Dr. Nils WlömertInstitute for Interactive Marketing & Social Media, WU Vienna

Vienna, September 28, 2016

On-demand Streaming Services and Music Industry Revenues

- Insights from Spotify's Market Entry

Agenda

1 Introduction

2 Theory

3 Method

4 Sample & results

5 Implications

Wlömert, N. and Papies, D. (2016): On-Demand Streaming Services and Music Industry Revenues - Insights from Spotify's Market Entry. International Journal of Research in Marketing, 33(2), 314-327.

Will streaming reverse the trend?

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Global Music Industry Revenue (US$ billions, trade value)

Streaming is becoming more popular

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Number of worldwide

Spotify users[millions]

The study investigates the influence of streaming services on music purchases and revenue

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(1) What are the effects of the adoption of free and paid streaming services on music expenditures in other channels?

(2) Can revenue from streaming services compensate for potential losses that streaming services cause in other distribution channels, and what factors moderate this effect?

Research questions:

Agenda

1 Introduction

2 Theory

3 Method

4 Sample & results

5 Implications

How can firms and artists generate revenue?

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Music purchases Sales revenue

Free Streaming Ad revenue

Paid Streaming Subscription revenueOverall revenue

+

Pre-adoption expenditures

+

+

RQ2RQ1

Agenda

1 Introduction

2 Theory

3 Method

4 Sample & results

5 Implications

Challenges in identifying cannibalization effects

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Spotify users are likely to spend more money on music products than non-users because they are generally more interested in music

It is difficult to separate substitutability or complementarity of goods from spurious correlation (Gentzkow 2007)

We control for unobserved individual effects by focusing on differences in behavior over time (Wooldridge 2002; Bronnenberg et al. 2010)

A longitudinal study was designed

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timeJan Feb May Jun

1 2 3 4 5 6

Oct

7

Dec

8

Mar Jul Feb

9

2012 2013

Music expenditures & service usage per person per month

Difference-in-Difference estimator (e.g., Wooldridge 2002)

Public awareness “Spotify“

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Google Trends Index for "Spotify"

The estimation exploits the longitudinal dimension

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change in log revenues

errorterm

(1)

(2)

change in log expenditures

free streaming service adoption

paid streaming service adoption

Identifying assumption: unobserved preferences that are related to adoption and expenditures are relatively stable over time (e.g., Wooldridge 2002)

log of pre-adoption expenditures

time dummies

Agenda

1 Introduction

2 Theory

3 Method

4 Sample & results

5 Implications

More than 2,700 respondents were repeatedly interviewed

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Cooperation with all major labels (Universal, Sony, EMI, Warner)

Participants were recruited via the label’s online consumer panels

Incentive: free CD of choice

9 survey waves over the course of 14 months

N = 2,759 (participated in all waves of the survey)

Sample is representative for the most important consumer group

Variables Music market Sample

Age (mean) 38a 37

Gender (% male) 60a 57

Daily music listening (h:m) 3:42b 3:58 (3:11)c

a BVMI (2013), b ARD/ZDF (2013), c Median

27% (8%) of participants have adopted a free (paid) streaming service

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* Share of participants, that had used the respective service at least once

Streaming service user share (cumulated)*

The adoption of a FSS (PSS) reduces expenditures by 11% (24%)

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Music Expenditures

Free Streaming Service Adoption

Paid Streaming Service Adoption

-11%*

-24%*

n.s.Usage Intensity

+ 1%

-0,81%**

-0,77%**

Individuals (i): 2,058Observations (t): 8Total observations (N): 16,464

n.s. = not signifikant* p<0.05

** p<0.01

Overall music industry revenue

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Label revenue = sales

revenue - 30% retail

margin

Label revenue =

subscription revenue -

50% (taxes & retail

margin)

Revenue per stream:

0.001 EUR

Label revenue =

streams per month x

payout per stream

Overall music industry revenue

Sales revenue Subscription revenue Advertising revenue

The net effect of PSS is positive, the effect of FSS depends on the pre-adoption expenditure level

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Music label revenue

Free Streaming Service Adoption

Paid Streaming Service Adoption

n.s.

+49%**

Pre-adoption expenditures +1%

-0,12%**

n.s.

Individuals (i): 2,224Observations (t): 8Total observations (N): 13,344

n.s. = not signifikant* p<0.05

** p<0.01

FSS are only profitable for previously inactive consumers

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Mean0 Max

-0.4

-0.2

0

0.2

0.4

Effect of FSS on revenue

Pre-adoption expenditures

External validation & aggregate level analyses

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Free service Paid service

Inactive Active Inactive Active

User share inactive/active 14% 86% 9% 91%

Overall adopters in DE 2014a 6,400,000 1,400,000

Number of adopters by group 896,000 5,504,000 126,000 1,274,000

Revenue contribution by user .33€ .32€ 5.14€ 4.01€

Revenue contribution by group 295,680€ 1,761,280€ 647,640€ 5,108,740€

Overall revenue/month 7,813,340€

Mean music expenditures DEa -- 5.00€ -- 5.00€

Cannibalization rate -- 14% -- 21%

Cannibalization by user -- -.70€ -- -1.05€

Cannibalization by group -- -3,852,800€ -- -1,337,700€

Overall cannibalization/month -5,190,500€

Overall net effect/month 2,622,840€

9,000,000€

2,250,000€

aIFPI (2015)

Influence of payout rate and previously inactive consumer share on FSS revenue

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Payout per stream [EUR]

Net effect of FSS adoption

[million Euros]

0 .001 .002 .003 .004 .005

-2

0

2

4

-4

6

10

8

Agenda

1 Introduction

2 Theory

3 Method

4 Sample & results

5 Implications

STREAMING SERVICES AND MUSIC INDUSTRY REVENUES - NILS WLÖMERT23 11.10.2016

Implications

Music Labels

Aim to attract as many users as possible (e.g., to prepare IPO)

Currently not profitable due to high free user share

To ensure long-term profitability, stronger incentives for free users to convert to the paying customers

Streaming Services

Streaming services cannibalize demand from other channels

Overall positive revenue effect

Focus on channels that directly generate revenue

Use free services to target inactive consumers and to convert users

Increase utility difference between the free and the paid version of the service (e.g., through windowing), as conversion is weak

DEPARTMENT OF MARKETINGInstitute for Interactive Marketing & Social MediaWelthandelsplatz 1, 1020 Vienna, Austria

Dr. Nils Wlömert

T +43-1-313 36-4958F +43-1-313 36-90-4958nils.wloemert@wu.ac.atwww.wu.ac.at/imsm

STREAMING SERVICES AND MUSIC INDUSTRY REVENUES - NILS WLÖMERT24

Thank you!

11.10.2016

Individual level expenditures per media type

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CD albums

CD singles

DVDs

Vinyl albums

DTO albums

DTO tracks

Premium subscriptions

Other subscriptions

expenditures

Individual level listening behavior per media type

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Ad-funded streaming (Spotify & Simfy)

Premium subscriptions

Other free streaming

Terrestrial radio

Video streaming

Digital tracks stored on devices

Physical products