Background: The effect of music streaming on consumption and discovery

The effect of music streaming. A few weeks ago I received a working paper from a study performed by Hannes Datta, George Knox and Bastiaan J. Bronnenberg. Title of the study ‘How Consumers’ Adoption of Online Streaming Affects Music Consumption and Discovery’. Since Spotify is considered a black sheep by artists like Taylor Swift and Thom Yorke it is time to know what the effect of music streaming is towards consumption and discovery behavior.

Data

With a unique panel data set of individual consumers’ listening behavior on digital music platforms, e.g., iTunes and Spotify, Datta and his fellow researchers study the effect of adopting streaming services on individual music consumption. Achieving quasi-randomization via a matching procedure, they estimate the changes in quantity, variety and new music discovery after adopting a streaming service like Spotify. Adopting streaming services leads according to the researchers to substantial increases in quantity, variety in any measure, plays of new content, and discovery of new favorites. It is also associated with a large drop in concentration. The effect of music streaming is clear

Adopting Spotify leads to more discovery of highly valued music

The researchers document that adopting Spotify leads to more discovery of highly valued music. Relative to using iTunes, adopting Spotify raises repeat listening for consumers’ best new discoveries, although — consistently with the marginal variety on Spotify being free — lowers repeat listening for the average new discovery relative to non-adopters.

Herewith the implications from the study for platforms, artists, labels, and consumers of the permanent shifts, documented heretofore, in consumer behavior when users switch to Spotify.

Platforms

The emergence of streaming services has provoked a wide-ranging debate about the benefits and drawbacks of ownership- versus access-based consumption. Datta and his team empirically document long-term effects on consumption: even half a year after users adopt Spotify, consumption is up by 50%. This adds to explaining why streaming revenues are climbing: not only are more users switching to access-based streaming models, but their overall music consumption is growing as well. With more time spent on streaming services, platforms like Spotify will increasingly become attractive to advertisers who seek an engaged audience to place their ads.

Permanent, growing negative impact of Spotify adoption on iTunes consumption

Datta and his team found a permanent, growing negative impact of Spotify adoption on iTunes consumption, which is down by about one-third six months after adoption. The results from the study hence support the view that Spotify draws from traditional, ownership-based business models, lending further support to the revenue displacement effect demonstrated by Aguiar and Waldfogel (2015). Datta and his team speculated that the decline of iTunes sales reported in the media urged Apple to launch its own streaming service in 2015 (after the data collection period).

spotify on ipad — ***What the effect of music streaming is towards consumption and discovery behavior***

Artists

Ken Parks, the former Chief Content Officer at Spotify was saying that listeners discover new artists through a Spotify playlist about two billion times every month. Dividing by 75 million Spotify users, this gives an average of 26.7 discovered artists per month to a typical user (Kissel 2015). The researchers found support for the idea that this effect is partially permanent. Six months after adopting Spotify, consumers still listen to more new artists than before adoption.

Six months after adopting Spotify, consumers still listen to more new artists than before adoption

Hence, Spotify expands consumers’ attention to a wider set of artists, potentially increasing demand for complementary goods, like live performances (Mortimer, Nosko and Sorensen 2010). Spotify also efficiently delivers and disseminates consumption capital (i.e., the ability to share consumption experiences in a network of friends). Users can follow favorite artists, receive updates on tour dates and buy merchandise. Artists, in turn, can target fans by tracking their listening habits, demographics and location using Spotify’s Fan Insights. Hence, artists can help foster consumption capital with potential fans via an unprecedented interaction between access to recorded music, and additional, consumption-enhancing content.

The other side of the discovery coin is a drop in the staying power of songs and artists in the consumption set of consumers. With new discoveries and a constraint on time, the share of new artists played more than once drops by 14% (0.086 from a pre-adoption level of .60) in the long-term. Thus, while it is easier to enter the consumption set, it is harder to stay there. Artists may thus need to exert more effort than before to stay top of mind.

Labels

With its rollout of a personalized playlist of local concerts for users, and its Fan Insights for artists, Spotify’s pitch to artists is increasingly “not just a place to earn money by uploading your music — it’s also a way to research your fan base, and to actively market to them” (Popper 2015). Hence, Spotify increasingly is taking over activities traditionally provided by labels. In response, labels can exert power over Spotify by negotiating collectively. For instance, the details of a leaked contract between Sony and Spotify show that Sony used a most favored nation clause, which forces Spotify to match the best deal it offers to any label (Singleton 2015). Such deals allow labels to soften rivalry and extract more revenue from Spotify.

Consumers spreading their consumption across a wider set of artists, discovering more artist

Generally, while the results of the study do not reveal a strong negative long-term effect of Spotify on superstar consumption, the remaining results — consumers spreading their consumption across a wider set of artists, discovering more artists, and engaging in less repeat listening — point to Spotify creating a more level playing field for smaller artists. Labels already follow a blockbuster strategy of concentrating their marketing resources on a handful of top artists.

As smaller artists are increasingly served by Spotify, Datta and his team expects labels will focus even more of their resources on their superstars (e.g., by funding targeted playlists). Perhaps labels will also engage in intertemporal price discrimination using windowing strategies, where music is released on Spotify only after it is first released for purchase only (e.g., Adele’s recent album “25”).

Consumers

Datta and his fellow researchers found considerable evidence that adopting Spotify makes consumers to consume more. In the ownership world, rational consumers only buy if they value the song above its selling price, e.g., $0.99 on iTunes. Put differently, consumers will avoid consuming music they value less than the price of downloading. By setting the marginal price of variety to zero, Spotify thus alleviates the deadweight loss problem for varieties where valuation is positive, but less than $0.99.

Adopting Spotify makes consumers to consume more

Spotify not only reduces deadweight loss; it also increases consumer welfare by reducing search costs. The researchers document support that consumers increase their rate of music exploration. Also, consumers’ best discoveries have a higher listening share than before adopting Spotify.

Conclusion

From a unique panel data set of music consumption on access-, and ownership-based platforms, Datta and his team demonstrated the short-, medium-, and long-term effects of adoption of online streaming on quantity, variety in consumption, and new music discovery. The study showed that Spotify increases total consumption, leads to more variety, and facilitates discovery of more highly valued music.

The study has a very interesting outcome timing wise as Spotify is considered a black sheep by artists like Taylor Swift and Thom Yorke. They’ve pulled all or parts of their catalogs off the music-streaming service in protest of the pay arrangements. My idea? Based on the above study not the best decision they made.

→ Download the full study here

Hannes Datta is assistant professor of marketing at Tilburg University. George Knox is associate professor of marketing at Tilburg University. Bart J. Bronnenberg is professor of marketing at Tilburg University and a research fellow in industrial organization at CEPR, London.