Economics of music streaming Contents

---

2The dominance of digital music

Significance of the UK market

8.Music streaming intersects two sectors of considerable political, economic and cultural significance to the UK: namely, our historic, world-renowned creative industries and our innovative, flourishing tech industry. Streaming services have provided a new and legitimate mode for people around the world to consume UK music and return the music industry to growth following over a decade devastated by digital piracy.23 Consumers now have access to more music than ever before at historically cheap prices (if they choose to pay at all).24 It is estimated that the UK is the largest digital music market in Europe and generated approximately $1 billion in revenue in 2020 alone.25

9.Prior to the Covid-19 pandemic, the creative industries added between £110 and £130 billion to the UK economy, supported over two million jobs26 and, since 2010, grew at nearly twice the rate of the economy as a whole.27 In terms of music markets, the UK is currently second only to the United States.28 The UK music industry contributes an estimated £5.2 billion in gross value added (GVA) to the UK economy per year, of which recorded music generates approximately £1.5 billion in retail revenues: a figure that is also growing year-on-year.29 The industry employs over 200,000 people, ranging from music creators (including over 50,000 UK artists) and their ecosystems, music venue and touring staff and employees of record labels, music publishers, music streaming services and collecting societies, based in every nation and region of the UK, stimulating local economies across the country.30 Annually, the sector generates £2.7 billion in exports, and recorded music specifically generates £500 million in export revenues.31 One in every ten tracks streamed globally is by a British artist, which the BPI has noted is four times greater than the UK’s share of global GDP.32 The UK’s comparative advantage in global music production is a product of its broader cultural capital and the prevalence of the English language as a first and second language around the world.33 Many contributors to our inquiry, including the BPI and the International Federation of the Phonographic Industry (IFPI), the worldwide record label trade association, have argued that the music industry is “a powerful component of the UK’s ‘soft power’ on the world stage”, whilst others have argued that music has made a significant positive contribution “to the perception of the UK globally”.34

10.In economic terms at least, the contribution of the creative industries is however rivalled by the UK’s tech sector. In 2018, the sector contributed £149 billion, worth more than £400 million per day, accounting for 7.7 percent of the UK economy, and was growing by nearly 8 percent per year, six times faster than the economy as a whole.35 The Internet Association, a worldwide trade body for internet companies, asserts that the internet sector alone contributes $45 billion to the UK economy every year, creating opportunities for approximately 80,000 businesses and 400,000 jobs.36 The 850 members of techUK, a national trade body for technology companies, collectively employ over 700,000 people.37 YouTube’s submission states that research by Oxford Economics, a forecasting and quantitative analysis outfit, found that the company’s “creative ecosystem” alone supports 30,000 full-time equivalent jobs and contributes £1.4 billion to UK GDP.38 Moreover, UK consumers of all demographics are often early adopters of new technology, making the UK a significant market for tech companies.39 As such, the Government has stated its desire to “shape a new golden age for tech in the UK”40 and has declared that the tech sector can be “an engine of job creation kickstarting our economy as we emerge from the pandemic”.41 The Secretary of State for DCMS has, repeatedly throughout his tenure, described himself,42 the Government43 and the UK44 as “unashamedly pro-tech”.

11.The UK’s tech credentials also extend beyond the private sector. Most prominently, the UK is at the forefront of developing new frameworks for digital competition, age appropriate design, online harms and cybersecurity. The Government has announced that Ofcom will operate as the new regulator of harmful content online in recognition of its global reputation and experience tackling harmful content while supporting freedom of expression in television and radio programming.45 The Government also intends to establish a Digital Markets Unit (DMU) within the Competition and Markets Authority (CMA) to oversee a new pro-competition regime for tech companies, including an enforceable code of conduct to govern the behaviour of the largest and most powerful companies with ‘strategic market status’ and pro-competition interventions to tackle the sources of market power, though it has yet to legislate and put the DMU on a statutory footing.46

Advent of music streaming

12.To understand the peculiarities of the economics of music streaming (such as the particular legal frameworks, remuneration and licensing arrangements and industry norms that underpin the music streaming economic model) it is necessary to understand the historical context from which it emerged.

