With the recent December announcement of music streaming service Spotify launching a free and ad-supported version for mobile device users, it is inevitable that the music industry will begin to see some changes in the near future. In recent years, the revenue accumulated from the purchase of physical music albums has decreased rapidly, but its competitor of digital downloads is also being impacted negatively with the rising popularity of music streaming. As a consequence of this, US digital track sales decreased for the first time ever last year.

A decrease from $1.34 billion to $1.26 billion in individual digital track sales was noted in 2013 according to Nielsen SoundScan. This was bad news for iTunes, the front runner in digital music downloads since about 2003. Through this program, users are able to purchase songs ranging in price from $0.99 to $ 1.29. This model was thought to replace the loss of profits from physical CD sales. Spotify, founded in 2006, has quickly become an alternative for the typical music listener in recent years. Users in the United States, Hong Kong, Singapore, Malaysia, Australia, and New Zealand are allowed to listen to unlimited songs remotely for free provided that they do not mind listening to occasional advertisements. And if they do, they are able to purchase a “Premium” subscription to the service that enables them to listen ad-free, with a higher bit rate, and enables offline access for only $9.99 a month.

The cause for this shift in the music industry could be that some people simply do not want to pay for music. In the past, digital downloads never efficiently combatted online piracy as it alone contributed to 31% of total North American Internet traffic just five years ago. However, with the introduction of music streaming, this pirating traffic dropped to less than 10% in the last year. These streaming services offer more than just free music for the user, but eliminate the possibility of computer viruses acquired through illegal downloading and other benefits such as a varied music library and easy to use layout. As a result, companies such as YouTube, Beats Electric, and even the French company Deezer, are planning to establish their own streaming services.

Musicians in particular hold many reservations when it comes to placing their music on these services. Some popular artists have even gone so far as to pull their music from the website or purposely keep their new releases from being allowed on Spotify due to the belief that it was negatively impacting their album sales. For this reason, the company has recently published information regarding its business model for compensating artists. In 2013 alone, the company paid out $500 million in royalties and has paid about $1 billion total since 2009, which accounts for about 70% of its revenue. Where does the money from these royalties go exactly? Well, it is dispersed to the music’s right holders who then pay a portion of the royalties to the artists, depending upon their individual contracts. There is currently no price per song model as rights holders are paid based upon the percentage of total streams on Spotify they achieve, however it is estimated that about $0.006 to $0.0084 is paid per stream. This may not seem like a lot, but through iTunes, artists usually only pocket less than 10% of total profits as well.

It is currently unclear whether the recent focus on music streaming will either benefit or harm the music industry. In order to maximize their profits, these companies would have to convert more free users to paid memberships. Despite the revenue accrued from ads on the stream, revenue from subscriptions is still much higher. And with the new ability to listen to music for free aside from intermittent ads, it is difficult to determine whether or not users will switch to a paid subscription.  As the vice president and principal analyst for Forrester Research James McQuivey states,  “When an industry shifts from being a product business to a subsidized feature of somebody else’s business, more people use your product than ever, but you get paid less and less for it until, for you, the connection between paying and using almost entirely evaporates.” What do you think we can expect from the music industry in 2014?

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