An Economic Analysis of Online Streaming: How the Music Industry Can Generate Revenues from Cloud Computing

Abstract

This paper investigates the upcoming business model of online streaming services allowing music consumers either to subscribe to a service which provides free-of-charge access to streaming music and which is funded by advertising, or to pay a monthly flat fee in order to get ad-free access to the content of the service accompanied with additional benefits. By imposing a two-sided market model on the one hand combined with a direct transaction between the streaming service and its flat-rate subscribers on the other hand, the investigation shows that it can be highly profitable to launch a business which is free-of-charge for subscribers if advertising imposes a weak nuisance to music consumers. If this is the case, and by imposing an endogenously determined level of advertising which is provided by homogeneous advertisers, we find that a monopolistic streaming service increases the price for its flat-rate subscribers in order to stimulate free-of-charge demand and to capture higher revenues from advertisers. An extension of the model by illegal file-sharing shows that an increase in copyright enforcement shifts rents from music consumers to the monopolist.

Keywords: Advertising media, Music industry, Online streaming, Piracy

JEL Classification: D42, L12, L82