(July 24): Stephen Witt recalls downloading thousands of bootlegged songs onto his MP3 music player in his Chicago college dorm room 20 years ago. By the time he was working in a New York hedge fund, he had hoarded more than 150,000 songs — everything from pop group ABBA to rock band ZZ Top.

“It wasn’t a desire to steal or an act of rebellion,” Witt, author of How Music Got Free, a history of digital music, tells The Edge Singapore in a recent phone interview. “I was hoarding music to impress my nerdy friends.” It wasn’t just a way to get music conveniently, he notes. “It was its own subculture.”

Two decades after peer-to-peer file sharing service Napster made piracy almost like child’s play and 15 years since Apple popularised music downloads with its iconic iPod, the legitimate digital music business is booming despite widespread stream ripping. These days, though, you do not have to be a thief to access free or cheap music in the convenience of your bedroom. Music streaming is available around-the-clock on free-to-air ad-based internet radio or for less than US$10 ($13.70) a month from the likes of Spotify, Pandora Media or Apple Music, which have an archive of almost every song ever recorded.

“Eighty per cent of the people stealing music online [didn’t] really want to be thieves,” Apple’s late co-founder Steve Jobs said after he unveiled the iPod. Yet, he argued, piracy was such a compelling way to access music that “people were willing to become thieves to do it”. What Apple tried to do was to make it so convenient and affordable (at 99 US cents a song) that nobody would be tempted to steal.

After years of stalled growth, the music industry has finally discovered its growth strategy — “subscription-on-demand”. Global music revenues had gradually declined from their 1999 peak of US$27.4 billion to US$16.6 billion in 2013 when digital revenues began kickstarting growth again. Overall industry revenues grew 3.5% in 2015 and 6.1% in 2016 and are projected to grow 7% this year as digital assistants disguised as smart speakers such as Amazon Echo, Google Home and Apple’s new HomePod provide new outlets for streamed music. Revenues of streaming services grew 53% last year and are forecast to grow 35% this year. That is music to the ears of an industry that has struggled for more than two decades.

The boom in music comes just as the streaming business is consolidating. In June, Tim Westergren, founder and CEO of beleaguered Pandora, stepped down from the internet radio and streaming music firm. Satellite radio giant SiriusXM is investing US$480 million for a 19% stake in the advertising-reliant Pandora, which despite its 80 million users has been under threat from on-demand subscription-based music services such as Apple Music (27 million paid subscribers) and Spotify (50 million paid subscribers) as well as YouTube and Amazon. Pandora, which accounts for 10% of US listeners but just 5% of US radio ad dollars, has seen its stock halve since its 2011 IPO and fall 79% from its 2014 peak.

Earlier this month, fledgling Berlin-based streaming service SoundCloud announced it was laying off 40% of its workforce. Like other independent services including Jay-Z’s Tidal, SoundCloud has been struggling as Apple and Amazon — which offer music services mainly to drive a broader product offering — siphon away listeners.

To be sure, while there is still stream ripping, piracy and legitimate music are learning to coexist. Giasone Salati, global music analyst at Macquarie Capital (Europe) in London, tells The Edge Singapore in a recent phone interview: “Sure, there is some piracy, like people still photocopy books, but streaming has made access to music so cheap and convenient that you are wasting your time trying to pirate stuff.” Moreover, he argues, “the new legitimate services are so much superior to the pirated ones that people don’t mind paying $10 a month and just forget about it”. In the past, consumers were attracted to pirated music because of convenience and cost. Now, they can listen to Pandora for free or sign on to the free services of Spotify.

So, what has changed? A few things happened in the aftermath of the tech bubble in 2000. Back then, media firms were at war with each other, recalls Witt. Search engines such as Google would not agree to clamp down on piracy. “It was a free-for-all and everyone was suing each other,” he says. There was also no will to get internet service providers to block piracy. Yet, by 2007, when the iPhone first hit the streets, media firms were more willing to cooperate with each other. The move from desktop PCs to smartphones helped legitimate music. “With desktops there was no limit to the applications you could install and it was really a freeform zone for exploration, sharing and communications, which encouraged piracy,” Witt explains. “With smartphones, it was much harder to ‘torrent’ something and there is more control of applications that can be installed.”

Rise and rise of Spotify Moreover, many early streaming entrepreneurs, such as Daniel Ek of μTorrent, moved to legitimate business with Spotify, which he founded, because they saw no future in the illegitimate business. “Ek specifically targeted young pirates to turn them into legitimate customers,” says Witt. Suddenly, legitimate music was hip again.

For now, nobody seems to be making money in streaming, not Apple, not Spotify nor Amazon. What, if anything, will it take to make money in music streaming?

“It’s a scale game and players need to get much bigger before they can amortise marketing and platform costs,” says Salati. Streaming firms are just beginning to tap into developing markets such as Asia and Latin America or new demographics such as middle-aged subscribers, he notes. “Apple and Amazon are willing to lose money in the race to be No 1 in streaming,” says Witt. “Eventually, there will be a couple of players with huge economies of scale that will then be able to raise prices, which will lead to big profits.”

