Music Industry Warms To Digital Streaming

It was Adele's night at the Grammy awards in Los Angeles on Sunday, where the British singer won six awards including best album for 21, which has sold 17m copies around the world.

Adele's international success makes the absence of her album from digital-music streaming services such as Spotify, Deezer and Rdio all the more glaring.

She is one of a small number of prominent artists who have held back most of their music from streaming services, amid concern that they can undermine or "cannibalise" purchases of albums on CD or more established download stores such as Apple's iTunes.

But Spotify and its rivals are hitting back at this criticism – and, after years of industry scepticism, their arguments seem to be winning over many music company chiefs. And with Spotify recently topping 3m subscribers to become one of the world's largest subscription music services, the music industry's tone is beginning to warm towards digital streaming.

Even Warner Music, one of Spotify's staunchest critics a few years ago, has been won over, with chief executive Steve Cooper telling analysts on a recent earnings call that streaming services are "coming on strong". Although they generate less than 10 per cent of total digital revenues, their faster growth rate than downloads mean "you will eventually see those lines cross", Mr Cooper said.

Adele and other holdouts such as The Beatles are increasingly becoming the "corner cases", says Ken Parks, Spotify's chief content officer. "These just happen to be higher-profile examples. The vast majority of artists and their labels are behind this model."

Rob Wells, Universal Music's digital president said last month that the cannibalisation argument is "totally bogus". His remarks came as industry body "the International Federation of the Phonographic Industry – revealed that digital music revenues had increased by 8 per cent in 2011 to $5.2bn, an acceleration over the 5 per cent growth rate in 2010.

While the pay-out every time a track is played on streaming services is smaller than for a download on the likes of iTunes, successful artists can, over time, see a larger dividend as the number of listens accumulates.

The new-found support from music labels is now helping some digital-music services to move from regional champions to global businesses. Rhapsody, which pioneered the subscription model when it launched in the US a decade ago, has acquired Napster from Best Buy to launch in the UK and Germany. Deezer, after working for four years in its native France, has launched in dozens of countries across Europe and Latin America since December.

That is quite a change in the music industry's tune compared with two years ago, when Spotify was struggling to secure rights to launch in the US.

Tim Hadley, director at Rara.com, which has launched in 20 countries since December, says: "It has taken a while to get here but it now feels like digital music services are being licensed on a global basis."

Jon Irwin, Rhapsody's president, says this new expansion is down to improvements in both business models and technology.

"In the last couple of years, technology moved to the point where smartphones and networks make the product experience so powerful," he says. More than 40 per cent of activity on Rhapsody comes from mobile devices such as Android and iPhone, he adds. "Two and a half years ago, there was no mobile access."

With so many "unlimited" music streaming services competing at the same £10, €10 or $10 monthly price point, differentiation is as much down to packaging as product.

Spotify's ambitious "freemium" service, where users can listen to hours of music a month without ever having to pay, in return for listening to ads, contrasts with Rara's more traditional method of discounting the first month's fee. Deezer has placed emphasis on bundling the cost into mobile and broadband packages from France Telecom.

"The one thing rights holders require is a differentiated service," says Rara's Mr Hadley. "They don't want five services targeting the same consumer."

Rara is targeting consumers who fuelled Adele's success through traditional CD sales but remain bewildered by the digital world – accounting for some 70 per cent of the UK population, according to an ICM poll that Rara commissioned.

At the current £120 annual pricing, they may struggle to win over the average Adele fan, who may buy just a handful of albums a year. But the opportunity to double music fans' average spend is exactly why labels are so excited by subscription services.

Mark Mulligan, an independent music analyst, predicts a balance may be struck between holdouts such as Adele and the streaming services by introducing "windowing", where albums' releases are staggered across different services.

For example, Coldplay's album Mylo Xyloto was released on CD and iTunes last October but only arrived on Spotify, Rdio and Rhapsody earlier this month.

"That is a really easy way to mitigate a lot of the risk of streaming," Mr Mulligan says. "The relationship between streaming and the download could be the same as radio and the CD. Radio cannibalises sales as well … But artists get many multiples higher on Spotify per play than they get on the radio."

Spotify's Mr Parks notes that there was similar anguish about iTunes – still the world's largest digital music service by some distance – back in 2003, when Radiohead was among holdouts. "We are obviously pursuing a model that changes the way the industry and artists have done business for over 50 years," he says. "That kind of thing can be difficult to do."

More News From Financial Times

Social unrest harms hopes of Greek reform

Hedge funds ride European bank rally

Equities trading costs under pressure

Liquidators in further MF fund returns in UK

Fuel costs and exchange rates throw Tam into loss