The ‘sad but true’ reality of music streaming

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Lars Ulrich and Sean Parker hugged.

It was an embrace no one would have predicted just over a decade ago, when the outspoken Metallica drummer was the face of music's anti-piracy campaign against Mr. Parker's file-sharing company, Napster. But a lot can change in 13 years, especially in the music business: Mr. Parker is now a director of legal music-streaming service Spotify Ltd., while Mr. Ulrich is a newly minted music-label owner, hoping to squeeze profits from his band's legacy.

They shared a stage in New York in December as it was announced that Metallica's entire catalogue would be available on Spotify, the Swedish subscription music service that puts 20 million songs at users' fingertips. Metallica's Sad But True rang through the room as the two men literally embraced, but no one acknowledged the song's irony: The grievances might be buried, but there's no proof that Spotify will save the music business.

It's yet to be seen whether Spotify and other streaming services can turn a profit – let alone provide record companies, music publishers and musicians the same kind of cash record sales used to. If streaming fails, an industry that once earned more than $10-billion (U.S.) annually will have to go back to the drawing board, in another setback to traditional media's struggle to survive in the digital age.

Digital music sales, while helping the music industry recover from mass Internet theft, made up 53 per cent of Canadian music sales in the first half of 2012, according to Neilsen SoundScan. But total music sales have fallen 31 per cent in the past five years, leaving room for the all-you-can-consume model of streaming services to fill the void.

Spotify's Metallica announcement marked the end of streaming's biggest year yet, as tens of millions of users signed up for it and similar services like Rdio and custom-radio-station-maker Pandora, which range from free to $10 or so a month. (Of these, only Rdio is available so far in Canada.)

These musical buffets are a treat for consumers, but they've yet to prove they can sustainably generate cash for stakeholders.

CBC said in October that its new CBC Music service would only sell $750,000 in advertising this year to offset more than $6-million in costs. And after posting a $16-million loss last year, Pandora disappointed investors in its third-quarter earnings release, saying that it expected to end its fiscal year with losses of 9 to 12 cents a share.

Many major streaming services are run by private companies, including Spotify. But in an annual report filed in Luxembourg earlier year, the company said it posted zero profit in fiscal 2011; Spotify representatives have also repeatedly said the company's focus right now is on growth, not profit.

These companies' greatest expense is content. Spotify says 70 per cent of its revenue, more than $500-million since its 2006 inception, has been directed to royalties to be split between labels, publishers, and musicians, and Pandora posted a loss last year after a $149-million royalty payout.

But even these royalty payouts paint a bleak picture.

Damon Krukowski, formerly of the alt-rock band Galaxie 500, made his royalty numbers public in November: Nearly 8,000 streams of their song Tugboat on Pandora netted the band's songwriters 21 cents in the first quarter of 2012, while 6,000 plays on Spotify gave them $1.05 to split.

Naturally, most musicians couldn't live off that, particularly as a replacement for record sales. Mr. Krukowski – a Spotify user – said in an interview he fears streaming companies are divorced from the music, using it as a way to increase capital and become the next Amazon.

As these services currently exist, "there will never be an incentive for the money to go to the artists," he says.

That's not how Spotify sees it. Rather than serve as a replacement for record sales, the company argues it has tapped a whole new market for the record industry: former illegal downloaders who would never pay for music in the first place.

That sentiment doesn't exactly appease record industry veterans.

While streaming services are "a heck of a deal" for consumers, says David Basskin of the Canadian Musical Reproduction Rights Agency, they come with a price for music's creators. "It's quite possible," he says, that "there will simply be a good deal less money in the system."

It's a well-echoed feeling. "You're not going to make the same amount of money" through streaming than by record sales or radio, says Jeff Brabec, vice-president of business affairs at music-rights juggernaut BMG Chrysalis.

If streaming or other options don't provide a solution, said Doug Chappell, a former Canadian major-label president, "record labels will die."

That's something a hug just can't fix.