Will Higher Streaming Prices Lift All Boats? Don’t Bank On It

EXTRA For more than two decades after the launch of Rhapsody, and then Real Networks, the price of a basic music streaming subscription, unlike nearly every other product or service, remained remarkably static — cemented a 9.99 a month across nearly all territories and currencies, irrespective of exchange rates. But it appears, at long last, as if the dam has begun to burst.

In May, Amazon raised the price of Amazon Music Unlimited for Prime members from $7.99 to $8.99 a month, although it left the 9.99 price for non-Prime subscribers unchanged. Then last month, Apple announced an across-the-board hike for an individual Apple Music sub from 9.99 to 10.99 in both U.S. dollars and British pounds. The prompted France-based Deezer to announce a similar hike for users in the U.S. and led Spotify to disclose plans for a likely increase in the near future.

What happened?

Last year, Will Page, author of Tarzan Economics and former chief economist for Spotify, published an essay on his blog titled “Malbeconomics.” In it, Page compared the prolonged stability of music streaming prices with recent pricing trends in viniculture, specifically in the cultivation and sale of Malbec.

Originally developed in France, the Malbec grape found its most favorable climate and growing conditions in South America, where growers and vintners refined its cultivation and marketed the wine aggressively. The result is that, today, Malbec is among the most popular varietals in the world.

In Page’s telling, the success of that refined cultivation and aggressive marketing has been captured in the higher prices consumers are willing to pay for Malbec wines. Between 2019 and 2021, the price of Malbec, from a single glass up to a full bottle, has effectively doubled.

By contrast, in staying flat over that same period, the real (i.e. inflation adjusted) price of a music streaming subscription has fallen significantly. Moreover, Page argues, because DSPs have improved their services over that time, by increasing the number of tracks available and piling on podcasts, audiobooks and other content without raising the nominal price, the deflation factor used to calculate the real price of a subscription should be even larger than implied by background consumer price index (CPI) inflation.

Source: Will Page, “Malbeconomics”
Source: Will Page, “Malbeconomics”

One main reason for the long stagnation in the sticker price of a music subscription is that, unlike the video streaming business, meaningful content exclusivity is essentially unknown in music streaming. Every DSP offers more or less the same (vast) library of tracks, making product differentiation among service providers difficult, if not impossible. Competitive pressure and fear of losing market share, therefore, kept a tight lid on prices.

Another reason — partly a consequence of the first — is that most pure-play music DSPs (i.e. those not part of a larger ecosystem like Apple and Amazon) embraced a strategy of pursuing scale above all else, believing (hoping?) sheer size would buy them what the lack of pricing power had cost them. Raising prices would have cut against that strategy.

The problem for the DSPs is that greater size hasn’t actually bought them what they were hoping for, or really much else. It hasn’t brought them greater leverage with the labels and publishers, and it hasn’t translated into higher operating margins. Spotify reported a whopping 20% YoY increase in average monthly users in the third quarter, to 456 million, in spite of predictions that broader inflation would undercut consumer spending on entertainment. Yet its gross margin for the quarter came in below expectations and it posted an operating loss of $225 million, and a net loss of $193 million.

For a while, the scale-at-all-costs strategy did buy Spotify and its peers disproportionately high valuations from investors, but even that effect has begun to wear off. In the wake of its Q3 earnings report, Spotify’s share price took a dive, as investors focused more on the continuing flood of red ink than on the unexpectedly impressive growth in subscribers.

Unable, or unwilling, to raise prices unilaterally, DSPs now seemingly have decided to all join hands and jump together, hopefully without being so obvious about it as to attract the attention of antitrust authorities.

It is not a given that the new approach will buy them much, either. In announcing its price hike, Apple said it was “due to an increase in licensing costs,” suggesting the move was more reactive than strategic, and certainly not a reflection of any increased leverage with the labels for Apple.

Moreover, given that licensing fees paid by DSPs are generally calculated as a percentage of revenue from streaming, it’s not clear they can price their way to better margins.

Apple noted in its announcement that “artists and songwriters will earn more for the streaming of their music.” But that doesn’t mean artists and songwriters will be getting a bigger slice of the overall pie. It could simply mean Apple expects to have more revenue it will need to turn over to the labels and publishers as a result of the move, some of which will eventually trickle back to artists and songwriters in the same proportion it does now.

The more interesting test case for the tradeoffs among scale, price and earnings might be Deezer. The French streamer, which went public in July via SPAC merger, reported a 13.8% YoY increase in revenue in the third quarter despite a 2.5% YoY decline in total subscribers, including both B2B and B2C subs.

The loss of subscribers, in fact, was strategic. Deezer made a calculated choice to reduce its investment in non-core markets and focus its efforts on France, where it raised its price from €9.99 to €10.99 in January, and a few other key territories (it also pulled out of Russia altogether, losing 104,000 subs, following Russia’s invasion of Ukraine). All of Deezer’s Q3 subscriber losses, in fact, came from outside France.

The result? Less scale, but a narrower net loss and a whopping 17% increase in average revenue per user (ARPU), which is something you actually can take to the bank.

Deezer, of course, is a mere fraction the size of Spotify and Apple Music, and like any small operator in a land of giants, it has to pick its spots. It’s not certain that the same strategy would succeed for a global platform like Spotify.

But it suggests that merely raising prices, absent any other strategic and operational changes to the business, may not have the same payoff.

Get the latest RightsTech news and analysis delivered directly in your inbox every week
We respect your privacy.