Digital album sales, which passed physical album sales in 2011, declined in 2013, likely due to streaming services making the concept of owning music irrelevant. This might mean the slow end of music ownership as listeners move to a model where users pay a fee (or pay by viewing ads) to borrow songs on a variety of devices.
In 2013, Nielsen's numbers for the U.S. show that digital track sales were down 5.7% and digital albums were down 0.1% while albums as a whole were down 8.4%, according to Music Industry Blog. Nielsen also reported a 103% rise in audio streams.
That shift is good news for streaming services including Pandora (NYSE:P) and Spotify, but bad news for digital music sellers like Amazon (NASDAQ:AMZN) and a mixed bag for Apple (NASDAQ:AAPL), which stands to lose in its iTunes music store, but gain on its iTunes Radio service.
Music Industry Blog calls the shift to streaming a transition of spending much like the download was a transition from buying a CD. The majority of [streaming] subscribers were already digital music buyers before becoming subscribers and the majority of those were iTunes customers, according to the blog. "50% of [streaming] subscribers buy album downloads every month and 26% buy CDs every month."
In the short term, that shows that streaming services can drive downloads and physical sales (which is especially beneficial for iTunes) but, the blog article explained, this is not likely to be a long-term result. "If streaming services do their job well enough, there should be little or no reason for a subscriber to additionally buy music. They do so because consumers transition behavior gradually not suddenly. The fact that a third of download buyers still buy CDs illustrates the point."
No more ownership
Mark Mulligan of MIDiA Consulting, who writes the Music Industry Blog, told the Fool that "Eventually the core of music ownership will fade as a consumer concept, but the change will not be anything like immediate. Even now, just 40% of music sales are digital. In markets like Germany and Japan, way more than two thirds of the market is still the CD."
The most engaged digital music fans are shifting their behavior, and in some cases spending, toward subscription services, Mulligan said. Those people may be moving away from ownership, but the mainstream music buyer is just starting his trip down that road. Additionally, Mulligan said, while traditional CD buying is declining, "we are seeing more ways in which people value ownership alongside access -- e.g., 7-inch vinyl singles, deluxe edition box sets, etc."
Digital makes it harder for unknowns
The music industry has always been a business of hits and streaming services make discovering new artists harder. And while iTunes and, in some cases, the streaming services allow an unknown band "shelf space" next to The Rolling Stones, that digital shelf is in a dusty corner of the virtual store that few customers are likely to see.
"The top 1% of catalog on digital services accounts for a much larger share of total sales than in CD sales," Mulligan told the Fool. "This is is due to many factors, not least of which is the tyranny of choice on digital services: there is so much choice (30 million tracks) that there is effectively no choice at all. People end up gravitating toward the familiar. It is the great paradox of having access to all the music in the world, choice paralysis."
Keeping audiences to the familiar is not only bad for new artists, it's bad for album sales as customers are likely to either already own familiar music or not feel a need to buy it.
Royalties could become an issue
One of the biggest challenges facing streaming music services is that they have to pay royalties on the music played. And while artists and labels complain that these fees are not high enough, they are already causing problems for the services.
"If royalties go up, they [streaming services] will die," Mulligan said. "Music subscription service penetration is already only 5% and is unlikely in the extreme to break through to mainstream at the $9.99 price point. These services are already operating on wafer-thin margins and most are bleeding cash. If royalty rates go up, consumer prices go up, which means consumer adoption goes down."
Artists could, Mulligan said, opt out of streaming services over payment issues as some did with iTunes when it launched. But most, he said, will likely come back. "There are very few artists now who would say iTunes was anything other than a crucial revenue stream," he said.
Will people still buy digital copies?
Much like albums, cassettes, and CDs before them, digital downloads will reach a peak then begin to fall. That fall might be excessively hard for the major labels (Sony (NYSE:SNE) , Universal Music Group, owned by Vivendi, and the privately held Warner Music Group) as sales won't simply transition to another format. During past industry transitions, there was a sales boost from people wanting to update their collections to the latest format. That is inherently impossible in a music world dominated by streaming services.
Mulligan does still see some growth for music downloads, but if you are a musician or record label, it's not a pretty picture.
"I think there remains a lot of potential growth for music downloads in some big emerging markets (e.g., Brazil, Turkey, Russia) but in established markets we will see a plateau and decline," he said.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Pandora Media. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.