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Why YouTube Should Be Singing a Different Tune About Music Streaming

YouTube has proudly announced that it paid more than $1 billion to the music industry from advertising over the past 12 months. But the growth of paid streaming highlights just how small YouTube’s financial contribution was compared with the size of its audience.

The Intl. Federation of the Phonographic Industry estimated that the music industry generated $15 billion in revenue in 2015, of which roughly half was from digital recorded music and the rest from a combination of physical sales and other sources. I estimate that global revenue will be up by 6% in 2016, based on growth rates at the major labels.

The biggest driver of that growth will be streaming services. Music revenue from streaming will rise from just under $3 billion in 2015 to an estimated $5.5 billion in 2016. But the contribution from ad-based streaming like YouTube will be just $1.3 billion, while the other $4.2 billion will come from paid services, a category dominated by Spotify and Apple Music.

sources: Company Reporting, jackdaw research Analysis

The two companies combined had streaming revenue of just over $2 billion in 2015; the 2016 total likely rose to $4.6 billion, driven by rapid growth in membership. (Gross revenue for Apple and Spotify doesn’t translate directly into industry revenue; arrangements vary, but the services typically pay out 70%-75% of revenue to the labels. That’s why the combined gross revenue for these two companies exceeds the industry’s net revenue from paid streaming, despite the existence of several smaller competitors.)

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sources: Company Reporting, jackdaw research Analysis

Spotify has well over 100 million users, of which almost 50 million are paid subscribers. Apple has 20 million paid subscribers (and doesn’t offer an ad-supported service). By my estimates, Spotify will pay out more than $2 billion to the labels in 2016, while Apple’s payout will exceed YouTube’s, at a little over $1 billion — this in only its first full year of operation and with an average of 15 million subscribers, versus YouTube’s 1 billion users.

So YouTube can continue to crow about its billion-dollar contribution to the music industry. But when it’s paying out about a dollar per user per year, compared with the $60-$80 per year that’s coming from the paid streaming services, it’s reasonable to ask whether YouTube is paying enough.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.

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