Streaming accounted for nearly 80% of U.S. music revenue in 2019, according to a new report from the Recording Industry Association of America (RIAA). Streaming revenue grew nearly 20% to $8.8 billion for the year, totaling more than the entire industry brought in just two years ago. Meanwhile, digital downloads continued to shrink while physical sales were roughly flat year over year.

The rise of streaming has been great for market leaders like Spotify (NYSE:SPOT). Apple (NASDAQ:AAPL) has successfully navigated the shift to streaming as well, cannibalizing iTunes downloads. Other companies like Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon have also carved out their own places in music streaming.

There are a couple of key trends for investors interested in capitalizing on the continued rise of streaming music detailed in the RIAA's report.

A woman wearing headphones holding a smartphone.

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Premium subscriptions are growing faster than ad-supported streaming

The number of U.S. consumers paying for a subscription to on-demand streaming like Spotify or Apple Music climbed 28.7% last year to over 60 million. That resulted in a premium subscription revenue increase of 27.5%. 

The discrepancy in subscriber growth and revenue growth can be attributed to timing, promotions, and the increased popularity of family plans. Spotify has notably seen its average revenue per premium subscriber decline over the last few years, but its strategy appears to be paying off. 

Importantly, the growth in premium subscription revenue outpaced the growth in ad-supported listening. Ad revenue from streaming services grew less than 20%, and it brought in just over $900 million. That compares to $5.9 billion for premium subscriptions.

The relatively slow growth in ad revenue is important to note for several companies. For Alphabet's YouTube, which primarily generates revenue ad-supported music videos in the U.S., the slower growth puts additional pressure on its efforts to push its premium subscription service, YouTube Music. 

For others, it's not as big of a concern. Amazon and Spotify both use ad-supported services to sell other products. Amazon sells Prime subscriptions and Echo devices; Spotify has long succeeded at transitioning ad-supported listeners to paid subscribers.

Apple has been a big beneficiary of Americans' willingness to spend on streaming. Its paid subscriber base is bigger than Spotifyd's in the U.S. That trend might change, however, as Spotify converts more free listeners to paid subscribers over the next few years. eMarketer estimates Apple will add just 3.4 million new subscribers in 2020, reaching about 37 million. It expects Spotify's total listeners (paid and free) to reach nearly 76 million.

Internet radio listening is declining

The RIAA report notes a considerable decline in SoundExchange payments made by internet radio platforms like SiriusXM's (NASDAQ:SIRI) Pandora. But SoundExchange's 2018 revenue included a $150 million settlement from Sirius. Adjusting for that revenue, SoundExchange royalties actually increased about 13% year over year.

But more telling of the health of internet radio is the decline in ad revenue from what the RIAA categorizes as "other ad-supported streaming." Revenue declined 0.1% year over year, after falling 4% in 2018. Considering average ad prices typically increase every year, it seems internet radio listening is declining.

Estimates from eMarketer back up the RIAA's numbers. The researchers estimate U.S. Spotify listeners surpassed Pandora listeners last year, earlier than anticipated. eMarketer said Pandora lost 5.5 million listeners last year, and that number will continue to decline over the next few years. Meanwhile, Spotify, Apple, and other on-demand streamers will grow their listenership.

Streaming is still growing quickly and increasingly important to the music industry, but that growth is specifically coming from on-demand services. In particular, premium subscription growth is driving overall revenues, as the segment is both significantly larger than other streaming segments and growing faster. Investors interested in the streaming music industry ought to focus on those companies that have shown strength in driving consumers to paid subscriptions -- Spotify and Apple.

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