music money

Igor Zubkis/Shutterstock


Will the recorded music industry ever grow again? Since 1999, the industry has been in rapid decline as CDs became unbundled into downloaded singles. The digital download market never came close to the size of the physical music market. Now we are in the midst of another format transition, this time from downloaded singles to streaming.

The question many people ask — like the thoughtful Marc Geiger — is how big will the streaming market be? I think the answer lies not in consumers’ appetite for streaming songs, but in the price services charge consumers for streaming.

Music Industry Pakman 1

At the 1999 peak of the recorded music market, about $40 billion of recorded music was sold. How much did the average consumer spend per year on recorded music? Hundreds of dollars? Nope. At the time, according to the music trade group International Federation for the Phonographic Industry, across the total 18-and-over population (both across many countries or individually within one), the average amount spent came to $28 per consumer.

But that includes people who did not buy any music that year. If we look at just the consumers who bought music, they spent $64 on average that year. And that was at a time when one had to buy a bundle of 12 songs in the form of a CD in order to get access to just one or two. What has happened since?

Once the bundle broke, the average spending per consumer decreased. This is predictable, since bundles artificially raise the amount of total dollars a consumer spends. The chart below shows the average spending per capita in various countries according to IFPI (in U.K. pounds):

IFPI Pakman 2

Another study by NPD Group in 2011 found similar spending, about $55 per music buyer per year on all forms of recorded music (they note that this spending is slightly higher among P2P music service users).

NPD Pakman

But the one retailer on the planet who would really know what consumer are willing to spend on recorded digital music today is Apple. The largest music retailer in the world, their data is very consistent — about $12 per iTunes account per quarter is spent on music, or about $48 per year.

Note that this figure declines year by year as iTunes users are confronted with many more choices on which to spend their disposable income, like apps and videos. Also note that total disposable spending, on average, is decreasing per account as iTunes gets bigger and bigger. As a service becomes truly mass market, it reaches fewer and fewer consumers willing to spend as much as previous consumers.

Apple Pakman

So, the data tells us that consumers are willing to spend somewhere around $45–$65 per year on music, and that the larger a service gets, the lower in that range the number becomes. And these numbers have remained consistent regardless of music format, from CD to download.

Curiously, the on-demand subscription music services like Spotify, Deezer, Rdio and Beats Music are all priced the same at more than twice consumer spending on music. They largely land at $120 per year (although Beats has a family-member option for AT&T users at $15 per month.)

This is because the three major record labels, as part of their music licenses, have mandated a minimum price these services must charge. While it may seem strange that suppliers can dictate to retailers the price they must charge end users for their service, this is common practice in digital music. The services are not able to charge a price they believe will result in maximum adoption by consumers.

The data shows that $120 per year is far beyond what the overwhelming majority of consumers will pay for music, and instead shows that a price closer to $48 per year is likely much closer to a sweet spot to attract a large number of subscribers.

For this reason, I believe the market size for these services is limited to a subset of music buyers, which in turn is a subset of the population. This means that there will be fewer subscribers to these services than there are purchasers of digital downloads unless one of two things happens:

  • (a) Consumers decide to spend more than two times their historical spend on recorded music, or
  • (b) major record labels allow the price of subscription music services to fall to $3–$4 per month.

I think the former is highly unlikely, given the overwhelming number of choices competing for consumers’ disposable income combined with the amount of free music available from YouTube, Vevo, Pandora and many others. The data shows consumer spending per category decreases in the face of many disparate entertainment choices.

The latter is the big question. My experience with the major labels when I was CEO of eMusic was that they largely did not believe that music was an elastic good. They were unwilling to lower unit economics, especially for hit music, to see if more people would buy. Our experience at eMusic taught us that music is, in fact, elastic, and that lower prices lead to increased sales. If the major labels want to see the recorded music business grow again, I believe the price of music must fall.

After 12 years as an Internet entrepreneur, David Pakman joined Venrock in 2008 as a partner, and focuses on early-stage Internet and digital media companies. He is on the board of Dstillery, Dollar Shave Club, Smartling and other Internet companies. Reach him at his blog and @pakman.


Hi David,

Excellent piece. One thing to consider also is that the labels aren't willing to drop the price of subscription because of the product offering. All these services are providing the same product: as much music as you can listen to for $9.99 a month. It's really one of two subscription products that are currently in the market, the other being the paid radio tier that Pandora and Slacker sell. 

