TikTok creates viral hits. YouTube is unparalleled in its ubiquity. But music subscription services pay the bills.
More than three in five dollars earned by US record labels in the first half of 2024 – 60.2% to be exact – came from premium subscription services, according to the RIAA's interim report. This marks the first time that subscriptions have surpassed the 60% share of total revenue, surpassing the 59.5% share in the first half of 2023 and the 59.3% mark for the full year of 2023.
Ad-supported on-demand streaming, on the other hand, has lost steam, growing just 2.5%, half the rate of paid subscriptions. The slowdown has been dramatic: Three years ago, advertising revenue rebounded from the pandemic slowdown to grow 54.1% in the first half of 2021 and another 17.7% in the first half of 2022. Its share of total industry revenue — 10.4% — is also down from 10.5%, 11.3% and 10.5% in the three previous H1 periods.
Other ad-supported segments are also lagging behind the growth rate of paid subscriptions. SoundExchange distributions, which include some ad-supported streaming as well as royalties paid by satellite radio subscribers, rose just 3.8% to $517 million. Other ad-supported streaming services, which cover services that don't operate under legal licenses, fell 1.5 percent to $155 million.
The situation around advertising is worse than the numbers suggest. Ad-supported on-demand streaming isn't limited to services like Spotify's free tier and YouTube. A new generation of platforms such as TikTok and Instagram are also grouped into this category. Without these emerging platforms, ad-supported streaming would look even worse.
For an industry that must constantly pursue growth, advertising is too small to play a role. In the most recent quarter, Spotify received 12% of its revenue from advertising — both music and podcasts — versus 88% from subscriptions. Even if advertising becomes a bigger part of the business, CEO Daniel Ek he said during the company's earnings call on April 23, it won't be a major factor in helping the company reach 20 percent revenue growth. “Anything we can do on our subscription side will obviously outweigh any improvement on the advertising side,” Ek said.
However, free music played an important role in building today's music ecosystem. In 2009, writer Chris Anderson followed The long tail with a lesser known book titled Free which promoted the idea that not charging for digital goods might be a wise strategy. While The long tail had tremendous success, Free never rose to the same level of fame. But Anderson's idea proved to have merit. In the same year Free It was announced that Spotify launched a “freemium” music streaming service in the UK—the world's third-largest music market—that used an ad-supported free tier intended to drive listeners to the paid version. The ad-supported permissions were minimal, but worked as intended. Free listening has proven to be an effective tool for attracting customers who at some point in the future will become some of Spotify's 246 million subscribers.
The growth potential of the subscription business lies outside the U.S. Globally, subscription streaming accounted for 48.9% of recorded music revenue in 2023, according to the IFPI, more than 11 percentage points below the share in the U.S. (RIAA reports retail value in the US while IFPI reports wholesale prices for each market.) Worldwide subscription penetration is only 15%, Warner Music Group CFO Brian Castellani he noted during an Aug. 7 earnings call, “and there's a lot of room to go from 800 million subscriptions today to well over a billion in the next five years.”
The future may be a mix of free and subscription. In May, the CEO of Sony Music Entertainment Rob Stringer called on streaming platforms to charge users of ad-supported tiers a “modest fee” to make free streaming “more of a marketing funnel” to attract customers. Stringer also called on short-form video platforms like TikTok, Instagram Reels and YouTube Shorts to step up their payments to rights holders. “Increasingly, these are primary sources of consumption and should be valued accordingly,” he said.
With subscriptions now over 60% of US revenue and advertising losing share, free platforms will likely come under greater pressure to offer more rights. Until that happens, however, expect the industry to increasingly pin its hopes for revenue growth on subscriptions.