13.Whilst music piracy naturally predates the digital age, the technologies that emerged and became increasingly widespread from the mid-90s onwards posed a unique threat to the music industry. The music industry’s move from cassette tapes and vinyl to CDs meant that music was sold in a readily digitised format, whilst the presence of CD drives on personal computers enabled more efficient (and higher quality) pirating of recorded music than was possible using tapes in the 1980s.47 The creation of new audio compression formats, such as the MP3 format in 1993,48 which allowed audio files to be compressed with relatively little loss of sound quality, prompted the development of portable MP3 players such as the iPod in 2001,49 and provided an alternative to portable CD and cassette players. Finally, the maturation of internet technologies and everyday use of the World Wide Web enabled a mass adoption of peer-to-peer (P2P) file sharing platforms that allowed users to share MP3s of recorded music with relative ease on an industrial scale at next to no cost. This effectively removed the physical limitations inherent to previous forms of piracy, such as the physical replication and distribution of pirated music. Napster, launched in 1999, was the first P2P file sharing platform to focus primarily on sharing recorded music.50 It was followed by Limewire, Kazaa, Pirate Bay51 and various other services throughout the following decade.52

14.The legal tension caused by the emergence of new modes of music consumption was not unforeseen by the industry or policymakers.53 Calls to address the challenges of unauthorised access to copyrighted works through internet and digital networking technologies led to the World Intellectual Property Organisation (WIPO) creating provisions in international law through the WIPO Internet Treaties,54 of which the WIPO Copyright Treaty (WCT) was signed by member states in December 1996.55 The WCT catalysed national copyright legislation for digital music consumption and mandated, amongst other things, that performers’ record labels “shall enjoy the exclusive rights of authorising the making available to the public of their phonograms by wire or wireless means in such a way that members of the public may access them from a place and at a time individually chosen by them”.56 Dr Hayleigh Bosher notes that this ‘exclusive right to make available’ (the so-called ‘exclusive right’ or ‘making available right’) was deliberately made ‘technology-neutral’, “where the technical means by which the communication was made was irrelevant, in order that any future technical development be included within the provision”.57 The making available right was adopted by EU member states (including the UK) in 2002, through Article 3 of the Information Society Directive (Directive 2001/29/EC of the European Parliament and of the Council).58 The UK Government of the day chose to enact the making available right as a subset of performance rights provided by the 1988 Copyright, Designs and Patents Act through the Copyright and Related Rights Regulations, commenced in October 2003.59

15.However, despite new modes of music distribution and consumption emerging throughout the 90s, the music industry was slow to develop a viable digital music business strategy and provide consumers with legitimate digital music products.60 In 2001, the market for recorded music reached its historical peak at $23 billion worldwide (equivalent to $33 billion in current prices).61 At the time, record label revenue exceeded £1.2 billion per year62 (approximately equivalent to over £2 billion in current prices), but record labels themselves remained committed to CD sales,63 which also peaked in 2001.64 However, between 2002 and 2015, worldwide recorded music revenues fell by 40 percent as consumers switched to digitally pirated music or to music made available by UGC-hosting sites. In 2006, one music industry report stated that 20 billion tracks had been downloaded illegally in the year prior.65 In 2008, the BBC reported that 20 percent of Europeans were using file sharing networks compared to just 10 percent using legitimate digital services such as iTunes,66 whilst the IFPI claimed that piracy accounted for 95 percent of music consumption.67

16.The music industry, for its part, did eventually attempt to respond to the growing prevalence of digital piracy. Ventures into the digital downloads market by the major record labels, namely through the PressPlay and MusicNet apps, ended in failure, with PC World commenting at the time that “the services’ stunningly brain-dead features showed that the record companies still didn’t get it”.68 Through its trade associations, the industry began to take legal action against individuals for illegal file sharing,69 which proved to be both financially costly and a source of negative PR.70 Moreover, such was the role of CDs in facilitating digital piracy that in one particular case a major record label was found to be secretly installing rootkit and copy protection software onto their CDs for general sale that left customers exposed to hacking attempts (eventually having to settle several lawsuits).71 However, there were some successes. Through various legal battles, record labels successfully managed to close P2P file sharing platforms Napster72 and Limewire,73 and force Kazaa to become a legitimate service;74 Limewire and Kazaa were required to pay $100 million in damages to record labels, whilst the Napster brand was acquired after the company went bankrupt and has since become a legitimate music streaming service. From 2012, on behalf of record labels, the BPI’s Content Protection Unit (CPU) began submitting millions of URLs to search engine providers for delisting and blocking hundreds popular pirate domains through internet service providers through High Court litigation.75 Yet, despite these efforts, industry revenues continued to decline; by 2015, record label revenue had fallen to less than £800 million76 (approximately equivalent to £900 million today).