It's my belief that to increase the number of people willing to pay *anything* for music, it will require more innovation around the product. There have been some steps towards this in Europe with, a service that allows customers to download 20/200 or unlimited number of tracks to your phone for different prices and O2 Tracks, a service based on UK's Top 40. 

I don't completely agree that the average revenue per user is something fixed. I mean before cable television the average revenue per user for those who watched TV was zero. Same with water consumption before bottled water. The people offering the service found a way to build perceived value. 

However, expecting someone to double their spend when the product it actually going the opposite direction--free--is a pretty big hurdle of the music business. 




When competing with a free price model such as P2P piracy, the optimal solutions are:  offer the simplest possible path toward getting at your music with extra bonus features that pirate sites don't have yet such as an `if you liked this, you might also like` feature, make sure your library of music is as large as feasibly possible, allow for direct linking of favorite songs to multiple social media sites, then offer a monthly subscription service with unlimited downloading and no DRM, so that the consumers aren't paying for the music, they're paying for the streamline convenience, the ease of service being provided ...

Constant Context
Constant Context

 the music industry won't have a Netflix moment until cars have their own data plans, there is really nothing worth mentioning until that's ubiquitous, other than the value of curation, sure you can hunt out your own little playlist and that's wonderful but i believe the more things music curated by reznor, knowles, whomthefuckever that is a professional will be able to compete with your cool/uncool friend's 'mixtape' playlist and or 'i'm feeling lucky' they are good but it's limited to you and your friend whereas pro curation (or at least that which is marketed as curated by reznor, knowles, whomthefuck) will get people paying $X.99 per month, so when do the backroom deals on bits enable this pie to get baked?

are there any fucking questions?


If the music business' future depends on record companies catching a clue then the industry is doomed, and it won't be because of those scapegoat "pirates". It will be because the dinosaurs failed to adapt.


Great research here. While it has dropped how much money consumers will spend per year on music, it isn't like everyone is trying to get everything for free. For me, Spotify and other one demand channels aren't enough of what I want to justify the subscription.

Sharky Laguana
Sharky Laguana

There is, I would imagine, fairly wide variance in consumer spending habits, so focusing on an average spend per year might be missing an important point. There are superfans and record collectors who spend tens of thousands of dollars a year on music, and there are casual listeners who might by a $1 single just once in their life. None of the graphs you display appear to address this uneven distribution of buyers which surely must exist. 

The reason this is relevant is that a sizable chunk of that $40B in revenue was likely made up of comparitively smaller group of buyers. However from the streaming services perspective all buyers are the same: you either pay the monthly fee or you don't. There is no revenue difference for them between the casual buyer and the superfan. Consumption rates don't matter. So it's a simple problem from the streaming services perspective: what gets the most amount of revenue in the door? There's a number that represents the ideal vector between price and # of subscribers, and you may very well be right that that number is closer to $4 or $5 a month than it is to $10. 

However both labels and artists have things to think about beyond just how many subscribers a streaming service has, or whether the streaming service industry is doing well overall. 

If, as an artist, I sell a single record for $10 I get $3 from iTunes. If I sell a physical vinyl album I might get as much as $7 or $8 after expenses. If I can acquire just 5,000 fans, which is a fairly small number, I can generate anywhere from $15k to $40k in revenue. That's before merch and other revenue I might make from some of the superfans. That's enough to make a modest living, continue to refine my craft, and see if I can grow that number to 10k fans or 20k fans.

But if I have exactly the same number of fans on a streaming service I will get a pittance unless each and every fan streams my music tens of thousands of times. Which of course is not how people consume new music. 

So from the perspective of a new artist, reducing the price of streaming would be devastating. The only ones who will make any money will be those with millions of people listening. At ~.04 cents a play I don't stand a chance with just 10k fans. The income gap between the haves and the have nots will only further widen.

So there's a dramatic difference in how both artists and labels value the superfans and how streaming services see them. 

The next problem is that to the streaming services not only are all customers the same, but all streams are the same. I pay $10 for Beats so I can hear new music when it comes out. The value proposition of the service is driven by new music and that's what I'm paying for in my mind. But in practice I listen to new music once or twice and my curiousity is satisfied. If I purchased the records on iTunes the artist would at least get a couple bucks. But since I'm streaming them they will be lucky to get a couple pennies. Meanwhile my wife listens to Fleetwood Mac constantly. The streaming service has replaced the CD player, and that's fine, but I don't need to pay $120 a year to listen to one or two Fleetwood Mac records, and that's not what I'm paying for. If that was the goal I would just buy the Fleetwood Mac records once and be done with it. But thanks to my wife's listening habits I would estimate 80-90% of the royalties generated by my subscription are going to Fleetwood Mac or other legacy artists. There's an obvious inequity here: legacy acts are benefitting from the value created by new artists and new streams, and it's a one way street.

