The Music Industry Continues to Bounce Back Thanks to Paid Streaming

Paid music-streaming services are driving the music industry's comeback in a big way. The Recording Industry Association of America (RIAA) released its midyear 2017 music industry revenue report earlier this week, sharing numerous statistics regarding the health of the U.S. music industry. Through the first half of the year, retail music revenue jumped by 17% to $4 billion, while wholesale revenue grew 15% to $2.7 billion.

Sales are continuing a yearslong trend of recovery, and paid streaming -- a market that continues to be dominated by Spotify and Apple (NASDAQ: AAPL) -- comprised 62% of U.S. industry revenue in the first half of 2017. RIAA CEO Cary Sherman notes that the industry has changed dramatically in just two years. Sales used to be dominated by digital downloads, but now paid streaming is the largest contributor.

Streaming is where it's at

At last count, Spotify had 60 million total paid subscribers, about twice the 27 million paid subscribers that Apple Music has. Those are global figures, though; paid music subscriptions in the U.S. jumped 50% to 30.4 million, according to the RIAA.

The ad-supported on-demand portion of the market, which the industry has always loathed because it cheapens the value perception of music, continues to stagnate.

Nearly 80% of all revenue comes from digital distribution, and streaming is taking over digital sales.

What this all means for investors

This underscores why Pandora (NYSE: P) is so desperate to grow its Pandora Premium service, its first on-demand service that was extremely late to the market. Pandora finished the second quarter with just 390,000 Pandora Premium subscribers. Nearly two-thirds of Premium subscribers were converted from the free ad-supported service, and Pandora expects that its free ad-supported tier will continue to be the "primary source" of Premium subscribers going forward.

Apple only offers a paid subscription, a model that the industry greatly appreciates. Apple Music is a big part of Apple's growing services business, both now and in the future. The Mac maker is ambitiously targeting $50 billion in services revenue by 2020, with Apple Music being a key driver of that growth. The Apple Music business was already at a run rate of $3.25 billion in June. (The company hasn't given an update on Apple Music subscribers since then.)

Spotify offers both ad-supported and paid tiers. The service has 140 million total active users (as of June), of which 60 million were paid subscribers (as of July). Spotify is preparing to go public through a relatively rare process of direct listing, bypassing an IPO. The company has reportedly met with regulators recently to evaluate its options, but a direct listing could save costs and be simpler in some ways, particularly if Spotify doesn't need to raise capital. Spotify's Premium business is at a $7.2 billion run rate, and the company raised $1 billion in convertible debt capital last year.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Pandora Media. The Motley Fool has a disclosure policy.