On-demand streaming services and music industry revenues — Insights from Spotify's market entry

On-demand streaming services that rely on subscription fees or advertising as a revenue source (e.g., Spotify) are a topic of ongoing controversial debate in the music industry because their addition to the distribution mix entails the risk of cannibalization of other distribution channels (e.g., purchases of downloads or CDs) and might reduce overall revenues. To date, no research has assessed the effect of streaming services on revenue, and whether cannibalization indeed takes place. Our research fills this void and assesses the impact of free and paid streaming services on music expenditures and on total music industry revenue. To this end, we constructed a research design in which we observed a panel of more than 2500 music consumers repeatedly over more than one year. This approach allows us to eliminate individual-specific unobserved effects that may otherwise confound the identification of a cannibalization effect. Our results show that the adoption of a free streaming service as well as the adoption of a paid streaming service cannibalizes consumers' music expenditures. The net effect of paid streaming services on revenue, however, is clearly net positive. In contrast, the net effect of free streaming services on revenue is only positive for consumers who were relatively inactive before the adoption. On the industry level, our findings suggest that the negative effect of free streaming on industry revenue is offset by the positive effect of paid streaming in the context that we analyze. Hence, in the market that we study and under the assumptions that we make, we estimate that the overall effect of streaming on industry revenue is positive.