Why Musicians and Advertisers Need Streaming Internet Radio

Inplace #2

Taylor Swift ignited a renewed debate about music industry revenue and the impact of Internet radio on artists. Like many debates what you believe may be driven more by where you stand than by reality. On one side you have artists and music labels that have experienced a decade long slide in music sales. On the other side you have Internet radio publishers serving music to consumers in much the same way as radio, but unlike radio they are paying artists for the privilege.

According to Spotify, Ms. Swift was on track to receive over $6 million in royalties from the service this year which is $6 million more than she would receive from broadcast radio and equivalent to 460,000 albums sold. Artists and labels may appear to have different economic interests from Internet radio publishers. However, data suggests their incentives are aligned even if their worldviews differ. The situation also offers important insights for advertisers.

Faulty Logic and a Bunker Mentality

First, the stated conflict is based on a false dichotomy:

If I am losing something and you are gaining something at the same time, you must be the cause of my problem; therefore, if I restrict your gains, I will maintain my share of the pie.

The fallacy here is conflating correlation with causation and not considering other factors. If A is falling while B is rising, B could be causing A to fall. However, C may be causing A to fall and B to rise. Even if A and B are correlated inversely, it may be that neither is causing the other to change. Sometimes there is another force, C, that may be the actual cause.

In this case, A is music sales and B is music streaming. Music sales have tanked by 50 percent over the past 15 years. In the past five years, Internet radio has grown rapidly. Revenue from digital music sales in 2013 fell for the first time in 10 years and music industry executives point to Internet radio as the culprit even though it doesn’t account for the previous decade of decline. Of course, the industry is now defending the same digital music format that they also claim caused the first 50 percent fall in revenue. How can this make sense?

The music industry asserts that its only hope for getting back to siphoning piles of money from consumers is to increase music sales. This ignores an important fact. The Recording Industry Association of America (RIAA) reported that Internet radio streaming generated 27% of all industry revenue in the first half of 2014. That is only 1% less than CD sales (By the way, who buys CDs anymore?). Spotify alone claims to have paid $2 billion in artist royalties since 2008. Revenue generated by streaming services are actually propping up the industry, not destroying it.

Economic Incentives are Aligned

National Association of Broadcasters (NAB) studies show music exposure through steaming services and radio actually boosts music sales. This is supported by a Pandora study from November 2014 and a Nielsen report in 2013 that stated, “users of on-demand music streaming services are 90 percent more likely than the average consumer to be heavy spenders on music.” Famously, Daft Punk leveraged exposure on Spotify to drive first week sales of 339,000 copies of its album Random Access Memories. Add to this the fact that digital downloads have fallen in markets not served by leading streamers Spotify and Pandora, and the argument blaming Internet radio for declining sales disintegrates. Data suggests the opposite is true.

What’s Really Going On? A Societal Shift.

The album sales decline is more likely caused by an age demographic that doesn’t want to own anything. It’s not just about music. Driven by a generational shift and new technology, many traditional products are moving toward a rental model.

How many people pay for their personal email service or store photos on rented cloud services? That’s only the start. The societal importance placed on ownership has fundamentally changed. There are more people renting homes and using car-sharing services than ever before. This has auto executives particularly concerned. Many millennials (born 1980-1995) in the United States would rather use a combination of the Zipcar car sharing service and Uber taxi service for transportation than purchase a car.

The proliferation of Internet radio services is a response to a generation that is not interested in ownership, but is willing to rent access. It mirrors other trends in visual media such as movies and television. Internet radio aligns with the societal behavioral shift and is not its cause.

Why This Matters to Advertisers

Advertisers care more about audiences than industry structure. The audio consumption habits of 78 million 19 to 34 year olds are being formed now around streaming music services. While album sales are falling and a Mark Ramsey Media analysis shows radio listening declined 13.3% between 2010 and 2013, Internet radio audiences are rising rapidly. eMarketer estimates that 159 million Americans now listen to Internet radio monthly and the audience is expected to grow to 183 million in 2018. This is no longer a niche audience.

Internet radio also provides novel ways for marketers to engage consumers. XAPPmedia offers interactive audio ads that allow listeners to respond to advertised offers simply by speaking. No thumbs are required to initiate a phone call, request a coupon, launch a video or start an app download. Some streaming services are also allowing brands to sponsor music channels, interact directly with artists or watch full video ads in order to receive ad-free listening blocks. Audio advertising also happens to be a very effective way to reach mobile consumers since screen size doesn’t matter to your ears. Advertisers interested in reaching millennials have a ally in Internet radio.

Headwinds or Tailwinds

So why did Swift announce that her album wouldn’t be on Spotify? Why did she opt for fabricated outrage against a service that sends her millions of dollars annually? Let’s assume Taylor Swift and company are adroit marketers aware of Robert Cialdini’s research around the influences of purchase behavior. If Taylor Swift fans cannot access her new music on streaming services they may buy it now due to the scarcity principle. Later, she can make the music available on Internet radio after pocketing big Christmas sales. Granted she will have lost royalties during that period, but maybe she wins both ways. Maybe a star as big as Swift can do this…for now.

However, artists that focus on music sales and abandon streaming services are flying against strong headwinds. Music will increasingly be discovered, listened to and paid for through Internet radio listening. That’s where the consumers are so that’s where the advertisers will be. Digital Tonto’s Greg Satell has an insight relevant to this debate:

Marketers are willing to pay more for consumers than consumers are willing to pay for content.

Recording artists should take this to heart when considering their future business interests. Audience growth and royalty revenue on Internet radio has a robust tailwind.