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Legal and Tech: How On-Demand Music Streaming Works

Mike had been a music lover since childhood. He had a great collection of CDs and vinyl bought in traditional music stores. But times had changed. The emergence of smartphones and the ensuing digitalization had greatly affected the music industry. Now, Mike could listen to his favorite tracks on his phone at any time and in any place without having to buy CDs. But Mike was a bit frustrated. His phone was unable to store a huge music collection. Years later, he finally found a solution to this problem — music streaming services. They didn’t require Mike to store all his music on his phone and let him browse new music conveniently.
Music Streaming

Still, the solutions available on the market didn’t fit all of Mike’s needs. To his mind, Apple Music had a bad recommendation engine. Spotify and Pandora weren’t available in his region. And Tidal was a bit expensive for him. What should he do? Mike was in despair. Until that day when he came up with an idea for his own, ideal music streaming service… Millions of people want to listen to high-quality music without interruptions and problems with storage, and this number is growing every year.

According to Statista, the number of music streaming subscribers worldwide amounted to 487 million in the first quarter of 2021, up from just under 488 million at the end of the first quarter of 2021. In this article, we examine how the music streaming market works and what you should know before starting music streaming SaaS app development. This analysis will help answer how you might enter this market with your own streaming solution.

Types of Music Streaming Apps

There are two major types of streaming services: radio and on-demand. Radio streaming services are mostly associated with music discovery, with an app acting as a DJ who picks what songs to play and in what order. On-demand services are characterized by user-created playlists that can be shared with others. Let’s talk about these two types of streaming services in more detail.

Radio Stations

The best representatives of radio apps are Pandora and iHeartRadio. These services aren’t designed for listening to the one specific song you want to hear right now. They call themselves “radios” because they play songs you might like based on your personal preferences. You can’t select a specific song with on-demand radio stations like Pandora, but you can create your own stations based on genres, songs, albums, artists, or bands.

Radio station apps have licensing agreements that don’t allow them to play songs on demand. These licenses allow radio stations to keep their costs down compared to on-demand streaming services.

On-demand Streaming Services

Examples of on-demand audio streaming services include Spotify, Apple Music, and Tidal, all of which let users play songs of their choice instantly. Similar to radio station streaming services, on-demand streaming services also offer recommendation and discovery features based on what users like to listen to.

Given the growing desire for on-demand music, Pandora launched Pandora Premium, a $9.99 per month streaming service for smartphones, tablets, and the web that competes directly with Spotify and Apple Music. Pandora Premium allows users to listen to Pandora radio while also creating their own playlists. To develop its on-demand streaming service, Pandora needed to sign licensing agreements with major record labels as well as independent distributors.

The streaming services also have to play the SaaS game to make certain subscribers don’t churn as well as join other streaming solutions. In lots of aspects, the artists themselves become creative for iTunes, Spotify as well as others, similar to engineers and item designers who are the rock stars behind various other SaaS companies, such as Uber and Airbnb. So SaaS software development has become more and more popular in the music industry.

Licensing Agreements

To make a music streaming app, you need to get rights on sound recordings and compositions (songs). Rights to sound recordings and compositions can be owned by multiple rights holders. For example, if an artist signs a deal with a label and records his or her song in the label’s studio, then this recording belongs (at least partially) to the label.

The song itself (the composition) belongs to the songwriter, although a songwriter can have a publisher manage those rights. Managing rights to compositions means issuing licenses for the use of songs, collecting royalties, dealing with accounting, and managing other administrative issues. Often, songwriters sell their songs to a publisher.

Every internet radio station and on-demand streaming service needs to pay copyright holders for the right to reproduce or make copies of sound recordings and compositions. These payments are called royalties. However, internet radio stations and on-demand streaming services require different licensing agreements and must strike these agreements with different organizations.

For Radio Stations

Radio stations pay government-approved organizations that in turn pay rights holders: labels, music publishers, and songwriters. Radio royalty rates in the US are set by the Copyright Royalty Board (CRB). If you want to develop your own radio station, you need to get licenses from the following agencies:

  1. SoundExchange for sound recordings. SoundExchange compensates labels and individual artists.
  2. Performance Rights Organizations (PROs) including ASCAP, BMI, and SESAC for publishing licenses. These organizations pay royalties to publishers and songwriters.

