When it comes to the business of music in 2023, it’s all about streaming. The Recording Industry Association of America estimates that 84% of the industry’s revenue in the United States comes from streaming music. Paid subscription services contribute the bulk of the revenue, with ad-supported music streaming, digital and customized radio, and licenses for digital apps like Facebook and TikTok making up the rest.
Globally there are more than 523.9 million subscribers to streaming services, and although half of all music streaming app revenue comes from the U.S., that is sure to change in the coming years as the number of subscribers outside the U.S. increases. Here are some things to know about the growth of the music streaming industry.
A brief history of music streaming
The digital distribution of music, aka streaming, began in the late 90s with MP3.com. For a short time, this website was the hub for independent artists who had the ability to create their own domain – mp3.com/artistnamehere – and monetize their own music using a ‘Pay 4 Play’ model that paid based on streams and downloads. Although smaller artists were embracing the MP3 format, music labels were against the idea, claiming it lacked copyright protection.
In 1999, Alanis Morissette struck a deal and became an early investor in the company which earned her millions of dollars over the next year and a half when she sold them. This move was a big moment for digital music, and although MP3.com was shut down in 2003 – largely due to lawsuits – it forced the music industry to begin reconsidering its aversion to digital music.
In 2000, the company that would become Pandora Radio began, starting as the Music Genome Project, which analyzed songs on 450 different musical attributes in order to make perfect recommendations for other songs. Unfortunately, at the same time, the peer-to-peer file sharing app Napster which had an emphasis on audio files was disrupting the music industry’s traditional revenue model, leaving it open to copyright lawsuits. Suits from big-time artists like Metallica, Dr. Dre, and Madonna eventually shuttered the company, meaning funding for digital music was near impossible to come by. After its own struggles and employee lawsuits, Pandora finally had enough funding to launch a full free service to the public in 2005. Spotify soon followed in 2006.
Later bigger companies like Apple, Amazon, and YouTube, entered the streaming market having learned the important lesson of getting their legal ducks in a row.
Music Modernization Act
In a delayed response to the rapid changes in the music industry, the Music Modernization Act was established in 2018. This law revamped a section of the U.S. Copyright Act that aimed to bring it up to speed with the 21st century. This act streamlined the music-licensing process, allocated royalties for producers and sound engineers, and expanded protection for sound recordings prior to 1972 that had not been retroactively protected when the Sound Recording Amendment of the Copyright Act was put into effect that year.
As a part of streamlining the music licensing process, the Act established the Mechanical Licensing Collective (MLC) that collects digital mechanical royalties from Digital Service Providers (e.g. Spotify, Apple Music, etc.) on music streamed with the U.S. and distributes them to the appropriate artist. The collective began doing so in 2021 and states they had already distributed $700 million by October 2022.
However, this collective may not be working the way it was intended. It has been noted that the MLC has amassed millions in unmatched royalties that have yet to be paid to artists and are currently collecting interest on that ‘black box’ of royalties. What happens with the royalties and the interest may be worth taking a closer look at.
Where is the industry going?
Discussion in this area has been focused on how the industry needs to ensure artists are being paid fairly for their work. A Forbes article covers this debate on what model for distributing royalties is the most ‘fair.’ The most used model ‘pro rata’ is seen by critics as favoring bigger artists at the expense of smaller ones, while a ‘user-centric’ is criticized for creating a complicated system that may actually water down royalties from high-consumption users.
The discussion on how to split the profits is perhaps not the only debate the industry should be having. As one blogger put it, the industry ‘was built for yesterday’s music business’ – meaning, the industry needs to focus on building a new infrastructure for the future of the industry rather than merely trying to catch up with the times.