Is It Time to Tune Out Streaming Music?

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Online music streaming has been on a roll lately. Now a handful of players are running into a rock that doesn't bode well for the sector.

A U.K.-based independent record label distributor, STHoldings, has decided to pull its entire catalogue of 238 record labels from a handful of popular online music streaming services. The distributor is ditching Spotify, Napster, Simfy, and Rdio after a study done by NPD Group and NARM showed that streaming services discourage listeners from spending additional dollars to buy songs. Of the 238 labels included, only four of them showed interest in staying on with Spotify.

A large portion of users feel that having access to music via streaming services is good enough for them, which deters them from additional spending to own music. The distributor said it needs to do what's best for its labels, and streaming services generate poor revenue themselves while cannibalizing sales. The real shocker is that STHoldings needed a third-party study to come to that obvious conclusion.

While respecting the decision, Spotify defended its ability to add value to the industry as it grows its base of paying subscribers while swaying people away from piracy. It maintains that as the service grows, revenue to artists and rights holders will also grow accordingly.  

STHoldings' decision follows others who have gotten off the streaming wave that Pandora Media (NYS: P) mostly started, including Prosthetic Records, Century Media, and Metal Blade Records, among others.

Best Buy (NYS: BBY) picked up Napster in 2008 for $121 million, only to unload it to Rhapsody last month in a deal that gives the retailer a minority stake in the music service.

One U.K.-based artist, Blu Mar Ten, who is on STHoldings' list, even backed the decision with some figures. The group says that the third quarter was the first full quarter to distribute through streaming services -- its iTunes European revenue fell 24%, and overall digital revenue dropped 14%. The four streaming services in question comprised 82% of all tracks delivered, yet only generated 2.6% of revenue.

While streaming services still boast expansive libraries, a trend is now forming that could hinder the services' discovery appeal of finding new tunes, particularly those from smaller labels. Smaller artists still prefer traditional digital storefronts like Apple's (NAS: AAPL) iTunes, Amazon.com's (NAS: AMZN) MP3 Store, and potentially Google's (NAS: GOOG) new Music Store.

It's a troubling sign of what may be in store for streaming services. They've done a good job convincing listeners to open their wallets, but artists and labels aren't too happy with their share.

Although most of the mentioned services are privately held, you can still keep up with the music biz by adding these players to your Watchlist.

At the time this article was published Fool contributorEvan Niuowns shares of Apple and Amazon.com, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Google, Apple, and Best Buy.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Apple, and Google.Motley Fool newsletter serviceshave recommended writing covered calls in Best Buy.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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