RENEE MONTAGNE, HOST:

And 2012 was the year that music streaming services sought to make physical ownership of a CD or even a song file passe. Both Spotify and Pandora launched major efforts to lure new customers. But they found their business model can be challenging, as NPR's Laura Sydell reports in today's Business Bottom Line.

LAURA SYDELL, BYLINE: There are two types of people music streaming services have been trying to win over in the U.S. There is the younger generation, like 19-year-old Kayleen Fong.

Do you ever buy music?

KAYLEEN FONG: No.

SYDELL: Like a lot of young people, when Fong wants to hear a song, she listens for free on YouTube. In fact, she doesn't even think about it as a video site. Here's her definition.

FONG: It's a search engine, where you type in my favorite artist, which is The Hollies. They have a video of them, and they usually have interviews.

(SOUNDBITE OF SONG, "BUS STOP")

THE HOLLIES: (Singing) Bus stop, wet day, she's there, I say: Please share my umbrella.

SYDELL: Fong's taste in music may date back to the days before she was born, but her way of getting it is totally au courant. A study this year by Nielsen found that YouTube is the most popular way for teens and young adults to listen to and discover music. Streaming services also have to lure an audience on the other end of the age spectrum.

JENNIFER TAYLOR: Hello, my name is Jennifer Taylor, and I am a dinosaur.

SYDELL: Taylor is a filmmaker in her 40s who still buys stuff. More than a thousand CDs and hundreds of LPs crowd her San Francisco apartment. She pulls out an album by Brazilian singer Tete Espindola.

(SOUNDBITE OF MUSIC)

TETE ESPINDOLA: (Singing in Portuguese)

TAYLOR: I remember buying this. I remember, you know, going to a record store in Brazil. I used to take these trips to South America with empty tote bags and minimal clothes so I could come back with tote bags full of 12-inch vinyl records that there would be no way I could find elsewhere.

SYDELL: As different as she is from 19-year-old Fong, Taylor presents streaming services with the same basic problem: How do you get consumers to pay a monthly fee for something when they won't actually own it and they can probably find it for free somewhere online? The two major streaming services, Spotify and Pandora, have been trying to lure these people into paying by offering free versions supported with ads. Mike McGuire is an analyst with Gartner.

MIKE MCGUIRE: You have to have some version of the free or the radio extreme experience so you can get people into the system. Then how do you get them to cross over to become paying subscribers?

SYDELL: So far, Spotify has only managed to get about a quarter of its 20 million users to pay $10 a month, but it still is not profitable. Its main competitor, Pandora, which has 175 million users, has had several quarters of profitability, but it's had to put the money back into growing the service. And the more users the two streaming services get, the more royalties they have to pay to artists and labels, even if those users aren't paying for a subscription. This year, Pandora launched a lobbying effort to get Congress to lower the royalty rates.

MCGUIRE: Because that's kind of their big existential threat, right, is if those rates go way up, it's going to be even harder for them to generate profit.

SYDELL: McGuire says even if Pandora were to succeed in changing royalty rates, there is still a question of whether these streaming services can hold on until music listening habits change.

MCGUIRE: We're in this period of transition where it's not going to be a simple cut-off transition, where, you know, at some point, you know, X percent of the consumer base all of a sudden flops over to streaming. It's going to be a progression, probably a relatively slow one.

SYDELL: Music fan Jennifer Taylor was actually surprised by what she found when she began investigating on Spotify. She was convinced it wouldn't have all the artists she loves, like that Brazilian singer. So, we searched.

TAYLOR: Oh, my God.

SYDELL: So, she's there. So...

TAYLOR: OK. She's there.

SYDELL: Taylor isn't planning to become a subscriber to Spotify anytime soon. But the pressure to move over to streaming services is growing. Many computer makers are no longer installing the CD/DVD drive. And rumor has it that this coming year, Apple is going to launch its own streaming music service. Laura Sydell, NPR News.

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