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How Digital Distribution changed the Music Industry Part 2: Introduction of Digital Music Services

After reading part 1 of our series you now know the history of how digital distribution came to be and how the music industry had to adapt to keep up with this new way of music sharing. In part 2 we will look at present day digital distribution and how the likes of Spotify, Apple Music, and many others came to be. We left off at the introduction and success of the iTunes Music Store, but what happens when an unlikely yet well equipped competitor makes their way onto the music scene.

The introduction of iTunes made way for many in the music industry to rethink their business model and see how far they could go when introducing new services. When it seemed the inner workings of iTunes were the end all be all of music streaming, others thought outside the box. What if there's a service that doesn’t only offer individual tracks or albums for purchase but instead consumers would be given access to a whole library of music at a set price. They would pay a monthly subscription and get access to a music library to listen to how they wanted and when they wanted.

Spotify was founded in 2006 by Martin Lorentzon and Daniel Ek. It was initially created with the intent of having a legal ad-supported music service that would be free for listeners while also generating licensing revenue to copyright holders. Some viewed Spotify as just another attempt at creating a legal service that would stray consumers away from illegal file sharing services. Due to skepticism from the music industry about yet another legal streaming service, negotiations had to be also made between Spotify and copyright holders before the service really took off.

In 2008, the company announced they had signed agreements with the music industry’s top copyright holders to distribute their music to audiences worldwide. These negotiations were finally agreed upon as Spotify conceded to making multiple changes to their primary business model. The copyright holders would hold shares in the company and instead of offering a service that was only funded by advertisements, they had to create a more premium version of the service that would be funded by fees paid by subscribed members.

Following the negotiations, Spotify then released their service with a free basic version and a more advanced version that would only be offered with a monthly subscription. This was the introduction of a “freemium” service, this is the idea that most users will start off using the service for free but will continue to use the app frequently so over time they would invest in paying for the application. To achieve this, most subscription services have to make their free versions annoying but bearable. This includes having advertisements playing frequently as well as limitations when using the app that you don’t have when paying a subscription.

What has made Spotify so successful in the era of digital distribution is not because they were the first to do it, but because they have found a balance in their service that makes free users make the switch to a paid service. For other streaming services, their issue may be that the free version is already good enough and users don’t feel the need to pay for the service or it is too lackluster and not enough is given in the free version to keep them from using it at all. In 2019, Spotify had a 27% conversion rate, this means out of their 75 million monthly users, 20 million of them are paying customers.

Some believed the success of Spotify would not be long lasting and that their business model would not be able to succeed. On the other hand many have argued that Spotify has created a vehicle for pushing the music industry forward. Although revenue from recorded music has seen a significant fall in the last 15 years, it is evident that people across the world are listening to more recorded music now than ever before and streaming services such as Spotify are fueling the recovery of music sales.

Although it seems like Spotify and Apple Music are the top contenders in access-based music services, competition will always arise. In 2018, the music industry saw some of the highest numbers of users among streaming services. In March 2018, Apple Music had 49.5 million users with Spotify trailing close behind with 47.7 million users. We then saw a drop in usage in 2019 with Apple Music falling to 44.5 million users and Spotify only having 44.2 million users. Soundcloud had one of the biggest drops amongst the streaming services going from 34.2 million users in 2018 to only 15.3 million users in 2019. The only other service with similar numbers to Spotify and Apple Music is Pandora Radio that had 31.5 million users in 2019.

Services compete mainly via the size of the music catalogs they offer, availability of use in different areas, customizability of their music catalogs. and the depth of artists that they offer. As many of them continue to grow and offer similar services, competition for subscribers will come down to price point and the culture built around the app, Spotify being a strong current example. But is there room for a game changing idea in our current streaming oligarchy? Streaming services have now looked to social media to increase membership. They have integrated their services into networks such as Facebook and Instagram to allow listeners to share with their friends what they’re listening to. On both Spotify and Apple Music the ability to create and share custom playlist gives users the chance to connect with those outside of the app. Both platforms have offered their catalogues to be used in Instagram stories as well. This tactic could attract outside users who do not pay for the service.

In the final part of our series on digital distribution in the music industry we will be looking towards the future. Who will be the top player in digital distribution? With numbers dropping in membership, how will these access-based music services keep interest? How will they differentiate their services from the competition and keep generating revenue? Make sure to check out part 3 as we take a deep dive into the future of the music industry and how far digital distribution may go in the years to come.

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