The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.
Over the last decade, streaming platforms have mostly held prices steady while racking up over half a billion subscribers globally. But for years, music executives have questioned subscription services’ decision to sacrifice higher prices — and with them higher royalties to labels and artists — to gain more subscribers.
Music streaming is following an age-old business tactic: launch at an affordable price, gain customers and, once people are hooked, raise prices. The question is when to raise prices. Too early a raise could risk alienating subscribers, while one that’s too late risks leaving revenue on the table once subscriber acquisition fades. The quality of the product comes into play, too. People will stay with a subscription service they love. But raise the price on a mediocre product and less fervent customers will depart. That’s a nightmare scenario for a music industry whose business is increasingly dependent on customer retention. Paid subscriptions accounted for 57.2% of U.S. record label revenues in 2021, according to the RIAA.
That decision-making process is currently playing out in the streaming video-on-demand (SVOD) marketplace. Disney quickly grew to 221.1 million subscribers for its various streaming services (Disney+, Hulu, ESPN+) at the end of the second quarter, narrowly edging out Netflix’s 220.7 million subscriptions. But Disney’s average revenue per user was only 39% as great as Netflix’s ARPU, and the company is feeling the pressure to turn streaming into a profitable business. In addition, growth has slowed: Disney+ added only 100,000 domestic subscriptions in the quarter, compared to 1.5 million in the previous quarter. Now, just like clockwork, a price increase is coming. On Dec. 8, Disney will raise the price of the premium, ad-free version of Disney+ by 38% to $10.99 and launch an ad-supported tier for $7.99.
Music platforms have been hesitant to raise prices — but they can. “We see real ARPU opportunity,” said Warner Music Group CFO Eric Levin during the company’s August 9 earnings call, “and Spotify and Amazon that have done forms of price increases, I think, have proven to the market that it doesn’t have an impact on churn and that price increases are really available.” That’s true. Spotify executives have said they have not noticed a meaningful level of churn after modest price increases on select plans in some markets.
It’s guaranteed that music subscription prices will rise – something more significant than the small increases seen recently – eventually. But when? Many analysts believe the SVOD market has run out of subscriber growth and expect companies to expand revenues through price increases. Music has a different timeline, however. Subscription companies could wait to raise prices until they get higher penetration rates in both developed and emerging markets.
Developed markets “are roughly 30% penetrated in aggregate,” said Levin. “We’ve seen both research studies but also market forecasts that showed that [penetration rate] growing into the 50s or even 60s percent over time. Emerging markets are still penetrated in the mid-single digits and are starting to show real, real improved growth.”
Kroll Bond Ratings Agency also highlighted music subscription’s growth opportunity in its August 2nd report on the Hipgnosis Music Assets royalty-backed security. “Streaming is a growing market that still has low penetration rates,” wrote Kroll analysts. That’s important to bond investors because, as Kroll noted, streaming is the main driver of industry growth. “Consumption is increasing at a subscriber level,” the report continued, “and the entire music industry is growing as the number of users increase as well as the frequency at which they stream.”
Because both ARPU and penetration have room to grow, “subscription streaming growth remains quite strong, remains in the double digits,” said Levin. “In the short term, we see that as being a very strong sign despite a [challenging] macro environment.” Over the long-term, added Levin, “subscription streaming growth has tremendous upside potential.”
STOCKS
Through August 12, the % change over the last week, and the year-to-date change.
Universal Music Group (AS: UMG): 21.44 euros, +0.0%, -13.5% YTD
Spotify (NYSE: SPOT): $123.63, +4.1%, -47.2% YTD
Warner Music Group (Nasdaq: WMG): $30.30, -3.8%, -29.8% YTD
HYBE (KS 352820): KRW 183,000, +4.6%, -47.6% YTD
Live Nation (NYSE: LYV): $97.89, +1.2%, -18.2% YTD
iHeartMedia (Nasdaq: IHRT): $10.23, +16.3%, -51.4% YTD
SiriusXM (Nasdaq: SIRI): $6.78, +3.0%, +6.8% YTD
Deezer (PA: DEEZR): 4.55 euros, -1.9%, -24.2% YTD
NYSE Composite: 15,804.38, 3.5%, -7.9% YTD
Nasdaq: 13,047.19, +3.1%, -16.6% YTD
S&P 500: 4,280.15, +3.3%, -10.2% YTD
