For some customers, music at Starbucks (NASDAQ: SBUX) is almost as important as its coffee. From the first Blue Note Blend music CD the company issued 20 years ago to support for emerging artists like John Legend, what you heard at the coffeehouse has imbued the experience of customers as much as what you drank.
But symbolic of the woes bedeviling the music industry, in which U.S. CD sales fell by 14% in 2014, all 21,000 Starbucks stores will stop selling music CDs come the end of this month. And just like the forces shaping the industry, analysts expect a Starbucks-branded streaming service to emerge.
A broken record
Of the 257 million albums sold in the U.S. last year, only 140.9 million were on CD, according to Billboard. Big CD sellers such as Barnes & Noble, Best Buy, and Trans World Entertainment (operator of the f.y.e. chain) recorded steep 20% declines in sales to 31 million albums.
While retailers such as Wal-Mart and Target sold twice as many albums, the figures still represent a year-over-year decline. Industry watchers say 2014 will be the last time CD sales surpass digital album sales.
But the problem isn't just a switch from physical albums to digital music, as sales of digital tracks also fell 12.5% year over year to 1.1 billion. That outpaces even the decline in digital albums, which fell 9.4% last year. Instead, the rise of streaming music through services such as Pandora (NYSE: P), Spotify, and even YouTube has eaten into sales.
Jumping into the stream
Nielsen Entertainment said on-demand streaming jumped 54% in 2014 to 164 billion streams. Apple's (NASDAQ: AAPL) iTunes can benefit from the change, but it's likely going to need to change, too, and we could see the tech giant's purchase of Beats as the vehicle for the transition.
As of last month, Apple was reportedly hard at work integrating Beats into the very fabric of iOS and iTunes, while also developing it for the Music app for the iPad, iPhone, and iPod. The subscription service would cost as little as $5 a month if Apple has its way, undercutting the $10 per month premium subscriptions from Spotify, Rdio, and Google's (NASDAQ: GOOG) Play Music.
So, despite Starbucks' decision to stop selling CDs, this isn't the day the music died, just another evolution in its consumption.
Music is more accessible than ever. Pandora ended 2014 with a record 81.5 million active listeners, a 7% increase from the prior year, with listening hours jumping 20% to 20.03 billion. Spotify has over 15 million paying customers and more than 60 million active users across the world.
The change in how music is consumed has required the industry to modify the way it ranks the hits. Billboard, for example, adopted the industry benchmarks that equate 1,500 song streams from an album to one equivalent album sale and 10 tracks as equaling one track equivalent album, or TEA. When viewed in that manner, rather than killing it, streaming music has saved the industry and allowed it to grow.
Yet one development also shows that no matter how much things change, they remain the same: Vinyl record sales are staging a comeback and were the one segment in the physical world that expanded last year. Some 9.2 million vinyl records, a near-52% increase, were sold in 2014, bringing the format up to 6% of all album sales.
Music will remain an essential component of going to the coffee house, even if, like the industry itself, it must evolve in response to changing consumer preferences. Although it hasn't said what will replace the CD rack next to its registers, customers can be sure it won't miss a beat in keeping the Starbucks experience connected to the music.