Music streaming services have become very popular in recent years and services such as Spotify and Pandora have gathered millions of users across the globe.
As download revenues have started to decline, streaming is expected to be the main growth driver of the music industry in the next few years.
Spotify and Pandora are perhaps the most popular streaming services out there and their revenue growth reflects the growing acceptance of paying for streamed music.
Both companies are generating more than $500 million in annual revenue from advertising and subscriptions. Yet both companies share the same problem: As user numbers rise and revenue subsequently increases, so do licensing fees and other costs. While both companies have shown remarkable revenue growth, both are far from profitable. Spotify's loss amounted to roughly $80 million in 2012 (the company has yet to publish results for 2013) while Pandora lost $41 million in the past year. An analysis published by Generator Research last year concluded that the streaming business in its current state was "inherently unprofitable" and that "no current music subscription service — including marquee brands like Pandora, Spotify, and Rhapsody — can ever be profitable, even if they execute perfectly.”
Spotify’s CEO Daniel Ek once said that his company paid 70 percent of its income back to the music industry, leaving just 30 percent to cover costs for marketing, product development and infrastructure. If Apple really acquires Beats Electronics to double down on streaming, the company will have one huge advantage over its competitors: It doesn't need to make money off streaming. Apple will likely be more than happy to take a loss with its streaming service, as long as it gets people to buy more of the company's gadgets. Spotify and Pandora don't enjoy the luxury of a profitable billion dollar business supporting their services, hence they will one day need to figure out how to actually make music streaming profitable.
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