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Cloud Music Expected To Boom In Next Five Years

Cloud_streets Subscription music services like Rhapsody and Spotify are expected to grow significantly by 2016 due to the increased ubiquity of smartphones and a possible lowering in price.

According to a study released by ABI Research, the number of subscribers to streaming music applications is expected to top 5.9 million by the end of this year, and by 2016, that figure is expected to grow to more than 161 million subscribers.

The problem with such lofty projections, however, is that they fail to recognize the many, many other hurdles that remain in the path of subscription services.

Market Leaders Matter

Ubiquity of smartphones doesn't guarantee raised awareness of subscription services as we've learned from the success of the iPhone. While it surely provided services with a boost in consumer interest and new subscribers, the iPhone didn't help establish a market leader. Currently, a majority of the population has little to no knowledge that subscription music even exists.

That, and due to the recent news that an "Apple Tax" may be issued for in-app signups, it matters precisely what smartphone provider becomes the dominate brand. If Apple becomes a market leader and does decide to hold strong on its 30% tax on subscribers it helped services obtain, that may hinder, not accelerate the boom in subscriptions, because it will force prices to keep rising. Second, even if Apple doesn't remain firm on the App Store levy, there's absolutely zero indication that the major labels will be willing to let the bounty they collect from subscription services fall. If anything, once a market leader is established, major labels will continue to pressure higher royalty rates and erode its bottom-line.

Previously, Guitar Hero became a market leader in music gaming and rather than embrace them, labels demanded that the publisher paid higher and higher royalty rates because they believed their music, not gameplay, is what made it valuable.

And well, Guitar Hero is dead now, in part, due to this schizophrenic relationship.

Price Hike, Not Fall

The record industry is transferring from a business of selling CDs to one of digital downloads. Meanwhile, consumers are shifting from downloads to streaming. As the more lucrative income, i.e. downloads, declines, pressure will be placed on streaming revenues to rise. As a way to preserve what portion of the download business they can, the labels will not allow subscription services to be a better value proposition. This is why Apple and Google are selling downloads and not subscriptions, as the labels don't want them to accelerate the download decline.

Thus, when ABI Research predicts that prices will fall by 2016, due to major label intervention, it's likely that they're wrong. Apple may force a price hike and the labels may too, and if not a price hike, similar to the way movie studios treat Netflix, labels may begin withholding content to drive sales of digital downloads.

If enough new music isn't present on subscription services, consumers won't be interested. Added to this is the fact that services have yet to find a balance of effortless and investment, be everywhere consumers want, create meaningful choices and curated music for listeners, and encourage an active over passive relationship to music. The truth of the matter is that while Spotify may change the world and Slacker may thrive, there's still plenty of problems left for Rhapsody, Rdio, MOG, and Napster to navigate before such a boom by 2016 will ever occur.

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