Why music streaming is hitting a chord with investors

When was the last time you bought a music CD, or downloaded a song on the internet? It is perhaps too hard to recall. 

Your experience perhaps reveals how quickly the global music industry has been transforming in recent years.

Over the last two decades, recorded music has gradually shifted from physical distribution to downloads, and now towards online streaming.

As the world enters the digital age, online streaming has become an increasingly common way for people to consume music. Nowadays, there is no shortage of people listening to music through their mobile phones during a bus ride, at their meals, or even when walking on the street.

Gone were the days when people queue up in front of music stores waiting to buy CDs, a phenomenon so common in the 90s when the internet was still barely accessible.

The popularity of music streaming applications has also put an end to music downloads, which had been the most common ways of consuming music at the turn of the century.

Now, music is just a click away on the mobile phone. Music lovers no longer need to search for songs and albums one at a time, because streaming apps like Spotify and Apple Music give users access to an almost-unlimited list of songs in return for a monthly subscription.

Digital music has clearly become the new driver for the industry. According to the International Federation of the Phonographic Industry (IFPI), digital music accounted for half of all global music revenues in 2016, with music streaming revenue rising 60.4% on a year-on-year basis. In contrast, music download revenue fell by 20.5%.

DISRUPTION

Some industry experts are hopeful that the music streaming revolution could revive the global music industry, which has been devastated by copyright infringement in recent years.

“Traditional music is integrating with the internet very nicely,” said Peng Jiaxin, CEO of Tencent Music Entertainment Group, China’s largest digital music distributor. “It is now the golden era for the music industry and music producers are more willing to try out new opportunities.”

Copyright infringement has been a long-standing issue dragging on the development of the global recorded music industry. According to the IFPI, the industry shrank for 12 consecutive years between 1999 and 2011, with total revenue falling by 38% from $23.8 billion to $14.8 billion.

In the age of physical distribution, unauthorised and counterfeit CD copies have eroded a significant part of music labels’ revenue. These problems became more detrimental in the age of downloads, since it was almost impossible to stop users sharing their music online.

As a matter of fact, online streaming has solved part of the copyright issues since music streaming apps offer music access, instead of ownership, thereby limiting the chance of producing unauthorised music items.

Record labels can now more effectively promote their artists and songs in collaboration with streaming platforms, which have access to a large group of their target customers. They now concentrate their marketing campaigns around various streaming platforms, instead of spending on mass media like TV and radio ads, or through flying billboards.

THE VALUATION BOOST

In the corporate world, the massive potential of music streaming is being reflected in the rising market value of streaming apps and online music platforms.

A recent success case is Spotify. Although the streaming app is yet to record any profit, it completed an initial public offering of shares in New York at a higher-than-expected valuation of $26.5 billion.

This suggests Spotify is now bigger than Universal Music Group and Sony Music Entertainment, the world’s largest music labels, estimated to be worth $23.5 billion and $20.1 billion respectively.

China’s Tencent Music Entertainment, which entered into an equity swap with Spotify late last year, is worth some $12.7 billion according to equity analysts and is expected to list in Hong Kong this year.

Aside from the public market, streaming apps are getting traction in the private sector.

In the largest transaction in Asia’s music industry, South Korean social messaging service provider, Kakao, bought Loen Entertainment, which operates the country’s top music streaming site Melon, for W1.88 trillion ($1.6 billion) in 2016.

Tencent, the Chinese internet giant behind Tencent Music Entertainment, invested $115 million in Indian music streaming app Ganna in February.

CHALLENGES

While the investment community is upbeat about the prospects of music streaming platforms, it remains doubtful whether the business model is sustainable. Profitability and competition are among the major challenges facing these streaming services.

“Most streaming platforms are yet to achieve a profit level that is operationally sustainable,” said Keri Chong, marketing manager at KKBox, a Taiwan-based music streaming service that is widely used in Southeast Asia.

According to Chong, music streaming service providers could only retain a small part of the monthly subscription revenue. About 70% of the revenue is paid to music labels and songwriters for the right to distribute their content. They also have to bear the royalty fee paid to telecom carriers and retail partners.

Apple Music VS Spotify

While music streaming is a growing industry, competition is equally intense. In addition to Spotify and Apple Music, nearly every major Asian country has at least one local music streaming service (see chart below).

However, the biggest competition facing the entire streaming industry is perhaps YouTube. The Google-owned platform, which has around 1.5 billion monthly active users, remains the single most-used website in the world to listen to music legally.

Similar to Spotify and Apple Music, YouTube is a major platform for music labels and artists to promote their content. However, they are subject to much higher licensing fees for marketing through YouTube because of its extremely huge user base, making it a much more effective marketing platform than any music streaming site.

IFPI estimated that YouTube pays less than $1 to music labels for every user, while Spotify pays $20.

FUTURE DEVELOPMENT

Despite these challenges, many music streaming services are gradually exploring new ways of monetisation.

“There is no denying that the proportion of non-music revenue has become much higher for music labels,” Danny Tuan, new media and business development manager at Rock Records, one of Taiwan’s leading record labels, told FinanceAsia. “Music sales are no longer the only source of income.”

Instead of selling music albums, music labels are increasingly earning from ticket sales from concerts, live shows, and music awards. They are also sharing part of the income from their artists for taking part in advertisements or commercial events.

Melon Music Awards

One typical example is Melon. The South Korean music streaming app is perhaps better known for its annual Melon Music Awards, as well as the music distributor for well-known K-Pop artists such as IU, Girls’ Day and EXID.

At the same time, telecom groups have become a new force in the music industry since streaming became the mainstream of music distribution. Many telcos have built their own music streaming platforms, while independent streaming sites form partnerships with telcos to distribute their music.

For example, Hong Kong-based music streaming service MOOV is a unit of PCCW, the city’s largest telco behind CSL Mobile and OTT service ViuTV.

SingTel, Singapore’s largest telco, operates its own streaming site AMPed.

Raku, a leading streaming site in Malaysia, is backed by pay-TV operator Astro Malaysia. It has also entered into a strategic partnership with Filipino broadband services provider Globe Telecom to distribute music in the Philippines.

As a result, music is now offered as part of a bundled package with telecom services in many countries, instead of being a standalone product.

As one of the earliest forms of entertainment, music has always been a business of huge potential. In the digital age, on-demand music streaming could be the answer to building a sustainable ecosystem to take the global music industry to the next level.
 

Asia's local streaming apps

Source: FinanceAsia research