To develop its on-demand streaming service, Pandora needed to sign licensing agreements with major record labels as well as independent distributors. As a result, about 70% of revenue from Pandora’s subscription service goes toward royalty payments to songwriters and artists.

For On-demand Music Streaming Services

To develop an on-demand streaming app, you’ll need to license content from the following organizations:

  1. Major labels such as Sony Music, Universal Music Group, and Warner Bros
  2. Independent aggregators such as the Merlin Network, which represents indie artists
  3. Publishers such as Universal Music Publishing Group and Sony/ATV

All of these organizations require direct licensing deals, which typically take one of the following forms:

  • Per-stream rate
  • Percentage of revenue
  • Upfront payment for future streams
  • Equity

The rules on the streaming web and mobile app market aren’t very friendly for emerging digital businesses. To make things even more troublesome, there is no global standard for music licensing, and therefore you need to license country by country. Dealing with boring legal matters isn’t the only challenge a music streaming app developer needs to tackle. The next challenge is choosing the list of features that will make your app the ideal solution for music lovers.

How to Create a Music Streaming App: Features Your Mobile App Can’t Live Without

Regardless of the type of music streaming app you choose to create, all apps of this type have a common set of features that are necessary. Here’s a list of them.

Large Music Library

A large library of songs for all tastes is a must-have for any music streaming platform. You should ask yourself four main questions.

  • What music should I offer? To avoid legal issues, license music and avoid downloading pirated music.
  • Where should I store data? The most common solution is Amazon S3 or any other cloud service with a Content Delivery Network (CDN).
  • How should I stream music to users? You also need to decide how to stream data. Streaming involves sending information from the server to users. To provide users with seamless streaming, you should choose the right streaming protocol. For instance, TCP’s congestion controls and the ability to resend lost packets made Spotify choose the TCP protocol for streaming.
  • Which format is the best for storing music? There are a plethora of music formats, each offering different sound quality. Below, you can see a diagram that shows how music formats affect streaming quality. Now let’s discover what formats famous applications use. Tidal, a famous app owned by Jay-Z and available for iOS and Android platforms, supports FLAC, ALAC, and AAC. Pandora uses only AAC, while Spotify supports Vorbis.


The first step toward providing a highly personalized experience is collecting and analyzing data about users’ musical preferences. The perfect time to do this is at registration. Applications like Spotify and Pandora, for example, ask users for their zip codes and birth years. With the help of this information, the application can recommend tracks popular in the user’s region and among users of their age group.

Some digital music services ask users direct questions about their favorite genres and artists. Your primary goal for this section is to create a clear and appealing design that doesn’t annoy users with questions. Look at how the onboarding looks in Apple Music. To make a new user’s experience more personalized, music app developers can use Facebook’s API to get access to data about a user’s likes and other music-related information in their profile.


If you decide to develop an on-demand app, you may need to provide your users with an advanced search feature. Let users search for playlists, tracks, genres, and artists so they can easily find a track they’re looking for. In addition, you can let them search for music by mood and activity, as Spotify and Pandora Premium do. After acoustic fingerprinting, each track gets its unique International Standard Recording Code (ISRC). With the help of this code, an app can distinguish the original song from remixes and edits.


After you acquire a sufficient music database and user base, you can start thinking about developing a more advanced recommendation and discovery system. Apple Music seems to be a good app, but a lot of users complain about its poor recommendation engine. It’s one of the main reasons why users opt for Spotify or Pandora Music. Most online music streaming services use both audio analysis algorithms and human curation for a more advanced recommendation and discovery system. Let’s scrutinize the recommendation engines of Spotify and Pandora, the top players in music streaming. Spotify, which owns Echo Nest, uses this company’s API. Echo Nest uses data mining and machine learning techniques to gather information from the web about songs, albums, artists, and genres.

The technology that Echo Nest provides can capture live playback behavior (artist plays, song plays, skips, bans, favorites, and more) and use this behavioral data to personalize playlists. The system generates playlists using similarity searches on cultural text data from the web, audio data from tracks, and user behavior. Pandora’s recommendations, on the other hand, are based on the Music Genome Project, an automated musicological analysis that ignores genres, user connections, and ratings. The idea behind this project is to figure out what you like (not what the market might like) by analyzing the musical structures in the songs you like and then playing other songs that possess similar traits. This approach is definitely interesting, but it does distance users from the tastes of their friends, peers, and critics.