Hardware makers such as Amazon.com, Google Home’s Alphabet or Apple are unlikely to relegate Spotify or Pandora to marginal players anytime soon. “Spotify is still the market leader and can’t be written off,” says Witt. “And the device itself is dead. The iPod was the last successful standalone music hardware.” Salati says Spotify has been pushing very aggressively to expand its lead on Apple and Amazon. (Spotify reportedly lost nearly €400 million [$631 million] on revenues of €2.9 billion last year.) “I don’t think it will be a problem for them to get scale in a few years,” he says. Spotify’s revenues grew nearly 50% annually in 2016. “Once we see streaming take a 65% or 70% share of total recorded music sales [from about 50% currently], the big players will all be profitable.” Little wonder, then, that new players are taking the plunge. The latest is electric car maker Tesla, which is reportedly readying its own streaming music service. CEO Elon Musk sees controlling dashboard content, like music, as the next big frontier for auto firms. Tesla expects to ship 500,000 electric vehicles next year. Morgan Stanley believes cars are becoming the “Fourth Screen” after TVs, PCs and smartphones.

As its base of vehicles on the road grows, Tesla would rather have that screen time to itself than watch emerging rivals such as Apple or Google grab it. Music streaming would be a data bonanza for Tesla, which keeps close track of its cars, not just for safety reasons but also to deliver real-time software updates. Apple’s Car- Play and Android Auto already allow owners of new high-end cars to connect their smartphones to their vehicles and access streaming music. The likes of Tesla are very interested “in the potential multi-trillion-dollar opportunity selling data, content, and experiences unfamiliar to today’s auto firms”, Morgan Stanley strategist Adam Jonas wrote in a report last month.

“The potential total addressable market of such a bundled mile (utility, content and data) dwarfs some of the major end markets” such as PCs and smartphones that tech giants like Apple currently serve.

Tesla Mobility, an on-demand Uber-like ride hailing service, is likely to have about two million vehicles alongside seven million privately owned Teslas by 2030. “Tesla wants to be more than a ‘dumb pipe’ that moves people around,” Jonas argues. Globally, the auto industry is likely to be a “money loser” by 2030, Morgan Stanley notes. If Tesla can monetise the time that people are spending in their cars, as it develops a “living room on wheels”, it would be head and shoulders above its peers.

Vertical integration Will the music industry follow the vertical integration route of video content, where Amazon and Netflix are now big in original programming? Will we see Apple or Spotify become music publishers or labels as they cut out middlemen such as Sony or EMI? Not necessarily. “Radio has a history of buying music from labels rather than producing its own songs while TV companies traditionally made their own programming,” Witt notes. “Netflix doesn’t need to carry every TV episode ever made.” They just need hits such as House of Cards as well as some old episodes to keep their binge-watching customers satisfied. On the other hand, Spotify needs tens of thousands of songs all the way back from the 1960s and 1970s because, if they had just half the music, their customers would go elsewhere, he says. That ties up a lot of the money for Spotify, which is not the case for Netflix.

The way people consume video and music is also different. With TV, we used to watch one episode a week of Seinfeld or Friends. With music, you could sit down and listen to your CD or record collection all weekend. Now, that has been reversed. There is binge-watching TV and you listen to streaming music on your iPhone a few songs at a time while you are on a gym treadmill or walking around in a mall. “We will see some vertical integration in music streaming, but it will be over time,” says Macquarie’s Salati. “In South Korea, Loen Entertainment operates a streaming service and publishes music under its own label,” he notes.

Here is how the music business works. Record labels such as Sony and Warner Music own sound recordings of tracks performed by artists such as Drake or Justin Bieber — called “master recordings” — that can be sold as CDs, downloaded from iTunes or streamed in Spotify. Publishing companies own the copyrights of the music — both composition and lyrics — and collect licences whenever the music is recorded or performed on stage. Streaming firms pay out nearly two-thirds of their revenues for master recordings. Artists typically get 10% of that. Beyonce, the world’s highest-paid musician, received only US$1.9 million from streaming of the US$62.4 million she made last year.

What’s next? For now, there is no other disrup tive technology in sight that would upend streaming. “This is it,” says Witt. The current streaming model works for all the stakeholders in the music industry — labels, publishers, streaming companies, artists. “Five years from now, how we listen to music will be similar to how we do today on Spotify or Apple Music,” says Witt. “Streaming gives us access to just about every song ever recorded. What more do I want?”

Still, he concedes that there will be marginal improvements in areas such as song selection or song preview with increasing use of artificial intelligence and machine learning to customise listening choices. Pandora has created an AI-engine based on its Music Genome project, which constantly learns about its listeners, and Amazon and Spotify are using AI as well. Moreover, music discovery through back catalogues will allow listeners to re-evaluate artists and reassess older songs. Until recently, the recording industry was focused on immediate hits.

Ubiquitous streaming and new technology will help a new generation of music aficionados to look at the entire spectrum of music from Taylor Swift, Lady Gaga or indeed The Rolling Stones or The Beatles in a new light. That means more money and power to the musicians.

Assif Shameen is a technology writer based in North America

This article appears in Issue 789 (July 24) of The Edge Singapore which is on sale

How streaming changed the music industry

How streaming changed the music industry

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