Nominal global recorded music industry revenues by format, 2001–2019 ($bn)

17.In the mid-2010s, the situation began to change. Spotify, the first mainstream subscription music streaming service, was launched in late 2008, seven years after CD sales had peaked.77 Our written evidence demonstrates a clear and broad consensus across the sector that streaming has been the biggest contributor to the decline of digital piracy of recorded music and the return to revenue growth for the music industry.78 Studies found that even in the early days of streaming, legitimate music streaming services were helping to incentivise people to move away from illegal platforms. One study in Sweden found that between 2009 and 2011, once streaming services became available, the number of people pirating music fell by a quarter.79 According to the 2018 YouGov Music Report, the number of people illegally downloading music fell from 18 percent in 2013 to ten percent in 2018 and that 63 percent of those who had stopped using illegal sites were instead using streaming services.80 Since 2014, the recorded music industry has experienced year-on-year growth each year.81 The ERA argues that between 2015 and 2019 streaming increased the value of the UK recorded music market by 38 percent.82 In 2019, global streaming revenue grew by 23 percent and accounted for 56 percent of total global recorded music revenue, marking the first time streaming contributed to majority share of music consumption.83 In fact, in the United States, 2019 music streaming revenues alone exceeded the total recorded music market for 2017.84 Streaming now makes up more than 70 percent of UK recorded music revenues and since 2009 has generated new revenues of £3.5 billion for the UK recorded music industry to date.85 Undoubtedly, the dominant music streaming services have underpinned a fundamental shift away from an acquisition model of music consumption towards a model based on all-you-can-eat access.86

Proportion of UK population downloading music illegally, 2001–2019

18.This had led several people to assert that the threat of piracy is largely over. Will Page, former chief economist at Spotify, argues that “the problem of piracy has been ‘old news’ for quite some time” due to the “frictionless and free entry point into legal streaming” that legitimate free-to-access models in particular offer to consumers (see paragraph 22 and Annex 2 for more detail).87 MIDiA Research claims that, currently, only 2.9 percent of UK consumers use P2P music platforms regularly and argues that whilst piracy still needs to be addressed, “the scale of the threat is now small in terms of both audience size and volume of files”.88

19.However, industry bodies have argued copyright infringement remains prevalent and is adapting to the streaming economy.89 Piracy continues to deprive the industry of nearly £200 million in estimated revenues, which would otherwise benefit both the corporate and creative ecosystems, as well as the taxpayer through lost VAT revenue.90 One such form of piracy that has emerged in the wake of streaming is ‘stream-ripping’, where pirates record and distribute streamed content for illegitimate streaming or download.91 Research conducted by PRS for Music Limited, a copyright collective made up of the Performing Right Society (PRS) and MCPS (Mechanical-Copyright Protection Society), in partnership with the IPO, in 2017 found that streaming ripping was the fast-growing part of the piracy landscape.92 IFPI estimates that 23 percent of people have used illegal stream-ripping services,93 whilst a recent study by IPSOS on behalf of Creative Content UK found that 35 percent of internet users are stream ripping.94 The same IPSOS study found also that stream-ripping was particularly prevalent amongst young people, with 53 percent of 16- to 24-year-olds admitting to pirating music and predominantly through stream-ripping services.95 PRS for Music notes that between 2016 and 2019, YouTube was the most likely service to have content ripped from it (though similar practices were increasing occurring on Spotify).96 YouTube contends that it has continuously invested in action against stream rippers, including through technical improvements to its services, legal interventions and collaboration with third parties.97 Stream ripping apps are also available through app stores, which have necessitated continued action by PRS for Music and other industry bodies.98

