The Music Streaming Survival War

The biggest news lately in Taiwan's domestic internet sector is that both Chunghwa Telecom and Taiwan Mobile have decided to invest in KKBOX, folding Taiwan Mobile's own music platform MyMusic into KKBOX. This signals that the two telecom giants are no longer going to run their own streaming music platforms — they've decided instead to let the domestic streaming industry consolidate.

It's an entirely sensible call. Why is running a music streaming platform so hard? Music streaming is one of the rare internet businesses hemmed in by more constraints than you can count, because it depends almost entirely on licensing from record labels. Video streaming is just as tough, but at least there you can shoot your own original content and sidestep needing a studio's license. With music, though, people want to hear the old songs — and there's simply no way around that.

Using MP3 Technology, Splitting Revenue with the Labels — Just to Survive

On top of that, you need to build out enormously heavy infrastructure, and ideally you'd want a big base of early users and a massive bandwidth footprint. On paper, telecom companies look perfectly suited to this business. But look at the industry leaders — they routinely count users in the hundreds of millions, more than Taiwan's entire population. The barrier to entry is genuinely that high. Without a meaningful degree of consolidation, domestic streaming platforms simply can't compete with international ones — and even Taiwan's three telecom giants have struggled to break through that wall.

Trace it back to the source, and where did music streaming platforms actually come from? Mainly from the invention of digital compression technology. A German researcher named Karlheinz Brandenburg invented the MP3. As a PhD student, his advisor, Dieter Seitzer, was studying an unusual field: psychoacoustics — the idea that the human ear is not, in fact, a microphone, and has plenty of imperfections that can, in effect, be tricked. Professor Seitzer loved music and wanted to build something like a remote digital jukebox, but the patent examiner rejected it, on the grounds that you'd need 12-to-1 audio compression to transmit sound remotely. Today we know that's a matter of algorithms, but in the early 1980s it seemed impossible. Brandenburg took on the problem, determined to settle the score for his advisor and crack audio compression.

At first, Brandenburg thought it was technically impossible — about as feasible as building a skyscraper out of old newspaper. But he gradually discovered that the human ear has four exploitable characteristics — four different ways you can, in effect, fool it (for instance, the ear is more sensitive to certain frequency ranges than others). He started by slicing audio into segments, then allocated more data to the parts the human ear perceives well and less to the parts it's less sensitive to. That's how he pulled off the feat of compression encoding.

As good as the MP3 technology was, it faced pushback from standards bodies, and it wasn't until 1997 that mainstream American media ran its first story on MP3. It started out as a niche format for sharing pirated files, but before long the world's first major music-sharing software, Napster, burst onto the scene. Its inventor, Shawn Fanning, came up with a peer-to-peer download method that let everyone swap the MP3 files they had through a central server. The idea went viral almost instantly, racking up twenty million users in no time.

The day after the 2000 Grammy Awards, the Recording Industry Association of America held a meeting where, whatever song anyone in the room searched for, Napster had it. The moment that really landed was when someone searched for a song that had only started airing on the radio three days earlier — and it was already on Napster. This was the year 2000! The record executives in the room reportedly turned pale on the spot. Naturally, Napster was quickly sued into oblivion by rights holders — and that's precisely what set the stage for the rise of the streaming platforms that followed, Spotify above all.

Apple Has the Phones, Google Has the Users — Spotify Breaks Through by Constantly Reinventing Itself

The founding story of Spotify's two Swedish co-founders has already been told in a well-made biopic and countless articles — a quick search turns up plenty, so I won't repeat it here. From a business standpoint, this industry is built almost entirely on licenses from record labels and rights holders, and the global recording industry is a tight oligopoly — just three giants, Universal, Sony, and Warner — so there's essentially no room to negotiate. The labels take equity in the business and set the revenue split, leaving Spotify to focus on one thing: serving customers well, through lower latency, a better interface, and better algorithms. Everyone grumbles about it — artists always want a bigger cut — but once the MP3 Pandora's box was opened, there was never really a better arrangement on offer.

Music streaming is a naturally monopolistic industry — nearly every competitor is dealing with the same counterparties, the three record-label giants. A few players also hold hugely tilted natural advantages: Apple and Google, for instance, one owning everyone's phone, the other owning everyone's user account and YouTube. And neither company is remotely short on cash, so they can afford to grind it out for as long as it takes. Living squeezed between rights holders on one side and ruthless rivals on the other, Spotify was forced to develop sharp instincts about exactly why people use a streaming platform in the first place. It uses a lossy compression format, for instance, because low latency is the lifeblood of a streaming service. And on playlists, recommendations, and device connectivity, Spotify's updates come at a dizzying pace — it's one of the very few internet giants at this scale that keeps overhauling its interface and core features again and again.

This business may look brutal to be in, but between 2019 and 2020, subscriber numbers for US streaming services grew nearly 25%. And if you can just manage to stay alive — even if life isn't necessarily comfortable along the way — you get to join the ranks of a natural monopoly. These days, if music isn't released on a streaming platform, it essentially can't spread or reach listeners at all, so however you look at it, this is still a business worth being in. What's more, musical taste is highly local, which means domestic platforms still have a real shot at surviving comfortably. Consolidating the streaming platforms was exactly the right place to start.