To develop their algorithm, Pandora employs trained experts who tag songs with dozens of pieces of metadata. This metadata includes specific tonal qualities, instruments played, rhythmic nuances, and hundreds of other details. Pandora is conducting ongoing experimentation on its vast user base to figure out how best to deliver music to its listeners. You can read more about their intelligence algorithm here.

Music Streaming – Possible Sources of Revenue

presentation with background music

From the statistics we showed earlier, you can see that music streaming solutions may be rather profitable. Now that we’ve discussed the features for your app, let’s find out what monetization models can be applied to it. Most apps of this type rely on a mix of the following business models.

Charging Listeners in Music Streaming

This is the most profitable and hence the most popular way to monetize music streaming apps.


There are two possible ways to handle subscriptions. First, you can provide users with basic features and charge them if they want additional functionality. For instance, Spotify Premium lets users listen to saved tracks offline, skip an unlimited number of tracks, and play any track in high quality. For this, users pay $9.99 per month. There’s also a Spotify Premium Family plan that lets up to five family members at the same address use their personal Premium accounts for only $15.99 per month.

Pandora offers Plus and Premium plans. With Pandora Plus, which costs $4.99 per month, users get unlimited replays and skips and the ability to listen to offline stations and create personalized stations. Pandora Premium costs $9.99 per month and includes all the features of Pandora Plus and also lets users download tracks to their devices, create playlists, and search through Pandora’s great music library.

Second, you can provide access only to users who purchase a subscription. Tidal only has paid plans but provides users with high-definition music curated by experts. Tidal Premium costs $9.99 per month, while Tidal Hi-Fi with master-quality audio costs $19.99 per month. In all these music players, users are able to start with a free trial. Before starting a trial, however, users need to enter their card information. After the end of the trial, they’re automatically charged. In case users don’t want to subscribe to the paid version of an application right away, many music applications integrate an additional business model for deriving revenue: advertisements.

Ads in Music Streaming

We won’t talk much about this business model, since it’s a traditional way to monetize a freemium app. While listening to free music streams, users may be exposed to small banner ads on their screens or audio ads between tracks. If users don’t want to see and hear ads, they may upgrade to paid accounts. Below, you can see the revenue that Spotify and Pandora get from advertisements and subscriptions.

Additional Sources of Revenue

Tencent Music Entertainment (TME) is Chinese music streaming company. Taking into consideration the cultural background of their target audience, the company came up with a brand-new revenue stream. Chinese people are great fans of karaoke, and many spend their leisure time in karaoke bars. The QQ Music app, owned by TME, allows users to sing karaoke and Livestream it. In this app, users can buy and send coins or gifts to their favorite singers during live streams. These social activities bring TME approximately $1.21billion in the third quarter of 2021.

In Google Play Music and Apple Music, if an unsubscribed user wants to listen to a particular song or album, they should purchase it. In this way, these services get additional revenue by selling particular songs and albums instead of selling unlimited access to all songs in the catalog.

Charging Artists in Music Streaming

Besides paying artists for songs, some streaming services also charge them for additional services.

Monetizing Songs

SoundCloud is often considered the best place for new artists to promote their songs. This service is also known for its paid artists profiles that provide singers and managers with additional capabilities. It has three Artist profiles  – SoundCloud Basic, SoundCloud Pro, and Repost by Soundcloud. The first one is free and enables newbie singers to view songs statistics and upload tracks with a total duration of three and more hours.

With the second plan, artists are able to monetize their tracks, turn off comments, upload music with a summary duration of six hours, and view advanced statistics of their tracks. It costs €8.25 per month. Repost by Soundcloud allows you to distribute unlimited tracks to all major music services and promote your tracks on SoundCloud discovery pages. Its price is €2.5 per month.

Promotion with Music Streaming

Spotify helps artists promote their albums and songs. Spotify Ad Studio is a convenient service for creating and managing ad campaigns for a price that depends on the targeting selection. As you can see, digital streaming services are a profitable distribution channel for record labels and publishers, but the streaming market isn’t the easiest to enter. To build a native app for this market you need to have both a thoughtful business strategy and advanced technology. Remember Mike? Let your app be loved by users like Mike all over the globe.

Zoey Peregrine
Zoey is a skillful content manager and SEO copywriter. She is interested in digital marketing and also writes informative articles on web development. In her free time, she prefers reading and taking part in quests.
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