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Streaming technologies driving global music resurgence

London, 07 Oct 2016

Revenues from music streaming services are tipped to increase exponentially over the next decade, with the technology buoying a resurgence in growth in the music industry globally.

Much of this growth is expected to be led by emerging economies, with the increase in paid music streaming services seen as a revolution comparable to that undergone by the video industry after the arrival of the set-top box.

“Music is about to start the journey that has led the video entertainment industry to quadruple over the past 30 years,” says Macquarie Securities senior media analyst Giasone Salati.

The proliferation of successful streaming platforms such as Spotify, Apple Music, Tidal, Pandora and Amazon Music, combined with a record high rate of conversion from free to paid streaming subscription services, has led Macquarie to forecast that streaming revenues will increase nine-fold by 2025.

In 2015, global sales of digital music overtook sales of traditional physical formats for the first time.

Digital revenues now account for 45 per cent of all industry revenue, compared to 39 per cent for physical sales. The fastest growing source of digital profits is streaming, where revenue increased by 45.2 per cent over the last year, offsetting a decline in both downloads and physical sales, according to the International Federation of Phonographic Industry .

Salati credits streaming for driving a hard-fought turnaround within the music industry, which registered eight per cent growth in the first half of 2016 in the US after declining by more than 70 per cent in real terms since hitting an industry peak in 1999.

The reason behind this growth is that streaming services are offering the right mix of convenience, affordability and range of music for consumers to be prepared to pay a monthly fee for access to a platform’s full catalogue of music, says Salati.

“Ease of use is higher in music streaming and the service is better. You can build a playlist in seconds and there is more functionality than CDs or iTunes ever offered,” he explains.

Spotify provides a good example of the willingness among consumers to pay. On its free tier, users can listen to Spotify’s music catalogue but songs are regularly interrupted by advertisements. On the premium paid tier, the music is available advertisement-free and consumers can download tracks for offline listening.

Currently, 28 per cent of free Spotify listeners like streaming so much they have converted to the premium model – a trend that will continue to drive increased revenues industry-wide. The launch of Apple Music as a paid tier-only service in 2015 also acted as a catalyst to attract even more consumers to paid streaming.

Macquarie forecasts that streaming platforms will evolve to accommodate a greater range of budgets and tastes in a similar way to pay TV. Services will add even lower price points for the casual listener, as well as higher price points that offer special premium content.

That content could include live streaming of concerts, special previews of new albums and interviews and Q&A sessions with artists.

To date, much of the focus on industry trends has been on the five largest markets of the US, Japan, Germany, the UK and France, which in 2015 accounted for 75 per cent of global music revenues.

But it is smaller markets such as China, Australia, Argentina, Italy, Canada and the Netherlands that are contributing most to global industry growth.

In coming years, emerging economies in Asia and Africa, where consumers are not currently spending money on music, will be major new sources of revenue as platforms begin to enter those markets to cater for a growing local middle class.

“The long tail of developing and emerging markets is going to be what drives industry growth into double digits,” Salati explains.

Contributing to Macquarie’s confidence that streaming technologies will continue to transform the global music industry is the fact that it is younger demographics that are most supportive of the services, including paid subscriber models.

Currently, more than 70 per cent of subscribers to both free and paid for platforms are younger than 35.

Salati says it is a common misconception that most paying subscribers come from older demographics while younger people either pirate their music or use services such as Spotify’s free tier.

“Our statistics show exactly the opposite. This means streaming revenue will continue to grow because it is coming from younger generations who will continue to use, and pay for, the platforms as they grow older,” he says.

Find out more about Macquarie’s research capabilities.

For more information on the report "Global music investing – Top picks to ride the next music wave" (9 June 2016) contact Macquarie Research.