Labels make money off of sales too. They are going to apply their energies where the margins are, and the margins are clearly much higher in sales then they are in streaming. So if streaming undercuts sales (and in my limited experience it absolutely has dramatically reduced my music purchases) and streaming pays less there's not a whole lot of incentive there to increase the proportion of the music business that lies in streaming.

So the bottom line is reducing the price of streaming would no doubt be great for the streaming services, and is a clear win for listeners, but it appears unlikely to generate a net benefit to the labels, and has the potential to be extremely damaging to new and not-yet-established acts. 

In San Francisco I constantly hear start-ups talk about the need to reduce friction with consumers. Of course there is a way to eliminate friction completely: just give it away for free. Sometimes that's a workable solution if you have another paying customer in mind (advertisers for example), but at the end of the day somebody has to pay *something* or there's no point in doing it. Lowering the price may help streaming services, but how is it going to help labels and new artists? I remain skeptical but have an open mind if there's a sensible response.


Doesn't the larger macroeconomic picture make the situation with streaming look worse?  I mean, in the 90's, anyone who could spell "job" had one, and the middle class had more disposable income to buy luxury items like CDs.  

While I agree unbundling will naturally lower prices, aren't we also seeing the impact of the lack of disposable income forcing people to cut luxuries out of their lives?


Or labels could allow streaming cos to deliver more value, e.g. allow 'family accounts' at the same price point. While this would reduce per user revenue on the balance sheet it's merely a reflection of reality.

I'm a Spotify subscriber. Kids have the app on their phones using my account. So by one measurement my household pays ~$3-4 per user. Since Spotify won't get more $ from me, and I'm inconvenienced due to their activation rules, why not let the kids have their own user (sub)account, collect their data and assist labels better understand their customers? I hear you laughing David ...


Thanks for another great set of insights David.  Always quality.

1) What would it take for streaming royalties to halve for this optimized model to happen?

2) Why, in your mind, is the industry so focused on unit economics of ARPPU (average revenue per paying user) vs. ARPU (average revenue per user, including all freemium users)?

3) Finally, given the number of royalty/rights holders involved for any streaming service, is there any simple way to test more pricing models like yours or is that just impossible?


@cphenner:  you definitely have a point when it comes to the other revenue streams that artists are focused on.   Certainly, they may consider exposure via streaming services to be essentially a loss-leader to help them generate money in other spheres.

But in general I think the article is focused more on what the labels can do to increase the consumption relating to them.  To the extent that they make money solely (or largely) from recorded music, and to the extent that the digital download market will never come close to replacing what went before with physical distribution, they must surely be focused on how to grow revenue from the streaming services.  It's clear that the 9.99 (in pounds, euros or dollars) model is not a mainstream proposition.  The streaming services will never have mass appeal at these price levels - however many people tell us that 9.99 seems like great value to them.  

It's also clear that consumers' expectations are increasingly based around getting whatever music they want at no marginal cost.  An all-you-can-eat streaming service is the best way to do this.  To be sure, there are some marketing and technical innovations that can help as well to grow service adoption, but if the marketing geniuses at Beats are - as I hear - surprised by the very low conversion from free to paid that they are currently seeing - that can perhaps only take you so far.   

Price is the most significant lever here.   It's also the most quantifiable and therefore the easiest to test.   Why shouldn't the labels at least allow some streaming services to test a lower price point for the same service to see what happens.   They can do it on a limited basis in confined markets.  What do they have to lose?


David: Great to see your post and whether 'recorded music will ever grow again.' I also wonder if that is the right frame.

'Share of consumer wallet' is one approach, but we already see artists making money in so many ways. So many analyses focus on per-track and per-stream earnings that it makes one wonder why so many artists put their music on streaming services.

Or whether 'share of consumer spend' is an indicator worthy of focus.

My meetings with artists and labels last week in Austin spent no time on consumer revenue streams when so much more is at stake via longer-term, stream-based revenue that happens via streaming services and via YouTube ad-sharing revenue.