20.Beyond stream ripping, other forms of piracy include using illegitimate, unlicensed music player apps and sites,99 account-sharing on legitimate apps100 and accessing legitimately-licensed free music ad-free.101 Contemporary digital piracy is often enabled by search engines and other digital intermediaries, due to a lack of clear legal liability in doing so.102 IFPI has elsewhere argued that “54% of those downloading unlicensed music also use Google to find unlicensed music”.103 Furthermore, leaked releases, often obtained via hacking, continue to deprive the industry of revenue whilst taking advantage of pre-release promotions.104 Finally, the music industry has noted that legitimate streaming services often host unauthorised uploads that are monetised by pirates, which deprives rightsholders of income and forces these rightsholders to devote resources to monitoring services for unauthorised usage.105

Music streaming service models

Daily and weekly active UK users of leading music streaming services, Q2 2020

21.Music streaming services are provided by the platforms of tech companies either as their core function or as a secondary service. Within the music industry, streaming services are often referred to as digital service providers (DSPs). However, we note that in common parlance this term may also refer to a range of businesses including search engines, online marketplaces, or cloud computing providers, and as such refer to them as music streaming services throughout this Report.

22.There are many ways that music streaming services can be categorised, including by pricing strategy, service offering and payment model (we provide a fuller description of these in Annex 2). The largest services currently operate on either a premium or free-to-access model or a combination of the two known as ‘freemium’ (though several start-ups, such as the Resonate Co-operative and Sonstream, offer interesting alternatives to this through micropayment models). Premium services are funded through monthly subscriptions (with a current benchmark of £9.99 per month), whilst free services are funded by advertising revenue—or, in the case of Amazon, bundled with a video and goods-delivery subscription. These revenues are then divided between the service and music industry according to pre-determined, negotiated agreements with the music industry (described in paragraphs 24–33 in Chapter 2). Most services then allocate revenue to individual tracks (and therefore rightsholders) according to a ‘pro-rata’ model, where the total revenue for each income stream is added up and then distributed to rightsholders according to each track’s proportion of total streams. However, some services are experimenting with alternative models: SoundCloud, for instance, is currently trialling a ‘user-centric’ payment system for independent artists, where each user’s subscription is paid according to the tracks they listen to rather than the aggregate listening of all users (whilst services like Resonate and Sonstream’s systems are user-centric by design).

Proportion of the 22.6m UK music premium subscription accounts by streaming service, Q1 2020

23.Another significant way that streaming services are categorised is based on content hosting. Most music streaming services, such as Spotify, Amazon Music and Apple Music, license music from the music industry. Some services, such as YouTube or SoundCloud, exclusively or additionally host UGC/UUC directly to their sites. Services that host UGC are exempted from legal liability for copyright infringement (among other things) unless and until they obtain “actual knowledge” of infringing activity, after which they must act expeditiously to remove or to disable access to the information.106 These exemptions of liability are referred to by the tech and music industry as ‘safe harbour’, and have already been transposed into UK law from European Union’s E-Commerce Directive (meaning they remain in UK law even after the UK’s withdrawal from the European Union).107 However, it should be noted that UGC-hosting streaming services, along with social media companies and other sites that host UGC, will soon acquire new obligations regarding copyright infringement in EU member-states under the new Directive on Copyright in the Digital Single Market (which will be discussed below in paragraphs 173–178 in Chapter 5).108

Copyright and remuneration from music streaming

When music is streamed

24.There are two distinct bundles of rights that are exploited when music is streamed: the copyright in the song lyrics and music (sometimes referred to in evidence we received as “the song” or “song rights”), and the copyright in the performance (referred to as “the recording/master” or “recording/master rights”). A song can often benefit from being performed and recorded multiple times by different artists over time.109 Though many creators may be involved with both composing and recording music in some fashion when creating a track, they may work with different companies in either process (assuming they do not decide to retain their rights and distribute their music as self-releasing artists).110 Songwriters and composers work with music publishing companies to exploit song rights, whilst performers work with record labels to exploit recording rights. Recording rights are licensed directly to streaming services by record labels or aggregators and distributors, whilst song rights are licensed collectively through collecting societies, which are bodies that license copyrighted works on behalf of rightsholders and ensure these rightsholders are remunerated for such usage in return for administrative fees.

