The Day the Music Died: Why Labels Are Abandoning Streaming Music Services

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What happens to streaming music services when they have no music left to stream? That seemingly zen question may be answered if more record labels follow the lead of the more than 200 labels that have withdrawn their catalogs from services like Spotify, Napster and Rdio following the release of a study that suggests streaming music hurts music sales.

The various indie labels are all represented by British indie distributor STHoldings, which released a statement last week explaining that “[despite] these services offering promotion to many millions of music listeners we have concerns that these services cannibalise the revenues of more traditional digital services. These concerns are confirmed in our own accounts and a recent study by NPD Group and NARM.” The statement went on to explain that only four labels from the company’s base expressed interest in remaining on streaming services, with the majority instead “feeling that their music loses its specialness by its exploitation as a low value/free commodity,” as well as having a detrimental effect on sales.

(MORE: Universal Music Sues Music Streaming Service for 100,000 Illegal Uploads)

The report mentioned in the statement may not be as damning as you’d expect from the reaction it caused, but it’s definitely not good news for labels; 37% of committed music fans (and 46% of casual music fans) agreed that having access to music online meant that they felt less need to own it, and only 23% of casual fans admitted to buying more music today than in the past. While streaming music services may increase people’s access to music, it also appears to be reducing their willingness to spend money on buying said music.

According to a statement from Spotify, that’s no big deal because streaming services–or, at least, Spotify–will replace sales revenue with streaming revenue:

Right now we have already convinced millions of consumers to pay for music again, to move away from downloading illegally and therefore generate real revenue for the music business… Artists can — and do — receive very substantial revenues from Spotify, and as Spotify grows, these revenue streams will naturally continue to grow. Spotify is now the second single largest source of digital music revenue for labels in Europe (IFPI, April 2011) and we’ve driven more than $150 million of revenue to rights holders (ie whoever owns the music, be it artists, publishers or labels) since our launch three years ago.

If any of that sounds familiar, it’s because it’s very similar to Spotify’s response to the August departure of metal and hardcore label Century Media and jazz and classical label Mode Records.

At the time, Mode’s Brian Brandt said that “the Spotify model is not financially sustainable for any indie niche label,” citing a royalty rate of less than one cent per streamed play, and just how much streaming services offer rights holders remains somewhat of a mystery to outsiders; a 2009 blog post from Steve Lawson suggested that one million streams earned somewhere in the realms of £1100 ($1,721 USD), which comes out as one tenth of a penny per stream (essentially a tenth of a cent), but that figure hasn’t been accepted when cited online at other times. Nonetheless, if that figure is even vaguely in the ballpark, it’s understandable why many smaller labels believe that streaming services aren’t worth the loss in sales revenue at this time.

The question is, at what point will major labels begin to agree with them? Obviously, music on major labels is more likely to be streamed more often–and therefore make more royalties–than something from Mode or Century or any of the STHoldings labels, but is that enough to fend off the money it’s not making because less people feel the need to buy the music as a result? We’ve already seen both Lady Gaga and Coldplay refuse to allow their new albums stream at time of release, and as streaming services become more established and the adoption rate (or, more importantly, the abandonment rate of purchasing) grows, I wouldn’t be surprised if more established acts follow their lead.

In many ways, this situation feels like filesharing’s threat realized in full, with music sales falling because the Internet has changed the way people think about obtaining and listening to music. Except, of course, this time the threat to sales can’t be argued against as illegal or immoral; in fact, many major labels have actually helped this particular threat along, by investing in or owning part of the companies causing the problem.

MORE: Spotify Raises $100 Million in New Funding Round

Graeme McMillan is a reporter at TIME. Find him on Twitter at @Graemem or on Facebook at Facebook/Graeme.McMillan. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

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