Streaming Conquers the Music Industry

Listening to recorded music seems like a basic, uncomplicated activity, but as we discuss in the opening to Chapter 14, few markets have been as disrupted by technological change over the years as the market for recorded music.  The following graph shows the distribution of revenue received by firms in the recording industry by type of music format. The data are first available for 1973. 

From the 1930s to the mid-1960s, nearly all recorded music was sold on vinyl records. In the 1960s, 8-track tapes began to compete with vinyl records. In 1973, recording companies received about 71 percent of their revenue from selling vinyl records, 24 percent from selling 8-track tapes, and 5 percent from selling cassette tapes. Cassette tapes became increasingly popular after Sony introduced the Walkman, a portable cassette player, in 1979.  The popularity of cassettes contributed to a sharp decline in sales of vinyl records.  The share of vinyl records in revenue received from sales of recorded music dropped from 71 percent in 1975 to only 2 percent in 1990. The greater portability of cassette tapes was a significant advantage over 8-track tapes, which were most frequently used in players built into automobiles. By 1983, 8-track tapes had largely disappeared from the market.

The introduction of digital compact discs (CDs) in the early 1980s ended the rapid rise in sales of cassette tapes. By the end of the 1980s, sales of cassette tapes began to decline rapidly and their share of the market had fallen to less than 2 percent by the early 2000s. 

As discussed in the opening to Chapter 14, the development by engineers in Germany of the MP3 file format made it possible to store the contents of a music CD on a file small enough to be downloaded from the internet. Apple’s opening its iTunes online music store in 2003 increased sales of music downloads, which peaked at 40 percent of the market in 2012. In that year, recording companies earned about 8 percent of their revenue from payments from streaming services like Spotify or Apple Music.

Steaming music has become increasingly popular and by 2020, 75 percent of industry revenue was earned from streaming. Ten percent was earned from “sound exchange,” which refers to revenue recording companies receive when music is used in a movie, television series, advertisement, or online video. (Some industry analysts consider sound exchange to be a form of streaming. Using that definition raises streaming’s share to 85 percent of the market.) Downloads had a market share of only 5 percent, about the same as the share of vinyl records, which had increased from a low point of less than 1 percent in 2007. CD sales continue to slowly decline and make up about 4 percent of the market. 

In Chapter 14, we discuss the streaming market as an example of oligopolistic competition.  When a market expands as rapidly as music streaming has, competition can be less intense because it’s possible for firms to increase their revenue as the market expands without having to attract customers from competitors. Typically when a market matures and the increase in total revenue levels off, competition can become more intense. We may see that development in the market for streaming music in coming years.

Source: Data from Recording Industry Association of America, “U.S. Sales Database.”

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