I remain hopeful that longer-term revenue via streams and ads -- more likely to flow from brands -- far outstrips whatever 'share of wallet' may happen.

Perhaps there is a lower consumer price point that may drive volume, but I did not hear anyone holding their breath waiting for that to happen or caring much about it.

Again, I love to see you thinking and posting on the topic and hope what I say above is constructive and useful for your work.



Apparently I am a gross anomaly.  I have subscriptions to XBox Music, Spotify, Google's All Access Music, and DJ Radio.  It's a convenience thing.  On my Windows PC - XBox Music is the most convenient, but I like playlists and what music is available on Spotify more.  So I switch between those.  On my Android phone, Google's All Access is the mot convenient, but sometimes I enjoy being exposed to new things on DJ Radio and Uberhype and use those instead.  Uberhype is currently free.

I have considered dropping some of them because they are very situational, but I haven't so far.  And I've been subscribed since they started.


I arrived at this article ready to post something about how music could hardly get much cheaper as a consumer proposition, but it's actually a well argued piece. Personally I think £9.99pcm for Spotify is fantastic value, but since they haven't reached mass penetration in many markets, I can't be representative of the masses.

I'd contest the suggestion that lower prices lead to greater track sales though; when variable track pricing was introduced on iTunes (59p/79p/99p instead of the regular 79p), it was quickly found that changing the price in either direction had little real impact on volume. Dropping the price didn't drive enough extra sales to compensate for the loss in margin, and raising the price didn't damage sales significantly either. 

A far more important factor was: "is the song good/popular?"

So if you ever see a new release priced at 59p, you know that the label is basically desperate, and trying the price drop as a last-ditch attempt to lift the song up the chart.


@Sharky Laguana while you make a few valid points, I am left to wonder if you or agraham999 really read the article that closely.

The author did in fact cover the spread of what people are willing to spend on music. Did he sum it up in a nice neat graphic and spell it out in simple words? No. What he did say was that as the size of a market grows it attracts people who aren't willing to spend as much on the service which brings down the average price.

That is why the average expenditure is a very valid metric for the message of the article. At the current prices the streaming sources are basically being forced by the record companies to exclude the larger market which includes people who aren't willing to spend as much on music.

The real danger of this is in habit and conditioning. With so many ad supported sources out there, many of those customers may simply become conditioned to use these other services for their music source.

I hate to say this, but this is basically the CD to digital move all over again, and the music execs have still not really learned their lesson.


@Sharky Laguana  you don't see a lot of well reasoned and thought out comments, but I'm going to recommend this one as one of the better ones I've read in an incredibly long time. No negative comments about some invisible greedy record exec, no complaints about past grievances against the "industry," just a fucking great comment without any insults or firebomb language. More of this please. add to your comment...

1. The current models of streaming revenue don't really have any room for growth. Industries have to grow or can't just have flat revenue and what we're seeing here is a structure that unless it can convince listeners to spend more as a value going to have a tough time expanding their business. Any value adds that might be service based don't translate into revenue for rights holders...meaning better services don't translate to increased artists get poorer which tech companies get richer.

2. The music industry employs many more people than any of these articles ever seem to pay any attention to...there are songwriters (who don't have merch or tour), there are carpenters, instrument makers, recording studios, people who manufacture parts for instrument makers, caterers, electricians, engineers, etc...the list goes on and on, and if we see a collapse of the current music industry...all these jobs are lost as well.  

3. As for this's obvious that the conclusions aren't really accurate. Some people are absolutely willing to spend more on music than others and therefore make up the difference for those that do not, or we'd not have seen a $40 billion market...and if everything is streaming, we don't have any "product" which would increase sales for the industry which includes rights holders and streaming companies. It actually looks like a dreary and sad marketplace that flatlines and takes any hope of breaking through as an emerging artist with it. 



I winced when I saw the below:

' the extent that the digital download market will never come close to replacing what went before with physical distribution...'

I don't know with what basis one can say the 'digital download market will never come close to replacing what went before...'  

If there were a way to set a calendar reminder to email ourselves this thread in 20 years (or more), streaming (at whatever price point) may make physical distribution look tiny some day.  In fact, how can that NOT be the case -- consider the global reach and efficiencies.

Appreciate your engagement, and I think we may be seeing the Dead Cat Bounce we have opined about for 15 years, with streaming as buttress of all U.S. recorded music sales (and wow).

