Spotify and YouTube Are Just Killing Digital Music Sales

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Since the iTunes Store launched in 2003, digital music sales have been viewed as the music industry’s saving grace in the face of declining physical album sales and rampant online piracy. Now, with a deluge of  music streaming services letting fans listen to songs for free, the digital download may be going the way of the CD and the cassette tape before it.

U.S. digital track sales decreased for the first time ever in 2013, dropping from 1.34 billion to 1.26 billion, according to Nielsen SoundScan. CD sales also continued their ongoing decline, dropping 14 percent to 165 million. Digital album sales were stable, staying at 118 million sold last year. Meanwhile the number of songs streamed through services like Spotify, YouTube and Rhapsody increased 32 percent to 118.1 billion.

The rise of streaming has been swift. Spotify just arrived on U.S. shores in the summer of 2011, but it has become a lightning rod for controversy thanks to a chorus of artists who decry that paying musicians a fraction of a cent per listen is unfair. Make no mistake, though: this model is the future. Both YouTube and Beats Electronics are planning to launch paid streaming services early this year, and the French company Deezer is expected to bring its popular service to American shores soon. Even Apple, the king of digital sales, has dipped a toe into the streaming space by launching the Pandora competitor iTunes Radio.

(MORE: Here’s How Much Top Musicians Are Making on Spotify)

“What we were thinking about was having full track download sales somehow replace the lost revenues from the rapid decline of physical [sales],” says Larry Miller, a music business professor at New York University’s Steinhardt School of Culture, Education and Human Development. “What wasn’t so widely anticipated five or six years ago was that full-track download sales would begin to decline as rapidly as they have this year, especially given how nascent the streaming services still are.”

It’s not clear whether this shift toward streaming will help or hurt the music industry in the long run. Digital downloads were a logical continuation of the business model that generated fat profits for record labels in the heyday of physical music stores. In some cases, with no manufacturing or distribution costs involved, a hit digital album could actually be more lucrative than a physical CD. Beyonce’s new surprise album, for instance, sold almost 830,000 copies in its first three days available exclusively as a $15.99 iTunes download.

Despite some successes, digital downloads were never really able to stop widespread online piracy, which tanked music sales for more than a decade. Miller says the only solution was to develop a platform that was “better than free” and provide users benefits they couldn’t get through illegal downloads. Enter Spotify and others, which offer services that are simple to use, boast comprehensive music libraries and won’t leave a nasty virus on a music fan’s computer. As these startups have grown in popularity, piracy has dwindled. Peer-to-peer filesharing networks, which Napster and all its ilk popularized, have dropped from 31 percent of total North American Web traffic five years ago to less than 10 percent today,  according to broadband equipment company Sandvine.

However, the music industry’s core problem—that lots of fans just don’t want to pay for music—remains an issue. Most people use the free, ad-supported version of Spotify, and the company recently expanded its free offering to mobile devices. The most popular platform for listening to music among young people is YouTube, which is almost entirely free. If these businesses can convert lots of free users into paying subscribers, artists, then record labels and the companies themselves will be awash in money. A premium subscriber to Spotify, Rdio or Google’s streaming service spends $120 per year on music, or enough to buy about 12 digital albums. That’s plenty to sustain the industry.

(MORE: Spotify Offers Free Music on Mobile Devices)

But if users refuse to migrate from free options, the music industry may regret the year it made digital downloads obsolete. “Until we’re able to change the denominator—the number of consumers who are interacting with these services—then the fundamental economics just don’t work,” Miller says. “Having said that, I’m bullish on the fact that we are going to get there, that we are going to effectively deliver these services to hundreds of millions or even billions more prospective music fans.”