After almost two decades of relentless decline caused by piracy and falling prices, the music business is enjoying a fragile recovery thanks to the growth of paid streaming services such as Spotify Ltd. and Apple Music.
The U.S. industry is on pace to expand for the second-straight year -- the first time that's happened since CD sales peaked in 1998 and 1999. Retail spending on recorded music grew 8.1 percent to $3.4 billion in the first half of 2016, according to a midyear report from the Recording Industry Association of America that was obtained by Bloomberg News.
The credit goes to streaming -- Internet services that give listeners commercial-free access to millions of songs for a monthly fee -- or for free if they're willing to hear ads. U.S. streaming revenue grew 57 percent to $1.6 billion in the first half of 2016 and accounted for almost half of industry sales.
"It feels like the market is slowly recovering after years of being in crisis and shrinking," said Zach Katz, the head of U.S. operations at BMG Rights Management GmbH, a record label and music publisher whose artists have included M.I.A. and Blink 182. "It's absolutely a step in the right direction."
The results can be seen in the financials of music companies big and small. The three major record labels -- Vivendi SA's Universal Music Group, Warner Music Group, owned by billionaire Len Blavatnik, and Sony Music Entertainment -- have all reported gains this year. BMG, a smaller label and publisher, reported a 4.6 percent sales increase for the first half of the year.
The industry is reluctant to declare victory. Annual sales have hovered around $7 billion for six years, down by half from the 1999 peak, according to Recording Industry Association of America data. Meanwhile the labels are still negotiating new contracts with Google Inc.'s YouTube and Spotify, two of the largest purveyors of free music in the world.
While sales from ad-supported, on-demand streaming grew 24 percent to $195 million in the first half of 2016, according to the Recording Industry Association of America report, those services aren't doing enough to persuade people to pay for music and and don't make enough money off their free users, association Chairman Cary Sherman said in a blog post.
"Many services rake in billions of dollars for themselves on the backs of music's popularity but pay only relative pennies for artists and labels," Sherman wrote. "Pirate sites operate with seeming impunity."
This is not the first time new technology has pushed to get people to pay online. Apple Inc. co-founder Steve Jobs convinced record labels that iTunes would save the industry from piracy, only to vaporize album sales by selling singles instead.
Yet Apple is no longer the only player in the market for digital music. Spotify operates a larger paid subscription service and has showed no signs of slowing down since Apple Music began competing in that market. Most of Apple Music's users are new to paying for music and are not former Spotify customers, according to label executives.
The arrival of new competitors could further boost sales.
Amazon.com Inc., the world's largest Internet retailer, is investing in a paid music service to help sell other goods on the e-commerce site. It will introduce a standalone music service by the end of the year, people with knowledge of the matter said in June.
Pandora Media Inc., the largest online radio service in the world, will also introduce a paid, on-demand service by year's end and aims to convert 10 percent of its 78 million free users into paying customers by 2020. IHeartMedia Inc. also plans a paid streaming service, the New York Post reported recently, citing people with knowledge of the matter.
For the good news to continue, sales of paid subscriptions must outpace the declining purchases of music, whether downloaded or on a CD. Physical music sales tumbled 14 percent while downloads also shrank by a double-digit percentage. Streaming holds promise because the cost of a one-year subscription -- $120 -- is more than the average consumer spent on CDs, even at the peak.
"We're starting to see on-demand music streaming as no longer a thing that hipster college kids and young people do," said Larry Miller, a former industry executive who now teaches music business at New York University.
SundayMonday Business on 09/26/2016