Apple and Google are muscling in on streaming as revenues rise, but not everyone is happy

If you wonder what the person next to you on the bus or train wearing headphones and looking at their mobile screen is listening to, it is probably the new radio – a streaming service.

According to the music business body the British Phonographic Industry (BPI), Britons streamed 14.8bn tracks last year, almost double the 7.5bn of 2013, as internet connectivity improves and becomes pervasive.

Compared to buying music downloads, streaming services have a number of advantages. Listeners can range over millions of tracks – the “universal jukebox”, create and share playlists socially, discover new artists effortlessly through “artist radio”, and listen anywhere (even downloading temporarily for times when their smartphone gets no signal).

This year Apple is expected to muscle in on the scene using the Beats brand it bought for $3bn (£2bn) in May 2014, as is Google’s YouTube, which last November launched a paid-for, ad-free music and video streaming service, YouTube Music Key.

Snapchat, best known for its self-destructing photos and videos that are a hit with teenagers, is also planning a music feature, according to emails leaked as part of the hack of Sony Pictures. A partnership with the music video service Vevo could be incorporated into future versions – which surely helped the Silicon Valley darling raise another $485m, valuing it at more than $10bn, in the past few weeks.

Sometimes it seems as if everyone is planning a music streaming service, just as a decade ago everyone down to HMV and Walmart offered music downloads.

But unlike downloads, musicians do not universally love streaming.

At the start of November, Taylor Swift removed her new album and back catalogue from Spotify and the other streaming services, having complained in a Wall Street Journal column in July: “Valuable things should be paid for. It’s my opinion that music should not be free.”

Ed Sheeran, Beyoncé and Coldplay have used similar tactics, offering CDs and digital downloads for sale before putting them on streaming services – the opposite of the way radio has been used for promotion for decades.

Yet streaming revenues are rising fast, according to the BPI’s figures: they have zoomed from zero in 2007 to £76.7m in 2013. Data released by the Entertainment Retailers Association and BPI this week suggested wholesale streaming revenues were £125m for 2014. (The ERA reported streaming revenues of £175m, but typically its values show a 40% retail markup over the BPI’s wholesale figures.) The problem with streaming services, though, is that they seem remarkably ineffective at persuading people to hand over their money. If they are the new radio, well, who pays to listen to the radio? And unlike radio, advertising cannot cover the cost of the service.

Spotify, for example, is available to nearly 1.1 billion internet users around the world, yet it can claim only 12.5 million paying users and 50m ad-supported accounts. So only 1% of potential subscribers actually pay. Another service, Deezer, claims to be in 182 countries, giving it about as many potential users (and payers) as Spotify; in mid-2013 it reported 16 million monthly active users, and 5 million subscribers.

The US-only Pandora claims 250 million users, but only 3.3 million paying its $5 a month subscription.

Mark Mulligan of Midia Consulting who has a long track record watching the music business, reckons there are only about 35 million paying subscribers worldwide for all streaming services, out of more than a billion potential users.

Mulligan thinks the problem is the price. Even before the digital revolution, the average person spent less than £5 a month on music, with most spending accounted for by a small number of big buyers. Cutting subscription prices would entice many more to pay, he thinks, easily making up for lost revenues. “I’ve been banging the pricing drum for so long the stick has broken,” he said recently. “Unfortunately there was pitifully little progress in 2014, with label fears of cannibalising 9.99” – the price of a standard album, in dollars or euros, on iTunes – “dominating thoughts”. Something needs to change. The figures suggest streaming is eating into digital downloads rather than CD sales: its revenue growth is almost exactly matched by a fall in digital download revenues, now at their lowest level since 2011. In the US, Nielsen SoundScan has confirmed the same pattern</a>, with paid song downloads down 12% in 2014, from 1.26bn to 1.1bn, while song streaming rocketed from 106bn to 164bn.

There’s another difficulty: streaming services tend to lose money.

Pandora, the market-listed US streaming service, hasn’t made an annual profit since it floated in 2011. Spotify still records losses – even though it is expected to seek a flotation this year.

The main problem is that for each song streamed, the service has to pay a set amount to the record labels; the more songs streamed, the greater the payment, creating a cost barrier that never shrinks. Spotify says it pays out 70% of its revenues to artists.

That could be about to change with the arrival of Apple. Its acquisition of Dr Dre’s Beats was seen as a defensive move after a dramatic fall in iTunes music downloads and revenues. “Apple had to address streaming,” Syd Schwartz, a former EMI Music executive, told Rolling Stone in May.

When Apple introduces Beats Music outside the US, it could galvanise the market. Music industry figures are eager to see what effect it could have because data suggests iPhone owners are typically higher spenders (and so easier to convert to paying subscribers) than the average smartphone buyer. “We’ve reached a very interesting point where there are important changes to come,” a BPI spokesman said. “It seems that we’re moving towards a time of people understanding that streaming is the future.”

Apple is understood to be seeking lower per-song payments from the music labels, so it can offer lower subscription rates. Google’s paid-for YouTube Music Key service launched in November with a six-month free trial and a discounted £7.99-a-month cost (down from £9.99). Mulligan expects that discount to continue, and pricing tiers to fall in line.

Yet YouTube itself might be a key obstacle to boosting subscriptions, because it is unofficially the world’s largest ad-supported music streaming service. Teenagers use it to find songs and related artists exactly as they do the normal streaming services. (Snapchat’s user demographic is a perfect match for that sort of service – which Vevo may seek to capitalise on.) When Swift removed her content from streaming services, it created a media uproar – but all her songs, including new album 1989, could still be found on YouTube.

Mulligan thinks artists and labels will have to swallow their pride and accept the world of change – and lower payments.

“The whole ‘changing download dollars into streaming cents’ issue continues to haunt streaming though,” he said. “With streaming services struggling to see a route to operational profitability the perennial issue of sustainability remains a festering wound. The emerging generation of artists such as Avicii and Ed Sheeran who have never known a life of platinum album sales will learn how to prosper in the streaming era. The rest will have to learn to reinvent themselves, fast – really fast.”

• This article was amended on Friday 2 January 2015 to correct the numbers of streamed tracks as stated in the second paragraph.