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.
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):
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).
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.
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.