A Look Into The Music Industry’s Crystal Ball

“Crystal Ball BLL -0.2%, Crystal Ball, tell me things as you think they will be.” The great thing about the music business now is that, unlike previous eras, it’s rapidly shifting and morphing at a faster pace than ever. That makes it difficult for some to keep up, more difficult for others to adapt, and pretty near impossible to predict what will happen ten years from now. That said, there are a number indicators that allow us to look into the near future and take an educated guess at what we may see just a few years down the line. Allow me to gaze into my crystal ball.

Streaming will become the primary way that most people consume their music. We’re only at the beginning of the streaming era of music and there’s a lot of room for growth. World-wide there were only 28 million paid subscribers of streaming services last year according to the latest IFPI digital music report, which is a drop in the bucket compared to the number of music consumers on the planet. More and more people are discovering just how useful the access model is as compared to the ownership model. It doesn’t take long to realize that your digital storage filled with a library of songs can’t compete with having access to 10+ million songs anytime and anywhere.

But there will be fewer outlets that deliver it. Right now streaming is a part of the industry that’s completely upside down financially. None of the major platforms, Spotify, Pandora, Beats Music, Slacker, etc., turn a profit yet, instead playing for the big score down the road when the economy of scale flips their way when enough new users sign up. Unfortunately by that time it will be too late. Apple AAPL -1.29% will have entered the game with their own streaming service that will play on all platforms, and will be able to convert its massive existing customer base into monthly paying customers. Amazon will be in the game too, and Google GOOG -4.59% will intensify it’s already potent efforts (perhaps with a separate new YouTube component).

Of the existing current players in the space, only one or two survive against the might of these giants. The key here is that Apple, Google, and Amazon don’t have to make money from their services, since music is only a small part of their overall businesses. Thats not the case for the other stand-alone streaming services, where music is their primary offering. It’s hard to compete against corporate leviathans with deep pockets and little to lose.

Music business revenue holds steady. It’s hard to believe that for as much as we hear about the death of the CD, it’s still going pretty strong, accounting for slightly more than 50% of the total global recorded music revenue (again according to the most recent IFPI numbers). That said, physical sales are declining rapidly, and as that happens, so is the total industry revenue. Downloads too are still a major chunk of digital music revenue and they’re declining as well. Can those loses both be replaced by the income from streaming? Let’s do the numbers.

There are 28 million streaming subscribers worldwide right now, and it’s not too much of a stretch to believe that we could hit 100 million in the next five years. If each subscriber pays an average of $39 per year as it does now, that’s around $3.9 billion. If ad-supported streams increase to around $1 billion in the same time span (which is doable at its current growth rate), that’s $4.9 billion

If we use the 11% that physical sales were down last year as a guideline for future earnings, the loss would be about $3.5 billion in five years (about half of what it is now). Add to that another half billion or so from download losses (if they stay at last years 2.1% decline, which most likely will accelerate), and we see that the current industry global revenue of $15 billion can actually increase by nearly a billion dollars. No great shakes, but no decline either.

The recorded music business is never going to see those days gone by of $25+ billion years unless the industry finds a new product that causes consumers to open their wallets the way they did in the past. How likely is that? It’s not on the horizon yet, but the music business has a history of changing with technology, and a new innovation could spark an unforeseen growth spurt. But that’s one thing I’m not willing to predict.