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Streaming Continues to Gobble Up More of the Music Industry

By Evan Niu, CFA – Sep 11, 2020 at 10:00AM

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A whopping 85% of U.S. recorded music revenue came from streaming services.

Streaming services accounted for just under 80% of all recorded music revenue in the U.S. in 2019, and that proportion has now grown even larger in the first half of 2020, according to new figures released by the Recording Industry Association of America (RIAA). In addition to streaming representing a larger piece of the pie, the overall pie is growing, too. U.S. recorded music revenue increased 5.6% in the first half to $5.7 billion.

Here's what streaming music investors need to know.

Many colorful musical notes on a blue background

Image source: Getty Images.

85% and counting

Music-streaming revenue jumped 12% to $4.8 billion in the first half of 2020, accounting for a whopping 85% of the industry's sales. The bulk of streaming revenue -- $3.8 billion of the $4.8 billion -- comes from paid subscription services like Spotify (SPOT -0.22%) and Apple (AAPL 0.23%) Music.

Paid subscription revenue grew faster in the second quarter than it did in the first, according to the RIAA, likely due to the COVID-19 pandemic that has increased demand for home entertainment. For example, Spotify added 8 million premium subscribers worldwide in the second quarter, representing an acceleration compared to the 6 million premium subscribers it added in the first quarter. Some markets were impacted by the coronavirus, but the Swedish music-streaming leader's performance in North America topped its expectations.

The number of paid subscriptions in the U.S. climbed to an average of 72.1 million, up from 58.2 million for the first half of 2019. That translates into about 1 million net new subscriptions per month on average, the RIAA notes. Approximately 29% of Spotify's total subscribers, or 40 million, are located in North America, with those customers concentrated predominantly in the U.S.

Revenue from ad-supported tiers was relatively flat, growing a mere 3% because the pandemic has hurt ad spending across the board. The negative impacts were mostly felt in the second quarter. "This category had grown by double digit percentages in previous years, but was significantly impacted by broader advertising declines due to Covid-19," the RIAA wrote.

Digital and customized radio service revenue -- such as SiriusXM (SIRI 0.00%) and its Pandora subsidiary -- grew 6% to $583 million in the first half. Sirius is mounting a podcast offensive, recently acquiring Stitcher, in order to better differentiate itself and compete with both Apple and Spotify on that front. Podcasts aren't included in recorded music revenue but are playing an increasingly important role in competition among audio-streaming services.

Validating Apple's decision to get into on-demand music streaming five years ago, revenue from digital downloads fell 22% to $351 million and now accounts for just 6% of the industry's sales. Once upon a time, the Cupertino tech giant revolutionized the music industry with digital downloads, but streaming has become the preferred way to listen to tunes, contrary to Steve Jobs' prediction many years ago that consumers "want to own their music" instead of subscribing to a streaming service.

It's not every day that you get to say that Steve Jobs was wrong about something.

Evan Niu, CFA owns shares of Apple and Spotify Technology. The Motley Fool owns shares of and recommends Apple and Spotify Technology. The Motley Fool recommends Sirius XM Radio. The Motley Fool has a disclosure policy.

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