North America set to keep its grip on music streaming

North America is set to maintain its grip over music spending in the coming years, as subscription models grow in popularity to account for more than 60 per cent of global consumer revenues by 2027, according to forecasts from consultancy Omdia.

Paid subscriptions to streaming services such as Spotify have revived the music industry over the past several years, restoring revenue that had been lost to online piracy at the turn of the millennium.

Subscriptions are set to make up more than 62 per cent of all global recorded music revenue by 2027, up from 58 per cent in 2022, Omdia analysts predict. Physical formats, such as CDs and vinyl albums, will recede to 13 per cent of revenue in 2027, from nearly 17 per cent in 2022, Omdia says.

Even as streaming services have expanded to many countries around the globe, Omdia expects North America to remain the bedrock of music spending by a wide margin.

The region will account for 43.2 per cent of global recorded music buying in 2027, down only slightly from 43.9 per cent in 2022, Omdia analysts forecast. Europe will maintain its number two spot, with 27 per cent of global music spending, the consultancy adds.

Spotify launched a decade and a half ago, and hundreds of millions of people across the world now pay a monthly fee to stream music. The streaming pioneer reached 226mn paying subscribers at the end of September.

But the early land-grab of new subscribers is slowing in some regions, leaving the music industry to find ways to keep up momentum and fuel future growth. “The days of high double-digit growth are long gone”, Omdia warns. “Developed countries all face the problem of what to do when the subscriber pool dries up”.

In the US, this slowdown has already begun. Last year, US recorded music revenue rose 6 per cent compared with the prior year, to $15.9bn, according to the Recording Industry Association of America, the trade group. This was its slowest growth rate since 2016, when the business had just begun to bounce back from its piracy-driven downturn.

In the next phase of music streaming’s evolution, Omdia analysts suggest that streaming companies will need to strike a balance with pricing.

Investment bank TD Cowen notes that the amount consumers spend on music relative to their other expenses is less than half of the level it reached during the 1990s. “Not only is music still relatively inexpensive; the product has also improved significantly, with streaming services offering access to a library of virtually all music ever created on easily portable devices”, says analyst Doug Creutz. Against this backdrop, he expects further price rises in the coming years.

Goldman Sachs analysts believe that the monetisation of music has “significantly lagged consumption” and also expect price rises “on a regular basis, especially in an environment of higher inflation”.

When Spotify launched in 2008, “the environment for recorded music sales was completely different”, says Simon Dyson, Omdia analyst. “Piracy was still horrendous. There was still lots of free music floating around. The $9.99 [price] was in line with the price of a CD.”

It would take more than a decade for Spotify to raise the price of its standard subscription in the US, the world’s largest recorded music market. The streaming group announced a $1 rise in July of this year, with Americans now paying $11 a month to stream all the world’s music. Spotify said the price rise would help the company “keep innovating in changing market conditions”. Rival Apple Music last year raised the price of its music subscription to $11 a month.

Dyson anticipates that Spotify will continue raising prices by $1 every year going forward. “It’s very underpriced for what it’s offering,” he says. “Even if they do a price rise next year and the year after, I think it will still be underpriced.”

Early financial results suggest Spotify has pricing power. During the quarter when Spotify raised prices, the group still managed to sign up 6mn new subscribers, above the 4mn it had forecast. The group also turned a profit for the first time in more than a year. Chief executive and co-founder Daniel Ek said the results proved that Spotify could become a “great business”.

“Because of our confidence in our product and our ever-expanding content offering, we felt the timing was right to raise prices”, Ek, the 40-year-old billionaire, told investors on an earnings call.

Omdia analysts believe that music companies and streaming services “need to be more proactive” in offering different pricing and subscription options. At the moment, Spotify, Apple, Amazon, YouTube and others all offer a similar catalogue of songs at similar prices. Omdia expects these services will need to differentiate themselves in the same way that Netflix and video platforms do, with exclusive content.

Spotify has made strides towards this, making a push into podcasts and audiobooks with the goal of expanding its scope to all things audio — not just music. Spotify is even offering UK and Australia subscribers 15 hours of audiobook listening per month at no extra cost, an offer that it plans to expand to the US in the coming months.

However, Omdia analysts expect streaming companies will eventually need to split some of these offerings into different subscription tiers or add-ons. “It may seem like a good idea to increase the breadth of content to limit churn, but continuing to keep all audio content in a single silo really is a recipe for disaster,” they warn.