Spotify is Growing — But Why Isn’t It Growing Faster?

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Spotify has frequently been hailed at as the savior of the moribund music industry. Sooner or later, the pundits argue, a streaming music service that gives users unlimited access to virtually every piece of recorded music in the world for a modest price – and that creates a revenue stream for artists — will crowd out the competition. Right?

Maybe so. But even as Spotify steadily builds its paid user base, a number of obstacles seem to be preventing the kind of growth that could restore the music industry to its former healthy glow.

The latest setback for streaming theory comes from Nielsen’s latest Music 360 study, which shows that teenagers get most of their music not from streaming services like Spotify, or from CDs, or even from iTunes — but from YouTube. That’s right: Close to two-thirds of U.S. teens 18 years old or younger use the video site to listen to music. Radio (56%), iTunes (53%), and CDs (50%) are next. The only streaming service that a substantial number of teens use is Pandora (35%). In other words, young people do seem to like the idea of streaming music from the web — they just don’t seem inclined to pay for it.

Nevertheless, Spotify is growing. The service updated its subscriber figures this month for the first time in a year, showing that it now had 15 million active users worldwide, 4 million of whom pay for the service every month. That’s up from 3 million in 2011. And the service is signing up subscribers at an unprecedented rate: According to a report by MusicIndustryBlog, it took seven quarters for Spotify to reach a million paying users while it took Rhapsody, a similar service, 11 years to do the same thing.

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Of course, Spotify — unlike Rhapsody — had the advantage of coming of age during the era of widespread broadband use and 4G mobile capabilities. And other streaming services have been just as successful as Spotify yet now don’t even exist. (Ever heard of imeem?)

But perhaps even more discouraging for champions of Spotify is that streaming services seem to be bumping up against a number of immovable objects. For one, YouTube is emerging as a prime destination for music. Listeners can easily search and find virtually any band or artist, all at no cost, without having to download a separate program. And YouTube’s made it much easier for users to re-listen to their favorite artists through saved playlists and customizable tools.

Then there’s the fact that consumers continue to illegally download free music over the web. It’s unclear how much of an effect piracy has on streaming services, but peer-to-peer file-sharing accounts for 15% of the music acquired in the U.S., according to Russ Crupnick, music analyst at NPD Group.

Another issue is our apparently stubborn desire to own the music we enjoy the most. Nielsen’s study shows that while most adults discover new music on the radio, 61% say they still listen to music on CDs. Even the old cassette tape — yes, cassette tape — is outpacing most music services. Nine percent of adults say they still listen to tapes, while only 7% say they consume music through Spotify and 1% use either emusic.com or Rhapsody. Pandora registers much better, with 32% saying they use the service. About 30% of adults say they download music through iTunes.

“I thought streaming would rapidly overtake digital downloads,” says Crupnick. “But I’ve reversed my feeling about that. What the research keeps saying is that people like the idea of ownership.”

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Less than 10% of music listeners are digital-only consumers, according to Mark Mulligan of musicindustryblog. Most still listen to music through some combination of digital downloads, CDs, streaming music services, and vinyl records. More than 70% of Spotify listeners also buy digital downloads — mostly from iTunes — according to NPD Group.

“Four million paid subscribers [for Spotify] is a fantastic achievement, but it’s a drop in the ocean in the music industry,” says Mulligan. “I’m not sure we’ll ever get to the position where most people will want to pay $9.99 a month for streaming music. The bottom line is that the vast majority of people value ownership.”

In the digital space, iTunes boasts 80 million customers, and Spotify is nowhere close to seriously chipping away at those sales. While CD sales fell 6% last year, digital downloads and vinyl sales were up big. Album sales across all platforms rose for the first time since 2004 (but you can largely thank Adele for that).

Why do consumers want to own their music? Most consumers have a long history of purchasing musical recordings — but not TV shows or movies — a habit that seems hard to break. Another convincing theory is that the music we listen to is seen as a reflection of identities, more so than the TV shows or movies that we watch. Many streaming services attempt to address this impulse by allowing users to create their own individual playlists — but so far it appears that isn’t enough.

On the other hand, Nielsen’s latest numbers do provide a glimmer of hope for champions of streaming services like Spotify. The youngest generation’s reliance on YouTube shows that it doesn’t place as much emphasis on actually owning the music that they listen to. That means that a playlist, saved somewhere in the cloud, may eventually be a satisfying alternative to ownership for them. If so, streaming services may yet prove to be the music industry’s salvation.

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