What Will the Economics of Music Streaming Look Like in 2021 and Beyond?
Written by Pavel Czernek
The world is changing at a break-neck pace. Has been for quite some time now, in case you haven’t noticed. I’ll be upfront in saying that the title of this blog is a little misleading. No one knows for sure where this ship (the music industry) is headed. Any claim to the contrary should be cause for concern (or at least skepticism).
The purpose of this blog is to give artists a high-level understanding of the state of music economics today, and the debates being had as to what they should look like tomorrow.
Art vs. Business
The relationship between art and business is notoriously complex and delicate. There is a seemingly endless saga of David’s (artists) vs. Goliath’s (big business) in the history of recorded music, many battles between whom have shaped the evolution of the music industry as a whole.
Delicious-looking pumpkin pie credits to sheri silver on Unsplash
Musical talent, and entertainment in general, is an extremely valuable commodity. Just think of how many millions (if not billions) of people consume music every single day. What’s more, the work of artists is (and hopefully will continue to be) one of the alarmingly few (and ever-dwindling) fields that have not and hopefully will not be replaced by machines or AI.
So, artists have this incredible talent and skill that the masses are willing to spend their precious disposable income on. This money is known as “the pie”. Labels, and all the other businesses that make up the music industry, offer services to help get that music heard by as many people as possible and therefore earn as much money as possible in exchange for some pie. Artists need the support of such services to scale their reach and earn more, but questions start to arise: Which side is more important - artists or businesses? How should we split the pie?
I think it’s safe to say we know which side is more important. The music industry would not exist if there were no artists making music. Labels, publishers, lawyers, distributors, managers, sound engineers, etc. would all be doing something else.
However, the value of the business side is not to be underestimated, as I’m sure you can imagine an alternate reality where a 12-year-old Justin Bieber, recently having won 2nd place at his school’s talent show, riding high on his 3 minutes of viral YouTube video fame, shortly thereafter resumes the hum-drum of his normal preteen life without the disruption caused by Scooter Braun becoming his manager. Talent and skill alone are not enough. Artists need their talents to reach thousands if not millions of people in order to earn a living.
Music Economics
How to split this pie is the more challenging question. This question forms the basis of the nuanced field of music economics. This field, along with the economics of every creative industry (and arguably every industry in general) are completely unrecognizable when compared to what they were just 20-odd years ago. For a recording artist in the 1990’s, the path to monetizing your talents was relatively straightforward, although admittedly less accessible than today. It looked a little something like this:
Johann Sebastian Bach (source: Wikipedia)
Step 1: Get really good at your art.
Step 2: Develop your sound, record a demo.
Step 3: Get that demo played to the right person at the right time.
Step 4: Sign a record deal with a label.
Step 5: Record the record.
Step 6: Watch as the label handles the marketing, printing, and distribution of the record, some aspects of which are outsourced to other companies.
Step 7: Collect your share of royalties earned from sales of the record.
Step 8: Return to Step 4… hopefully.
Now, obviously, this is a gross exaggeration of what was even then a complicated process, and there are certainly a plethora of recording artists who had a totally different path to success. But you get the idea.
Back in the good ol’ days (say, in 18th century Germany) monetizing your songs was even simpler. You, Johann Sebastian Bach, got really good, published a replicable version of your music (sheet music at that time), got your songs performed for royalty or clergymen, and voila! You earned a living through your craft by way of commissions, licensing, touring, and so on.
Historically, this process complicates with advancing technology. The invention of the printing press allowed sheet music to be copied and licensed at scale. Now the earning potential is greater, but two new businesses need to be paid. Do I pay them in advance and bear the risk that my music doesn’t sell, or can I give them a percentage of each sale? Oh, wonderful, now scientists have figured out how to record audio. Now my fans can now listen to my music exactly as I would play it live, just by buying my vinyl record. I guess I need to hire a recording engineer and a producer. What happens if someone starts buying my records and selling them at a premium without my permission? I suppose I need a lawyer now too.
Technology
As technology has advanced, more and more specialists have come forward to help make music more ubiquitous and lucrative in exchange for their slice. This has only accelerated over time, especially with the advent of the internet, smart devices, software, and big data. The latest technologies have been particularly disruptive, and the transition from physical to digital has been quite bumpy, to say the least. Software like Napster blew up in popularity seemingly out of nowhere - blindsiding the music industry with massive declines in record sales, thereby forcing the industry to their knees. Why would people pay $10 for an album when they could get the exact same thing online for free? Turns out most wouldn’t.
Along comes YouTube, and suddenly you can listen to music online for free, legally, in exchange for your personal data and exposure to ads. Woah. Then comes Spotify, with a genius new business model. Users can now pay less than $10 a month for unlimited access to a seemingly endless catalog of music, on-demand. Not only that, they can make custom playlists, see what their friends are listening to, and even get automated recommendations for new music based on magical machine learning algorithms that know what you like better than you do. It’s on your computer, your phone, your TV… hell, it’s even on your new smart fridge. For many, this value proposition is well worth the $10 per month, especially when you consider that songs on iTunes sell for $1 each. Naturally, it exploded (and continues to explode) in popularity - now reaching hundreds of millions of active monthly users and premium subscribers.
