In the United States, music has always been an evolving form of entertainment -- and not just in format, style, or tempo. The method of content delivery itself has changed frequently as well. Over the past 50 years we've had the 8-track, the record album, cassette tapes, MiniDiscs, CDs, digital downloads, and streaming delivery. At one point, each was the newest and most exciting format before being replaced by a newer delivery method.
As far as physical copies go, the CD is still the predominant format, but it finds itself struggling against digital downloads and, now, streaming-based services. Here's the revenue breakdown as of 2014:
As you can see, CDs are struggling against digital and streaming delivery. After conceding the No. 1 format to digital downloads in 2012, CDs last year finished behind both digital downloads and streaming. By pulling in $1.86 billion, an annualized decrease of 12% over the past two years, compact discs are falling more quickly than any other noted format. Meanwhile, streaming-based revenues are growing quickly, by growing from $1 billion in 2012 to $1.87 billion -- an annualized increase of 35%.
With that incredible growth, you'd think record labels would be happy with streaming services ... and you'd be wrong.
Universal to Spotify: You're hurting our business model
If a Financial Times report (by way of Engadget) is correct, major record label Universal is using content negotiations to force Spotify to become more aggressive in its attempts to convert free ad-supported users to premium subscribers. Specifically, Universal is blaming Spotify's free services for slowing CD and digital download revenue from Apple's iTunes. Last year, a Wall Street Journal article (subscription required) reported that Apple had experienced a music digital download revenue drop 13%-14%.
Specifically, the report states that Universal wants Spotify to institute limits for ad-based users to convert them to more-lucrative subscribers. Essentially, the label wants streaming to return to its 2013 form. Then, Spotify had a per-track cap for ad-based (free) users and streaming company Pandora (NYSE: P) had a 40-hour monthly limit as well. The question Universal needs to ask is how far it's willing to go if Spotify or Pandora fails to transition more users in a substantive way.
Will Universal Taylor Swift-boat Spotify?
The nuclear option would be for Universal to pull its entire catalog from Spotify and other streaming-based music options, joining popular artist Taylor Swift, who pulled her catalog off the service last year. But that's easier said than done. Streaming is now responsible for roughly 28% of the music industry's revenue, and there's no guarantee Americans would buy CDs or digital downloads if the free spigot were turned off via streaming limits or required subscription fees.
So it doesn't appear the "Taylor Swift option" is on the table, but it does seem that labels are getting more aggressive. Although major record-label CEOs have commented on their desire for streaming-based services to do more to entice users into a subscription, they've mostly resorted to rhetoric to influence streaming companies -- at least so far. If Universal is pressuring Spotify in licensing negotiations, that might lead to Pandora and Spotify changing their business model.
Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple 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.