David Pakman
David Pakman

@cphenner  Clearly, artists have adapted to the free-fall of the recorded music market and have found (returned to?) other ways to get compensated for their work. It is not surprising to me that artists and labels alike do not think much about lowering the price of recorded music after fifteen years of a shrinking market and lower earnings. Nevertheless, the data shows the price of music generally is not optimized for getting the most number of people to pay for it and without changes, the industry will continue to shrink.

David Pakman
David Pakman

@yodaniel  I have never seen actual data on iTunes variable pricing to conclude that no songs demonstrate elasticity. I believe the data will show that, for some parts of the catalog, sales increase at lower price points. Our empirical data at eMusic showed this clearly; for catalog music, lower prices increases sales. It is probably true that for hit tracks, increasing the price by 30% did not decrease sales. So, not all songs demonstrate the same levels of elasticity. 


@cphenner  "how can that NOT be the case -- consider the global reach and efficiencies" - because of the price the record companies (surely illegally) have conspired together to ensure that streaming services must all charge.  

If they could just let go and stop trying to control everything, perhaps we could find a level at which paid consumption of music would achieve mass adoption.  Sort of like it used to be, but in a world now where increasingly - as I said before - the expected marginal cost of listening to a track is zero.  If that doesn't happen - and almost certainly it won't unless the labels are forced into it - I would be happy to wager anything you like that your dead cat will be staying 6 feet below the surface.

Appreciate your engagement too!


@David Pakman @cphenner  I disagree...the solution isn't decreasing's creating new sources of revenue. Again you keep talking about artists...artists are only a portion of a larger industry. Tell me...when songwriters get smaller percentages than artists when it comes to will they support themselves? T-shirts?

Lower prices may mean faster adoption, but it also means Spofity has less money to pay on royalties...and keep their own business growing and compete against companies like Google or Apple. 

Without new solutions for revenue that benefits more people employed in the industry, then yes the market will continue to shrink. The music industry cannot simply support itself on a $5 a month account regardless of how many users you convert...the numbers just aren't there and more and more reports lately are showing this reality. 


@David Pakman

Hi David.  I was just reading this morning's RIAA figures, and the passage struck me w/r/t your 'continue to shrink' comment above.

'2013 sales results show the continuing emergence of streaming music models as meaningful contributors to industry revenues. As recently as 2009, 95% of US music industry revenues came from 

traditional purchasing (with the majority in physical formats). 

In 2013, 21% of revenues came from streaming models, where fans can listen to vast libraries of music either for free or as part of a subscription, and nearly 2/3 of total revenues came from digitally distributed formats. All of this shows the music industry today has grown into a diverse digital business teeming with a wide variety of innovative services catering to all types of music fans.'


@SuChef @cphenner  Mass adoption won't support even the 2012 global music industry. The problem is that conversion rates and revenue just isn't there to keep the whole system afloat and only massively popular artists and legacy catalogues pull in the big money. 

Everyone always talks about "the labels" but that ignores other realities of the industry as a whole. 

Let's take a look at the UK music industry, which makes up about 60% of the global market. 

Recorded music (labels) account for only about £634M in revenue, while musicians, composers, songwriters, and lyricists make up £1.6B. Music publishing is also about £400M. Songwriters don't sell merchandise and they don't get a 50/50 split on royalties. They get less than a mechanical sync royalty....I believe its around 15%. 

Streaming, therefore, mainly rewards the mechanical recording...and that's really only as it hits a certain scale. 

Record companies (the majors) currently get large checks from the streaming companies (which is mainly borrowed VC money), because they have huge catalogues of all the popular music. That leave indies and smaller artists out of these negotiations. They don't get any cash upfront. 

We need to get away from the simplistic discussions that talk about "labels" because they aren't the entire music industry and it takes a lot of focus off the future which are new artists going to come up or make it in this business, when no one values them enough to put money into supporting them? 

The reason the record companies can't let go is because the only thing they control any more is the rights they hold on this media...they've lost distribution, promotion, sales, etc...all controlled by big tech. This is the only thing they still control and if you were in their position you would as well. 

Remember, no streaming company is profitable to date and the numbers aren't really looking positive...companies like Spotify are built on a shaky foundation on media they don't own...and no guidance or real proof anywhere that they can be profitable. 

And also keep in mind...we're heading towards a future where in maybe 2'll only have 5 or 6 providers to get your music from. 


Get every new post delivered to your Inbox.

Join 299,840 other followers