But wait a second. People are listening to music now more than ever before, but artist revenue hasn’t increased? How does that work out? What is a stream? Is it to be treated like songs purchased, rented, played on the radio, or something else entirely? How much does the artist get paid for a stream? With digital distribution being so much easier than physical, do labels and publishers still deserve as big a cut of the royalties? How do these algorithms that suggest new music to people work? Who are these people making popular playlists, and how do we give artists a fair chance to get their music on them?
The UK Inquiry
Post-Brexit, the need has arisen for UK lawmakers to write new legislation around how streaming royalties are to be treated, now that the EU laws no longer apply. To help them with their decision, they invited a host of big industry players to speak at an inquiry into the economics of music streaming.
This could have huge implications for the future of independent music. The current laws in place across major music markets heavily favor large, established artists. Although the UK is just one market, it is a large one, and the results of this inquiry could pave the way for industry-wide change.
The two main questions that have been raised are:
How do we classify streaming?
What is the appropriate royalty distribution model for streaming?
How do we classify streaming?
The explosive growth in streaming over the past few years should mean there’s been an explosive growth in revenue for artists. Instead, we’ve seen the opposite. Streaming is killing radio, which has a few ripple effects. For one, artists earn a 50% cut of radio play, which is significantly more than what an artist earns from streaming. As radio play revenue decreases, it does not get replaced in full by revenue from the streams that replace it. Session musicians, in particular, are facing the worst of it.
This has become a subject of much debate - how do we classify a stream? Is it more like a sale of a single, a rental, or like the licensing of a song for radio play?
A survey conducted as part of the #fixstreaming campaign found that 60% of the 2000 survey respondents likened listening to playlist streams as more similar to radio than a traditional song purchase. This makes a lot of sense, and if streaming were treated as such, we would see artists earning a lot more per stream than they currently are.
Major labels beg to differ. They say that streaming is much more similar to a sale, as users are able to play tracks of their choosing, create their own playlists, and are not bombarded by whatever music a DJ feels like playing at a particular moment.
While the majors do have a point, they are conveniently ignoring the fact that many users spend the majority of their time listening to playlists made by tastemakers very similar to traditional radio DJs. According to statistics released by Spotify in early 2020, about 1/3 of total listening time is spent listening to Spotify-curated playlists, with another 1/3 spent listening to user-curated playlists. This means users only spend 1/3 of their time listening to songs they’ve searched for, or compiled into their own playlists. That means a whopping 67% of total listening time is spent listening to playlists that they didn’t create made up of songs they didn’t choose (sounds like radio, doesn’t it?).
While we don’t have a conclusion to this debate yet, I think the fairest way to resolve this is to create a model that’s somewhere in the middle. If a user is listening to a playlist created by Spotify, those streams should be treated as a license, similar to radio play. If a user is listening to a playlist of their favorite songs that they created, those streams should be treated as sold tracks. This model, while more complicated, is the fairest way forward in my opinion.
What is the appropriate royalty distribution model for streaming?
Another key topic being discussed is the model of royalty distribution. Spotify royalty calculations are quite complex and not very transparent. To explain simply, there are two revenue sources for Spotify: ad revenue from freemium users, and subscriptions from premium users. Currently, this revenue is added up into one big lump sum, then distributed to the various parties on a prorated basis. Spotify takes home 30% of all revenue, which pays its staff, overhead, and investors. The remaining 70% is divided according to the fraction of listens an artist’s catalog earns against the total number of listens.
Let’s say the number of listens to Sam Smith’s songs amount to 1/100th of the total number of listens. In this example, Sam Smith’s songs would earn 1% of that 70% chunk of revenue left over after Spotify takes their cut. This explanation is grossly oversimplified, as in reality there are many more facets affecting the final number Sam would take home, but it gives you an idea of how the current model works.
Source: Spotify
Many players in the industry have come forward with the idea for a more user-centric royalty distribution model. This model, while not fully ironed out, would look at each user's listening activity and distribute funds accordingly. If Tom from England listened to nothing but Sam Smith for the entirety of 2020, all of the revenue earned from Tom (less Spotify’s cut) would go into Sam’s team’s pocket.
This model seems to make more sense. It rewards artists for having dedicated fan bases. This is especially nice for independent artists - whose music isn’t going to be seen anywhere near a Billboard Top 100 chart - but who may have a small diehard following. The user-centric model would ensure that a Spotify user’s money would go to the artists they actually listen to. Not into some big pot for pro-rata distribution.
Somewhat surprisingly, the major labels don’t seem to mind this idea. They warn that the end result of such a change would be net-zero - some artists will win (earn more), while others lose (earn less). The total amount of royalties collected would not change.
Going forward
It’s hard to say exactly what changes will come in the future. However, it is undeniable that the independent market is growing. We seem to be on the cusp of a renaissance for independent music. Some people speculate that we are one big artist going independent away from the tipping point, where we’ll see a domino effect of artists choosing to go indie.
One thing key takeaway for artists: keep an eye on this inquiry in the UK. Keep an eye on the landscape of the music industry in general. As mentioned earlier, the world is changing. New opportunities and threats seem to emerge on a weekly basis. Who knows what it will be next? Blockchain, AI, some new device? We don’t know yet - but it is of paramount importance for indie artists to have a team who are aware of what is happening, and who can help you navigate the rough seas.
We will continue to monitor the inquiry as it unfolds, and will periodically post updates here. For consultation, feel free to reach out to us at contact@artistbridgeconsulting.com.
