Analysis

How much are Spotify and Apple Music driving growth in the US?


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Last week, US industry body the RIAA revealed that recorded-music revenues were up 8.1% to $3.4bn in the first half of 2016.

“The strongest industry growth since the late 1990s” was justifiably celebrated by the industry, with a 112% rise in music-streaming subscriptions to just over $1bn hailed as a key driver for that growth.

Spotify and Apple Music loomed large in media coverage of the RIAA’s figures, particularly the latter service. No surprise: Apple Music launched at the very end of the first half of 2015, and has since signed up 17 million subscribers globally. You’d expect it to be an important factor in the US industry revival.

What hasn’t been explored, yet, is the question of how Apple’s overall music business is evolving: not just Apple Music, but its iTunes download store. How much is Apple Music’s growth outweighing iTunes’ decline?

How much new revenue is Apple’s streaming service creating for labels, and how much is simply shifting across from its existing downloads business? And how does all this compare to Apple’s main rival in the streaming space: Spotify? We’ve been crunching the numbers to find out, and our workings follow.

tl;dr: we estimate that Apple Music generated just under $180m for US labels in the first half of 2016, while Spotify Premium generated just under $325m.

When falling iTunes sales are factored in, Spotify is clearly driving more growth for the overall US industry. However, the fact that Apple and Spotify combined account for more than 85% of US on-demand streaming subscriptions may be a concern.

But in more depth…

Retail to wholesale

Our first task was to convert the RIAA’s “retail” figures, representing how much US listeners spent on music, to “wholesale” or “trade” figures: the revenues paid to labels after digital services took their cuts.

The RIAA said that overall wholesale revenues rose by 5.7% to $2.4bn in the first half of 2016, but it didn’t break down the individual segments – downloads, streaming etc – into trade figures.

To get that data, we compared the RIAA’s retail figured for full-year 2015, which were published earlier this year, to the trade figures in the IFPI’s Recording Industry in Numbers report for that year.

For example, the IFPI says that the trade value of single-track downloads in the US last year was $897.8m, while the RIAA reported $1.23bn of retail sales. The margin for retailers like iTunes and Amazon MP3 was thus 27%, and the labels’ share 73%. For digital album sales, these percentages are more like 30% and 70%.

It’s more complicated for paid subscriptions, because the IFPI lumps “paid subscriptions and freemium streams” together, but the RIAA doesn’t. Stripping out the freemium streams – around 10% according to our industry sources – suggests that the trade value of premium subscriptions is around 58% of the retail total.

By our calculations, the wholesale value of single-track and album downloads in the US fell from $880m in the first half of 2015 to $729m in the first half of 2016. That’s around $151m in lost revenues for labels.

Meanwhile, the trade value of paid subscriptions grew from $278.6m to $589.7m in the same period: around $311m in new revenues for labels.

Apple Music and Spotify’s shares

To calculate Apple Music and Spotify’s share of those paid subscriptions revenues, we’ll need an idea of their respective market shares in the US.

According to estimates shared with Music Ally by Midia Research, Apple Music has a 30.5% share of paid streaming subscriptions in the US. If true, that suggests it generated $179.9m of revenues for US labels in the first half of 2016.

What was iTunes’ share of the decline in music-downloads sales though? This is more difficult, because the most recent estimate we have for iTunes’ US market share is from 2014, when research firm MusicWatch claimed it was 52%.

When we followed up with founder Russ Crupnick, he said that MusicWatch stopped tracking market share in 2014, but that its most recent study (from Q2 2016) suggests that 64% of music download buyers shop at iTunes.

That’s a measure of people, not spending, though: some industry sources suggest iTunes’ share of US download sales has risen as high as 85% in the last couple of years.

We know that the trade value of US music downloads fell by $151m year-on-year in the first half of 2016. If iTunes’ market share is 52%, Apple’s share of that decline may have been $78.5m; at 64%, it may have been $96.6m; and at 85%, it may have been $128.4m.

There’s no hiding the fact that we’re in the realm of very fuzzy logic here: not just guessing at iTunes’ market share, but working on the basis that this share remained static over the last year.

Still, using those figures, if iTunes’ market share remained static at 52%, then Apple’s overall digital music business may have grown in value to US labels by 22% year-on-year to nearly $560m.

At a 64% market share for iTunes, Apple’s payouts may have grown by 15% to just over $646m. And if iTunes had an 85% share of the downloads market – more money for Apple but also more exposure to the decline – the company’s overall payouts may have grown by just 7% to around $800m.

As we said, fuzzy logic, but the main points are clear: Apple is still the biggest digital partner for the US industry, but its contribution to growth can only be measured by looking at iTunes’ decline as well as Apple Music’s growth.

The bigger picture

What about Spotify, though? Midia Research estimates that Spotify has a share of around 55.1% of the US streaming subscription market, which would suggest around $324.9m of trade revenues for US labels in the first half of 2016 alone.

Spotify’s premium business has grown sharply in the US, and it’s fair to suggest that it is accounting for a big share of the industry’s growth in the first half of 2016. Apple Music is certainly playing its part, but as a company – once iTunes is factored in – Apple’s contribution to growth was more modest.

Both of these streaming services are growing impressively, which brings us to perhaps the bigger talking point. If Spotify’s US market share of on-demand subscriptions is 55.1% and Apple Music’s is 30.5%, that’s a combined share of 85.6%.

What can existing services like Rhapsody, Google Play and Deezer, as well as new entrants like Pandora, Amazon and SoundCloud Go, do to make this more than a two-horse market going in to 2017?

As things stand, Apple Music vs Spotify in the US in the US on-demand subscriptions market is starting to look a bit like iOS vs Android in the smartphones world. And nobody wants to be the Windows Phone or BlackBerry in that scenario.

Finally some caveats.

– These calculations focus on premium, on-demand subscriptions: so personal-radio subs like Pandora One and Slacker Radio Plus aren’t included.

– Apple Music is far from the only factor in falling iTunes sales. It’s reasonable to wonder how much of Spotify’s growth represents value transferred from the downloads market, rather than completely new income for the industry.

– There’s a separate analysis to be done for music publishers, and the value they’re getting from all these services.

Stuart Dredge

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