25.Whilst many music companies may have both publishing and recording operations, they are usually organised as autonomous entities, meaning that any service that wishes to use recorded music (such as radio or streaming services) will need to license the song and recording rights separately. Record labels may each license their catalogues of recording rights directly with the music streaming companies, particularly if they have large catalogues.111 Otherwise, smaller labels (and self-releasing artists) can go through a music distributor who, in this context, acts as the middleman between rightsholders and music streaming services.112 Distributors range from small-scale boutique services to collectives like Merlin, a third-party licensing hub set up by independent record labels to leverage their aggregated market share.113 Song rights, on the other hand, are negotiated and licensed collectively on behalf of songwriters, composers and publishers by PRS for Music.114

26.The complex underlying intricacies of rights, licensing negotiations and corporate/creator agreements have important repercussions for how parties are remunerated from music streaming. Before streaming income is divided amongst licensees and rightsholders, the Government receives revenue from music streaming subscriptions in the form of value-added tax (VAT), which is an indirect tax levied on most goods and services in the UK, at the standard rate of 20 percent of the gross margin. From a standard £9.99 subscription, this amounts to £1.67 per subscription.115 From the remainder, known as the gross revenue pot, the music streaming services then receive their share of revenues. From a standard subscription and from advertising revenue, this is generally assumed to be 30 percent,116 though the Association of Independent Music (AIM), a trade body for independent record labels, has posited that the figure is actually closer to 35 percent.117 The remaining share, which goes to industry, is known as the royalty pot.118 From the royalty pot, the majority of revenue goes to the master rightsholders, who receive approximately 55 percent of the gross revenue pot. Song rightsholders therefore receive the remainder, amounting to approximately 15 percent of the gross revenue pot. Put in terms of the royalty pot, the master rightsholders therefore receive approximately 78.5 percent of the revenues that accrue to the music industry rightsholders, whereas song rightsholders receive approximately 21.5 percent.

Allocation of revenues from music streaming (after VAT)

All percentages are approximate or illustrative

How rights are exploited

27.UK copyright law provides specific rights for the owners of copyrights and for performers that control how music is consumed. The Copyright, Designs and Patents Act 1988 (‘the Act’) provides the owner of copyright with the exclusive right for certain acts. When music is consumed (either legitimately or illegitimately), it will involve one or more of these acts. These acts include copying, issuing, renting or lending119 copies of a work, performing in public, communicating to the public (e.g. broadcast) and/or making an adaptation of a work.120 Copyright is infringed where someone does, or authorises someone else to do, any of these acts without licence from the copyright owner,121 albeit with certain permitted exceptions, which include use for purposes of research, critique, reporting and parody, caricature or pastiche.122

28.Regulations made under the Act also confer several rights on performers. Since 1996, the ‘reproduction right’, ‘distribution right’, ‘rental right’ and ‘lending right’, for example, provide performers with the right to authorise or prohibit the making, issuing, renting and lending of copies to the public respectively.123 Pertinent to this inquiry, since 1996 these regulations also provide performers with a unalienable, unassignable ‘right to equitable remuneration’ (known as the ‘remuneration right’) where a commercially published sound recording is played in public, communicated to the public or (when a performer transfers their rental right to a record or film producer) rented to the public.124 The precise rate of equitable remuneration is not enshrined within UK law, but current industry norms dictate that the corporate and creative partners divide this revenue half each.125 Finally, and equally pertinent, since 2003, regulations also provide performers with the making available right, whereby their rights “are infringed by a person who, without his consent, makes available to the public a recording of the whole or any substantial part of a qualifying performance by electronic transmission in such a way that members of the public may access the recording from a place and at a time individually chosen by them”.126 The making available right therefore means, for example, that someone infringes on the rights of a performer under UK law if they enable others to make copies of a copyrighted work, even if they themselves do not issue the copies. As noted by prominent streaming auditor and accountant Colin Young, the Copyright, Designs and Patents Act does not extend the right to equitable remuneration where a work exploits the making available right.127

29.Music streaming is a particularly complex case in terms of the rights that are exploited when a track is consumed via a streaming service. Although both the song and recording rights of a single track are exploited simultaneously, each falls under a distinct legal characterisation.128 On the one hand, the streaming of a recording is treated as ‘making available’. On the other hand, the song rights are treated as both a ‘public performance’ communication to the public of a work and a ‘mechanical’ reproduction thereof. As discussed, where a communication to the public occurs (except by ‘making available’), all parties are remunerated equitably. Where music consumption is classified as a ‘mechanical’ or ‘making available’, the creators are remunerated in accordance with the terms of their publishing or recording deals respectively by the companies that their rights are assigned to, licensed by or distributed with.

