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Big Tech Crashes the Streaming Party: How Technology is Changing the Music Industry (Part 2)

Last week, I made the case that music streaming services will soon crush the download market.

And I’m not the only one who thinks streaming music is the future.

Digital media juggernauts Apple (AAPL), Google (GOOG), Microsoft (MSFT), Amazon (AMZN) and Twitter all have plans to add streaming services to their online arsenals.

For example…

  • Twitter: The social media firm just launched #Music – a mobile app and web service that channels powerful analytics to bring users snippets of trending songs. To listen to a full song, it connects with streaming services like Spotify or Rdio. It’s a smart move for Twitter since music fans represent an active user base with eight out of the top ten most followed celebrities on the site being musicians.
  • Google: Remember, Google owns YouTube – the most popular way for teens and young adults to listen to and discover music, according to a 2012 Nielsen study. Google is reportedly looking to add a subscription service component to YouTube as an additional revenue stream.
  • Microsoft: The company jumped into the field last October by offering a streaming service through its Xbox gaming consoles. Xbox Music has adopted the now familiar platform: free service with ads, or a monthly subscription for ad-free listening.
  • Amazon: Details are sketchy on Amazon’s foray into streaming at the moment. Online magazine The Verge reported that Amazon is in informal talks with record companies and music publishers, presumably to secure licensing rights.
  • Apple: With its recent struggles well-known, Apple is rumored to be in talks with record companies with regard to a streaming service set for launch this summer.

But it’s what’s going on behind the scenes that could turn the recording industry upside down…

Licensing Rites of Passage

When you hear a song on the radio, at a sporting event, or on hold with the electric company, the copyright holder is usually getting paid for that use.

When it comes to streaming music companies, they have a couple of choices: They can either choose to pay a congressionally mandated rate put in place by the Digital Millennium Copyright Act. Or they can negotiate prices individually with the respective record companies.

Take Pandora (P), for example. It’s chosen the first option and pays the statutory rate of $0.12 per 100 plays of a song. Trouble is, that amounts to 60% of its revenue. To deal with the problem, Pandora has formed a lobbying wing in the hope that Congress will pass a lower rate.

On the other hand, Spotify has aggressively renegotiated its contracts with record companies, trying to get a headstart before the big boys jump into the market.

Currently, Spotify pays $0.35 per 100 plays, with 70% of its revenue going towards licensing fees. A renegotiated rate will churn more money back to the bottom line.

By comparison, radio-backed services such as Clear Channel’s (CCO) iHeartRadio pay about $0.22 per 100 plays.

So what does this mean for the big music players?

Apple’s Aggressive Goal Could Provide Liftoff for This Burgeoning Industry

Apple wants to shake up the music streaming business by paying a $0.06 royalty per song.

Suffice it to say, that would blow the doors off every other music streaming service’s royalty agreements.

As a result, it would provide an overall shot in the arm for the streaming music industry… but bad news for the recording companies and musicians who rely on those royalties.

Or so you’d think.

There are signs that streaming revenue could be a bigger boon to artists than originally thought. Just recently, streaming royalties topped radio licensing revenue for the first time in the United Kingdom.

So if Apple can wield its considerable clout with the recording industry, look for the “rising tide lifts all boats” effect to kick in and provide a big boost to the streaming music business – and the companies in it.

Ahead of the tape,

Elizabeth Carney