The music industry is in trouble. Album sales are slipping, and people are instead using a technological platform that allows them to listen to music absolutely free. Over 90% of Americans use this platform, with the average American spending two hours every day using it primarily to listen to free music. And I'm not talking about streaming music online: The technology I'm talking about is AM/FM radio.
Long before Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube, Pandora (NYSE:P), or Spotify, terrestrial radio had been conditioning listeners to believe they shouldn't have to pay for music. Terrestrial radio thrives by the music industry, with over 80% of all radio programming being music, but its interests don't always align with the music industry: in fact, it's been fighting to avoid paying higher royalties to performers and labels. And while many artists and record executives have watched the rise of streaming music with dread, seeing these services as threats to the physical and digital sales, the industry might be missing out on a massive opportunity to convert low-value radio listeners into high-value music streamers.
Streaming (should) kill the radio star
The music industry has sharply criticized streaming music services, like Spotify, for purportedly low payouts to artists and labels. (The business-savvy Taylor Swift made headlines by removing her entire catalog from Spotify last November.) However, the industry often overlooks that streaming services on a listener-per-play basis pay vastly higher royalties than terrestrial radio -- as much as 16 times higher according to some analyses. Therefore, the music industry as a whole would profit more if as many people streamed music as listened to the radio.
So why is the industry stuck on terrestrial radio?
Terrestrial radio royalties look more generous than streaming royalties purely because of audience size. Compared on a per-listener business, terrestrial radio is pretty stingy. That's because historically, terrestrial radio has been required to pay royalties only to songwriters and producers and not to performers or copyright holders (usually labels). The idea was that radio play served as free promotion for performers, helping them to sell albums. Now, however, radio promotion is not sustainable for album sales. The RIAA reported that recording sales (inflation-adjusted), not including streaming sources, have fallen from nearly $15 billion in 2003 to under $6 billion in 2013. While some particularly powerful artists and labels have struck side deals with broadcasters for higher royalties (perhaps most tellingly Taylor Swift's own Big Red Machine label, explaining her apparent double standard), the National Association of Broadcasters strongly opposes any move to broadly increase royalty payments. With such diminishing revenues, the music industry can't afford to accept low-valued terrestrial play and write the meager earnings off as promotional or advertising spending.
As a troubled industry itself, broadcast radio will probably never save the music business. To survive, the music industry needs a new paradigm.
Pay the piper
Enter streaming music. It has been criticized as an inferior substitute for album sales, but it also has the potential to be a vastly superior substitute for radio. Broadcast radio has built a $17 billion industry by giving away music, selling listeners to advertisers, and passing the leftovers back to the music industry. There's nothing inherently wrong with that model. Streaming services can do it, too, and they could potentially do an even better job of selling ads: Television networks have already found that they make more money off streaming shows than broadcast because they're able to target specific consumers.
Further, streaming services like Spotify and Pandora, soon to be joined by heavyweights Apple (NASDAQ:AAPL) and Google, also offer something both old-fashioned and completely revolutionary: the ability to simply pay for the product you like. Premium subscription services have already been dismissed by countless artists, insiders, and analysts as too unprofitable, too small, too threatening, too stingy, yet these services have already proven that people will pay for access to music. They may not want to buy the album, but consumers don't want or need to own digital media; they just want access to it. Services like Spotify and Pandora are proving that people will pay up for that access, and the music industry needs to see this as a value opportunity.
This is not a strange idea. The music industry's media cousin, television, faces similar challenges and already works exactly this way. Piracy is rampant, DVD sales have fallen off a cliff, and consumers already get broadcast television for free, yet thanks to America's 100 million paying cable subscribers, not to mention 30 million Netflix (NASDAQ:NFLX) subscribers and millions more on other streaming services, television is in the middle of a new golden age.
The music business needs to learn from television and embrace the changing landscape. Spotify, for example, currently charges $10 a month for unlimited music. If as many Americans paid their "music bill" as already pay a $65 cable bill, the American music industry would be bringing in $12 billion in revenue from streaming subscriptions alone. The album sale, physical or digital, would surely be dead, but the industry would still be much stronger. But to do this, artists and record companies need to stop seeing streaming music as the album killer, and start seeing it as the radio killer.
Daniel Ferry wrote this article while listening to the Alvvays record on Spotify. He also owns shares of Apple and Google (A and C shares). The Motley Fool recommends and owns shares of Apple, Google (A and C shares), Netflix, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.