How rightsholders are remunerated

Performers and record labels

30.Relatively speaking, performer remuneration is a straightforward process. First, the record label or distributor receives revenues for the recording (i.e. 55 percent of the gross revenue pot, or approximately 80 percent of the royalty pot). Next, the label or distributor pays the performer according to the terms of their contract. Though record deals are individually negotiated between the relevant creative and corporate parties, there are several broad types of agreement a recording artist might negotiate with a record label: a traditional recording agreement, a distribution deal or a label services deal (though labels and artists may negotiate a range of terms).129

31.Under a traditional recording agreement, an artist will assign their rights to the recordings produced under the terms of the deal exclusively to the record label, in exchange for an advance (i.e. an up-front fee) and either royalties (once certain costs have been ‘recouped’) or a share of the profits. These are known as ‘advance and royalties’ and ‘advance and profit share’ deals respectively.130 In terms of the monetary split, an ‘advance and royalties’ deal will favour the record label, with the performer receiving between 12 and 30 percent depending on when they signed and their prior popularity and success.131 These deals are most often offered by the major record labels.132 Under a distribution deal, the record label agrees to distribute recordings to music streaming services on behalf of an artist for a distribution fee of approximately 15–20 percent of revenues. Under a label services deal, the label provides the services of a distribution deal alongside marketing and promotional services for a slightly higher fee (of roughly 25–30 percent). Alternatively, a label may exclusively license finished recordings for a short period from a third party on the terms of a traditional agreement (albeit with a higher advance and royalty rate, as the third party must subsequently pay the artist that it in turn has acquired the rights from).133 Otherwise, an artist may decide to self-release altogether. To do this, they must release their music through a distributor or aggregator to upload their music onto streaming services in return for a flat fee per track, but without the services associated with a record label, such as promotion, marketing and data insights.134

Songwriters, composers and music publishers

32.For the song rights, the process is much more complex. First, the song revenues (i.e. 15 percent of the gross revenue pot, or approximately 20 percent of the royalty pot) are split evenly between the mechanical and public performance. For the public performance, both the publisher and songwriters and/or composers split the revenues equally due to the right to equitable remuneration. The revenue is paid to their collecting society, who then pays the rightsholders accordingly.

33.For the mechanical, the publisher and songwriters and/or composers are paid according to the terms of their deals. Unlike record deals, publishing deals between music publishers and songwriters are often more generous (albeit at face value, given that the song receives a much smaller percentage of streaming revenues).135 The most common types of deal are individual song agreements, where a songwriter assigns their rights in specific works to a publisher in exchange for a portion of revenue, and exclusive songwriter agreements, where a songwriter assigns all works created during a specific time in exchange for a share of generated income and monthly or termly payments that are treated as recoupable advances. Other types of agreement are co-publishing agreements (where songwriter and publisher co-own the copyright and the songwriter also takes a share of the publisher’s income), participation agreements (which are similar to co-publishing but without co-ownership), and administration agreements (which allow publishers to license a song for a period of time for an administration fee).

The consumer experience

Consumer benefits from streaming

34.There is a wide-ranging consensus that the consumer benefits significantly from (and therefore values136) the current music streaming model. There are two (related) reasons for this: price and service offering. For relatively cheap monthly price plans, consumers generally receive an ‘all-you-can-eat’ service,137 where they can stream any track in their service’s catalogue as often as possible (though some freemium streaming service providers, such as Spotify and Amazon, typically restrict access to some or all on-demand tracks to premium users only to incentivise their premium services). Professor Ruth Towse argued that “the subscription fee is set not with respect to the market for recorded music but in relation to those by competing platforms” and that “so far there has been no price war between music streaming services”.138 As the nominal prices of streaming subscriptions have been fixed at the aforementioned price plans for over a decade, which means that the consumer has experienced a fall in price in real terms amounting to 26 percent in total over the same period when the nominal price is considered against inflation.139 Prices are also set at the same nominal price in most currencies (i.e. individuals pay £9.99 in the UK, €9.99 in the Eurozone and $9.99 in the United States),140 demonstrating a lack of price parity for streaming services for consumers in different countries. As a result, UK consumers spent just over £1 billion on music streaming subscriptions in 2019, up from £812 million in 2018.141 Furthermore, streaming has again made tracks available to consumers that record labels previously no longer considered economically viable to continue pressing and releasing.142 As such, more legitimately licensed music is now available to consumers and for cheaper prices, if consumers pay at all. As legendary musician and three-time Grammy Award winner Nile Rodgers told us, “if I were a young person coming up right now, I now have access to more music than I ever had before”.143

