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Why Downloads Are Dying: How Technology is Changing the Music Industry (Part 1)

Today’s modern technology isn’t just changing lives, it’s also changing people’s entire philosophies and popular culture.

For example, it’s spawned a distinct difference between the younger generation and “the rest of us”: Younger folks aren’t as hung up on owning what comedian George Carlin famously dismissed as “stuff.”

From Zipcar, to Netflix (NFLX), to owning a house, today’s “on-demand” culture has made many modern goods and services more convenient and more affordable than buying outright.

One area where on-demand is proving increasingly popular is the music industry…

Musical Chairs

The days of spending ages at the local record store and owning a massive music collection are dwindling. A 2012 Nielsen study found that YouTube is the most popular way for the young to listen to and discover music.

It’s also leading to the rise of streaming, on-demand music services like Pandora (P), Spotify and iHeartRadio.

In fact, they’re growing faster than popular download sites like Apple’s (AAPL) iTunes and Amazon (AMZN).

Figures from the Recording Industry Association of America support this: Streaming services jumped by 58% last year to over $1 billion in revenue, while music downloads only saw 8.6% growth to $2.9 billion.

In the meantime, the number of people buying music in the United States has remained flat for the last three years.

Streaming Hits the Highway

In today’s mobile age, it’s no surprise that smartphones and tablets are the main device for streaming music.

And just as streaming music is usurping records and downloads, it’s also replacing the car’s AM/FM dial. Drivers are streaming music through the auxiliary jack on their phones.

In a survey of 13 to 35 year olds who use streaming services, NPD Group found that more than half said they do most of their listening in the car. (Presumably, the ones under 16 weren’t driving!)

Car companies are taking notice. Thirteen automakers have at least one model that offers streaming music leader, Pandora. It’s also in every BMW and Mini.

Overall, streaming services now make up 15% of the global music market. But the move to streaming music in the United States has actually been pretty slow, compared to some other countries.

And there’s one that stands out…

Sweden: From ABBA to Spotify

Sweden has undergone an extraordinary turnaround in the last decade.

Once the home of rampant music piracy, epitomized by its notorious file-sharing site, The Pirate Bay, a massive 91% of Sweden’s online music consumption now comes from paid subscriptions.

The main reason?

Sweden’s streaming service, Spotify.

As the company’s Chief Product Officer, Gustav Soderstrom, confirms: “Spotify really started to combat online piracy, so I’d say we didn’t create a behavior that didn’t exist, we just transferred it to a legal medium. It offered the same principle that you could get music for free, but all the music was licensed and it was better than piracy because you didn’t have to wait for the whole file to download before you could listen to it.”

The model is hugely popular.

Worldwide, Spotify has more than 24 million “active” users – i.e., people who’ve used the service in the last 30 days. Of those, six million are “premium” customers, who pay $10 a month for ad-free listening.

And Spotify continues to grow. It recently announced expansion into Latin America, Asia and Europe.

So what do these streaming music fans know that the rest of us don’t?

Last Willis and Testament?

If you read the terms and conditions on download music sites like iTunes and Amazon, you’d see what you’re actually buying when Apple takes your 99¢.

You’re not actually “buying” the music at all. You’re merely buying the right to “use” a song in your iTunes library. In other words, you can’t resell or give away that song to anyone else.

That’s starting to sink in with consumers (leading to absurd rumors involving film star, Bruce Willis). After all, why buy a song that you don’t truly own when streaming music gives you exactly the same thing for much less when amortized over time?

Downloading Versus Streaming: A Copyright Mess

The rise of digital media has people asking what it means to “own” something intangible?

Current music copyright laws focus tangible goods – vinyl, cassettes and CDs. And the courts seem content to rule in mind-bogglingly nonsensical ways.

Take a company called ReDigi, which purports to be a digital marketplace for “secondhand” songs – i.e., music you no longer want.

ReDigi’s software has a unique way of verifying if a downloaded song was originally obtained legally, and then once re-sold in the secondhand marketplace, it erases all traces of the song on your synced devices and prevents you from reloading it afterwards. Soon after ReDigi launched, Capitol Records promptly sued the company for infringement.

The judge in the case ruled that to resell a song, you have to sell the device it’s stored on. Needless to say, ReDigi is appealing.

But streaming services bypass all the legal confusion that plagues downloaded music.

Next time, I’ll reveal which big sharks are about to enter the streaming music waters – and the mess that’s about to engulf the entire recording industry.

Ahead of the tape,

Elizabeth Carney