No, Streaming is not more profitable than Transactional Sales… Not Today, Maybe Not Ever…

There’s a recent report from the Wall Street Journal that is being grossly misinterpreted from this line,

“Data reviewed by The Wall Street Journal showed that one major record company makes more per year, on average, from paying customers of streaming services like Spotify or Rdio than it does from the average customer who buys downloads, CDs or both.”

This does NOT mean that streaming will be more profitable than transaction sales anytime soon. It seems to suggest that streaming could possibly, possibly become more profitable than transactional sales, but that is seemingly unlikely due to simple math which will review below.

What that sentence says is that a premium paid subscriber spends approximately $120 per year on music purchasing, whereas an average music consumer spends less in total over the course of a year. This does not take into account the non-average music consumer who spends much more than $120 a year, nor does it take into account that the number of “average music consumers” is hundreds if not thousands of times larger than the number of premium paid subscribers.

What would be truly interesting and important to the conversation is to see how much total revenue is being generated by streaming in the aggregate against transactional sales. As we’ve reported before, using a simple spreadsheet, streaming services would need at least 90 million subscribers to be competitive as a viable option to replace transactional sales.

By most estimates there are few people who think Spotify can scale up to and maintain 30 Million paid subscribers in the US. So this begs the question…

If streaming is the future how does $2.5b in revenue from a massively successful Spotify replace the loss of $8.3b in annual earnings?

Complicating discussions around the streaming revenue issues are also the risks of cannibalization. As the early year end numbers come in for 2013 we’re already seeing transactional download numbers starting to flatten and decline.

As Music Downloads Decline, Expect More Anti-Spotify Anxiety | FastCoLabs

It’s official: We’re buying less digital music. Just like vinyl, cassettes, and CDs before it, the digital download may have reached it peak, with total sales dropping 4% from last year. The culprit? It’s complicated, but expect the already-raging debate over Spotify, streaming, and the future of music distribution to heat up.

Here’s a breakdown. In the first half of this year, U.S. music fans paid for 25-30 million digital tracks per week, according to Billboard. In October and November, that number dipped below 20 million. Billboard blames “a web of interrelated stories that show new technologies affecting consumer behavior” for the decline, with the most obvious culprit being that little green and black icon on your home screen.