35.Conversely, if consumers still find these services prohibitively priced then they can instead stream in the same ‘all-you-can-eat’ fashion via YouTube’s free, ad-funded, user-uploaded video-sharing service. Though YouTube does impose some friction on the consumer, such as advertising and online-only playback (like other free services) and no background playback for mobile users, it is the dominant music streaming service.144 In 2017, for example, a consumer insight report by the IFPI found that YouTube was responsible for 46 percent of all on-demand music streaming time, which was more than Spotify, Apple, Tidal, Deezer and Napster combined,145 whilst data from the Recording Industry Association of America (RIAA) showed that that YouTube commands at least a 51 percent global market share in terms of streams.146 In 2018, a subsequent IFPI report stated that as many as 35 percent of music streaming consumers cited user uploaded services like YouTube as the foremost reason why they do not acquire a premium subscription.147 Polling in 2020 found that user-uploaded video-sharing sites were the service of choice for younger demographics in particular, with 70 percent of American 12 to 34-year olds responding that they used YouTube for music or music videos (compared to 50 percent of all American respondents) whilst 56 percent of UK 8 to 15-year olds used YouTube and Vimeo for the same purpose.148

Changing consumption habits

36.Consumer habits are changing in response to the advent of music streaming, and successful music industry actors have responded. UK consumers streamed recorded music 114 billion times via audio-only subscription services (i.e not YouTube and other video streaming services) in 2019 alone, which marked the first time streaming exceeded 100 billion plays.149 Streaming is also growing contemporaneously to a decline in physical revenue, which fell by over 5 percent between 2018 and 2019.150 Meanwhile, streaming is also cannibalising radio listening, particularly amongst younger audiences: one study in 2016 found that millennials only listened to the radio 12 percent of the time on average compared to 35 percent for the general population, but used on-demand streaming services 51 percent of the time on average compared to 24 percent for the general population.151 Written evidence from the IFPI asserts that, globally: 89 percent of consumers now access their music through on-demand streaming; 83 percent of 16 to 24-year olds use audio streaming platforms; and 47 percent of consumers said streaming was the most convenient way to access music.152 Research has also found that music streaming consumers have differing tastes on aggregate relative to the tastes of the broader UK population: rock music, for example, tends to be underrepresented on streaming services’ top 50 songs whilst hip-hop tends to be overrepresented.153 Moreover, research has suggested that music consumption has become more task- and mood-centric, which creates additional signals for marketers to base targeted advertising on.154 The influence of this approach can be seen on the BBC Sounds app, which itself offers human-curated “music mixes” around topics centred on specific artists, events or moods.155

37.Underpinning this convenience and change in habits and tastes are new forms of music curation, such as playlists. The International Federation of Musicians (FIM) argues that:

For consumers, curated playlists have gradually replaced thematic broadcasts. There is one playlist for each moment of the day: wake-up, breakfast, work-out, relaxation, meditation, running, partying etc. One single click of a button and music is on for the next 30 minutes or the entire evening or night. No further action is necessary: the tracks that fit your taste or mood are selected for you by a third party and pushed to your device—whether a phone, a smart speaker or hi-fi gear.156

There are three types of playlist as pertains to streaming. User-created playlists are discrete series of tracks, played sequentially, shuffled or skipped through, curated by individual users according to their own preferences.157 Editorial playlists are those created by music streaming services’ own teams or by high-profile affiliated curators.158 Finally, algorithmic playlists are those generated by streaming services’ automated recommendation systems, which approximate user preferences through a Bayesian machine learning paradigm based on big data derived from signals such as a user’s previous listening patterns, manual searches and the listening patterns of other users. In other words, streaming services use machine learning to create personalised playlists by continually learning about a user’s preferences from their streaming history, which is gathered and used continuously by the system. This individualised user experience sets streaming services apart from pre-existing one-to-many music broadcasts such as radio. Playlists, alongside user experience, is one of the key means by which streaming services differentiate themselves from others in the market.

