Page last updated at 03:04 GMT, Saturday, 26 December 2009

How internet-based music services make their money

By Andrew Wong

music headphones
Online music services generate revenue through a combination of download sales, advertising and subscription.

Since the launch of Apple's iTunes in 2003, digital music has become big business.

A number of new music services have sprung up on the internet, offering legitimate opportunities for people to listen to or buy tracks online.

With the government's digital economy bill threatening heavy action against persistent piracy, legal music services are hoping to increase their appeal.

But digital music is still not the road to riches for musicians.

"Bands should not be under the illusion that they can plan a tour of (say) North America based on digital revenues," says Will Page, Chief Economist at PRS for Music.

"What digital can provide, though, is new information on where demand is, and more options on how you want to distribute your content. There is an element of irony here, in that digital monies won't pay for your tour, but digital data will tell you where your fans are."

The three main ways of accessing music legitimately online are through streaming, downloading or subscription services.


Music lovers can search for, and listen for free to the music they want using streaming services such as We7, Spotify, Myspace Music, and

UK Licensing body PRS for Music stipulates a payment of either 0.085p per track played or 10.5% of gross revenue (whichever is the greater) for streaming-only music services
For downloads the record company will set a dealer price for a song, of which around a quarter will go back to the artist - PRS says on average a label will take 50p from a tune priced at 79p - of which the artist will collect around 7p. The publisher will see around 5.5p, of which the artist will get 4p.
With subscription services, PRS for Music stipulates a payment of 40p per subscriber per month, or 8% of gross revenue, whichever is the greater.

Of these offerings, We7 and Spotify have the largest range of music available - Spotify has almost 7m songs in its catalogue and claims to be adding 10,000 tracks a day.

Spotify and We7 have advertisement-based business models for their streaming services and will regularly stream short adverts before or in between songs.

Spotify lets users skip the adverts for a monthly fee (£9.99), while We7, co-founded by musician Peter Gabriel, rewards frequent listeners with occasional advert-free days.

MySpace Music and don't play adverts with the music, but they do display adverts across the website while tracks are playing - click away from the page, and the song stops.

Spotify is the only service that does not let users listen via a webpage - instead offering computer programmes and smart phone applications.

"Streaming online is very flexible," says Paul Stoke, associate editor at NME. "You don't need to ever have any records banked - it's realistic to think that you can listen to most music that's available."

For Mr Stokes, the downside is speed when on the move.

"If you want to listen on a mobile, you're reliant on how quickly the data will download - it's liable to interruptions," he adds.


A myriad of online stores, including 7digital, Amazon, HMV, Orange, Play, SkySongs, Tesco, TuneTribe, and We7, sell tracks as downloads, usually in MP3 format.

Customers can pay anything from 29p to £1 to download a single track, or between £4 to £12 for an album (or a collection of songs).

Price comparison sites such as can reveal the cheapest prices for a particular piece of music.

"It's the traditional way if you can call it that - basically once you buy it the track is yours," says Mr Stokes.

"DRM (Digital Rights Management) is removed more and more, or you can pay extra for DRM free - that means you can put it on different players. It's closer to owning a physical copy of a record and playing it wherever you like."

Real music lovers however will need large hard drives.

"Downloads take up loads of memory space," adds Mr Stokes. "You will fill up your MP3 player quickly."

And because of the bitrate sampling speeds, some audiophiles may feel that their copy is of a lower quality than the original.


A third option for music fans is to pay a monthly fee for an unlimited streaming service from companies like Napster, SkySongs or Spotify.

Prices start from £5 per month, and can include the option to download a limited number of tracks to an individual computer.

Paying upfront for music removes the temptation to click beyond the budget when a lot of good tunes come out, says Paul Stokes.

"The downside is that you will only get music from that source - so if they don't have a deal with a certain record label you might not get the music you want. It also means you're less likely to shop around and get a good deal."

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