in its mid-year report, which has yet to come out for 2016.
According to the RIAA, 2015 was the first year ever when streaming singlehandedly drove overall revenue up by 0.9%, bringing the music business to its first growth state in over a decade. Any claim that this growth will continue into the future rests on several assumptions: that paid streams will outpace ad-supported streams, and that the volume of video streams and SoundExchange distributions (payouts of royalties from non-interactive digital services like Pandora and SiriusXM) will continue to rise, which is ambiguous amidst increasingly heavy competition from the on-demand streaming world.