Potential consequences of current trends

Average revenue per user

Spotify’s global premium revenue, number of subscribers and average revenue per user (ARPU), 2016–2020

38.Though streaming has realised price and convenience benefits for recorded music consumers, there are potential consequences for them too if the issues with streaming continue. Several submissions have noted that there has been a continuous fall in average revenue per user (ARPU) for streaming services and therefore, by virtue of the revenue-share model described above (see paragraphs 24–33), the music industry. Spotify recently reported that, between 2016 and 2020, ARPU has fallen by €6,38 to €4.19, equivalent to 34 percent.159 This has been driven by several factors, including a rapid growth in subscribers, increased intensity of consumer usage, real-term price decreases, the growth of free trials, bundles, discounted tiers and multi-user plans and lower ARPU in emerging markets.160 This may be exacerbated by the recent announcements by Spotify and Apple that the services will offer lossless audio streaming with standard subscriptions (as opposed to services like Tidal who offer high-fidelity audio at a higher price).161 There are some causes for optimism (from an industry standpoint) however. Will Page notes that consumers have more money to spend and are spending more of it on music, asserting that, since 2014, “gross disposable income has increased by 20 percent, whereas music’s share of wallet has increased by 25 percent”.162 But this is a relatively short-term view, set against the legitimate industry’s nadir when piracy was at its height. Recorded music revenues remain much lower in real terms than they were 20 or 30 years ago, but have been rising since 2014. MIDiA Research argues that there are indications of consumer tolerance for higher prices163 though the #BrokenRecord campaign says that this is dependent on how this money is distributed.164

(Approximate) per capita music spend and total revenues, in constant 2020 prices

Social trends

39.This may subsequently impact the long-term creation of music. Academics Peter Ormosi and Franco Mariuzzo hypothesise that, although consumers “have low-price access to an unprecedented selection of music, the long term damage can be more severe if the current revenue structure leads to a loss in music variety, as independent artists cannot recoup their investment because they are being foreclosed from receiving revenue from online streaming”.165 The BPI similarly warns that editorial and algorithmic curation could “lead to overly narrow music recommendations being made and trap users in the ‘echo chamber’ of their pre-existing tastes”.166 Indeed, academic evidence already suggests that streaming has exacerbated the “hits-driven preferences of consumers”.167 Soweto Kinch, a successful jazz saxophonist, composer and MC, told us that streaming had defunded jazz music by approximately 3 to 6 percent because of the ‘winner-takes-all’ approach to revenue splits, despite the genre demanding greater relative production costs due to greater composition and recording time and the costs of remunerating big band musicians.168

Consumer awareness

40.There appears to be little consumer awareness about the debates that currently rage within the music industry. Academic research has found that the majority of consumers do not understand how artists are compensated when their music is streamed and do not factor in or prioritise ethical artist compensation into their decision-making processes; this was speculated to be a consequence of the lack of media coverage regarding the low artist remuneration at the time of research169 (though it should be noted that we have observed significant media interest in this subject both before and throughout our inquiry). However, where there is awareness, the public appears to support the creators’ perspective. A recent YouGov survey, commissioned by the #BrokenRecord Campaign, found that the overwhelming majority of surveyed music streaming service subscribers felt that artists and songwriters are underpaid, record labels and streaming service providers are overpaid, and that session musicians should receive some form of compensation from streaming.170 It also found that whilst the majority (61 percent) of respondents said that they would not be willing to pay more for music streaming under current remuneration arrangements, approximately half of these same respondents stated that they would pay more if an increase in their subscription went directly to the writers and artists they listen too.171 Evidence from Patreon, a digital platform where users can pay a monthly or annual subscription to creators they follow, supports this sentiment, claiming that the number of musicians on their platform and the total revenue generated for musicians through its service doubled between October 2019 and 2020.172 It should, however, be noted that conclusions drawn from polling or Patreon’s own performance does not account for factors on consumer tolerance of price, such as the price of competing services, consumer income, and so on, or qualitative analysis as to whether Patreon users could be considered atypical ‘superfans’ willing to spend more on particular artists than music casual fans.

41.Streaming has undoubtedly helped save the music industry following two decades of digital piracy but it is clear that what has been saved does not work for everyone. The issues ostensibly created by streaming simply reflect more fundamental, structural problems within the recorded music industry. Streaming needs a complete reset.