While streaming music services have grown steadily more popular with consumers, the top players have found it challenging to establish a successful business model.
 
Market leaders Pandora Media (NYSE:P) and Spotify lose money. More importantly, the two companies have increased their losses as they gain customers. The lesser players in the field, including subscription services Rhapsody and Beats Music, the latter which is now owned by Apple (NASDAQ:AAPL), are also money losers.
 
Still, it's still very early in the game for streaming, and there are signs of hope that these digital music services -- and some you might not know -- will ultimately succeed. That optimism was evident at the 2015 Consumer Electronics Show during the panel discussion "Streaming Music Wars: Will there be a Winner?"
 
Moderated by Forbes magazine reporter Zack O'Malley Greenburg, the panel featured Rdio CEO Anthony Bay, Smule CEO Jeffrey Smith, and Gracenote Chief Strategy Officer Ty Roberts. All three panelists said they believed that there would be winners in the space, but they acknowledged there are challenges as well.
 
 Streaming

The panel strongly believed that streaming music will produce financially successful companies. Source: author.

There are essentially two models 
In the streaming world, the big players are using two different models. Pandora offers a radio-like product. Users tell the service which artists they like and are served songs based on those preferences. The service has a free, ad-supported model and a paid subscription service that drops the ads.
 
Spotify has a free version that lets users pick specific artists (but not songs) and a paid service that gives subscribers access to an enormous library of music on an on-demand basis.
 
Essentially, Pandora is personalized radio while Spotify is a large library of music that users can pick through.
 
Swift leaves a blank space
Taylor Swift made headlines last year when she pulled her music from Spotify, because the young singer is among a small number of artists who can still sell a million records. During the panel, Bay clarified exactly what happened in that dispute.
 
Swift wants more money from services like Spotify in order to compensate for the lost potential sales when a song is released. In all likelihood, she deserves it if streaming costs her sales. The problem is that Spotify already pays 70% of its revenue in royalties, according to Bloomberg Businessweek which means that it's already paying out as much as it possibly can and isn't looking to cheat any artists out of what they are due.
 
"All streaming is not created equal. You have paid subscription which most artists, including Swift, are generally fine with," Bay said.
 
The pop star, though, objected to the concept of free on demand -- the idea that users can specifically hear her music without paying for it.
 
"Her basic premise is music shouldn't be free," he said.
 
Swift denied Spotify permission to use her music on its free service, and the company's policy is to not offer music on its subscription platform from artists who are not on its free service.
 
This threatens to become a growing trend, as the window for selling music is relatively small and giving it away for free has, in most cases, reduced sales. That hurts overall revenue for artists as consumers and advertisers simply aren't paying enough on a song-by-song basis for an artist such as Swift to match her earnings from a physical or digital sale.
 
"Artists are pulling out of free services to get whatever sales they can," Smith said. "It's only a sales window of a few weeks, but for her it's significant."
 
Labels offer problems and solutions
Record labels are a further complication, as they are actually taking in the money from the streaming providers then paying it out to artists. This helps from an organizational standpoint, but it adds another mouth to feed to the equation.
 
In some cases, streaming services are being blamed for low payouts to artists, but the record label is cutting into that payment.

"It comes down to what is in the terms of that contract," Bay said. "U2 has a different deal than a starting artist."

Can streaming produce any big winners?
The biggest challenge facing the industry is that Pandora, Spotify, Rdio, Rhapsody and all the other major players don't make money -- in fact, they have actually increased their losses as they add customers.

According to a November 2013 report from Generator Research, the current business model for streaming music is "inherently unprofitable." 

"Our analysis is that no current music subscription service -- including marquee brands like Pandora, Spotify, and Rhapsody -- can ever be profitable, even if they execute perfectly," Andrew Sheehy, the main author of the report, concluded.

The panel was optimistic
While financial returns have so far not been good, all three panelists were optimistic there will ultimately be financially successful streaming services.

"The numbers of places you can listen to music continues to skyrocket," Roberts said. "Listening is up and piracy is down, so there is an opportunity for music services."
 
Bay, who said his company is currently losing money according to plan, told the Fool in an interview after the panel that the losses being posted by major players are just a bump in the road for what will ultimately be a successful industry.
 
"Spotify and Pandora lose money if they don't manage their cost structure," he explained. "They individually make money on each customer, but you have to manage your costs. It's potentially a quite profitable business."
 
He likened the streaming business to retail, where margins can be small.
 
"As long as you make money on each thing, you have to sell enough things," Bay said. "You have to make sure you have enough users."
 

Daniel Kline owns shares of Apple. He uses Pandora but is not bullish about it business model. The Motley Fool recommends Apple, Google (A shares), Google (C shares), Netflix, and Pandora Media. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Netflix, and Pandora Media. 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.