Streaming’s Dirty Dozen

Atoms for Peace’s Thom Yorke and Nigel Goodrich’s much publicized decision to withdraw their music from Spotify added to a small but growing band of streaming hold-outs. Rather than add to the surplus of Atoms commentary, instead here are a dozen of the most pressing issues surrounding streaming.  They are presented in no particular order and are a mix of both positive and negative trends and implications:

  1. Technology has made access models ready for prime time. Downloads (both paid and P2P) made perfect sense in the days of dial-up, slower broadband and GPRS.  But now ubiquitous high-speed connectivity and cached streaming mean consumers don’t need to get as hung up about downloading to own anymore.  Access models are ready for primetime and Apple would be in, driving the market if it wasn’t so terrified about trashing its ability to 32 and 64 GB iPhones and iPads (when everything’s in the cloud who needs local storage capacity?).  Of course being ready for primetime doesn’t mean the world will change tomorrow.  There is always a long ‘flash-to-bang’ for new technology to manifest itself as consumer behavior.  But the inescapable fact is that downloads will eventually become a digital anachronism, an evolutionary dead end.  Though again, not tomorrow, because they remain the perfect route for new converts to digital to switch from the CD and because it remains Apple’s core mode, and Apple is the beating heart of the digital music market.  But the shift will come.  Consumer behavior is moving on and if business models don’t catch up then the illegal sector will fill the vacuum.
  2. Everything has happened before and will happen again. 10 years ago when Apple launched the iTunes Music Store artists were up in arms just as they are now, terrified that it would kill the CD and that it would result in consumers dissecting albums.  To some degree both those came to pass but you will be hard pressed to find an artist now who does not consider iTunes to be one of, often ‘the’, key source of recorded music income.  As the cliché management phrase goes ‘change is difficult’, but it is.  No one ever really knows how things will pan out and if you have a degree of stability the last thing you want is to jeopardize that.  Taking risks is fine when its someone else’s money and company, but not when it is your livelihood. So it is utterly understandable why there is so much fear among artists and songwriters, but there has to be a belief that the market will find an equilibrium.  If the streaming model is unsustainable for any part of the music industry food-chain it will ultimately have to rebalance. Services can’t exist without labels, labels can’t exist without artists, artists can’t exist without songwriters. The concern is whether some artists, services and labels could end up as collateral damage in the process.
  3. Transition not cannibalization.  Streaming will replace downloads, that much is incontrovertibly true.  It won’t happen immediately, but it will happen.  To consider the process as ‘cannibalization’ however misses the bigger picture of an inevitable transition in behavior.  You could argue that the car cannibalized the steam train, but the answer would not have been to ban the production of cars.  The consumer behavior shift is happening, business models will catch up.
  4. Scale might not benefit artists as well as labels and publishers. The holy grail of streaming is ‘scale’.  When it is reached all will be well, so the argument goes.  Clearly the amount of income will be dramatically better with 100 million paying subscribers but scale may be slower to benefit artists and songwriters.  This is because a label and a publisher both have a big pool of catalogue, so a 50% increase across hundreds of thousands of works is going to be measured in millions of dollars while for an artist with a couple of albums it will be measured in hundreds of dollars.
  5. Fuzzy data: Artists have become empowered with their ability to shed light on streaming by publishing their payouts.  But there are so many variables (what sort of deal they are on, whether they are a songwriter, whether they are recouped etc) that even averaging the data out is problematic. There are other problems too.  Many of the artists who pay most attention to the economics of music are later on in their careers, sometime in the sunset of their careers so their overall popularity is on the wane.  But a factor that impacts all artists is the delay between consumption and reporting, i.e. finding out how much they get paid. With labels the delay is typically quarterly, but with collection societies it is often a year.  So much of the data artists are looking at is a year out of date, representative of where the market was 12 months ago but not now.  And with the streaming market changing so quickly, this has big implications.
  6. Windowing might work some of the time.  There is a steady flow of high profile albums that have been held back from streaming services but there is no definitive evidence on how streaming impacts album sales. Coldplay and Adele both held back and had hugely successful album sales. Yet the three artists with the biggest first week album sales in 2013 (Justin Timberlake, Jay-Z and Daft Punk) were all available on streaming services the week of release.  There is a very strong case for holding back new releases from free streaming services (why should free customers get new releases the same time as paying customers?) but the case for paid streaming is less robust.
  7. The journey is becoming the destination too.  Nowhere more so than YouTube. The difference with YouTube is that everyone now accepts it as a crucial marketing vehicle.  The problem though is that for so many people YouTube is not just the discovery journey but also the destination itself, what’s more YouTube is the globe’s most popular digital music destination.  So instead of driving sales it replaces them for many users.  This is particularly true among younger music fans.  So even if YouTube was paying out the same amount as subscription services (which it isn’t) artists have a much, much bigger cannibalization risk in YouTube than they do in Spotify et al.  This is the core of the streaming challenge – the distinction between what constitutes promotion and consumption is blurring to the point of irrelevance.  Right now many of the positioning and commercial mechanics of free streaming services and tiers is that of promotion, even though they are also consumption.
  8. Pricing and product must evolve. Streaming pricing and product sets must evolve.  9.99 is not a mass market price point, however good value it may represent.  In fact it is the entire monthly spend of the top 10% of music buyers.  Much more needs to be done around testing pricing elasticity, else subscriptions will never break out of their aficionado niche.  There are a few interesting experiments, such as MusicQubed and Bloom.fm which focus on curating small amounts of content at low price points.  But much more needs to be done on this front, the leap from free to 9.99 is too big. There must also be innovation in the product experience, and Deezer’s, Spotify’s and Soundcloud’s developer platforms all look like great environments for such innovation to occur, but they’re not enough on their own.  Product and pricing need to be used strategically to target services at discreet consumer segments. The 2000’s taught us that one size does not fit all for digital music, the same applies to subscriptions.  One key way the mainstream services can start segmenting their offerings is by providing artist channel subscriptions were a user pays $/£/€1 per month per artist.
  9. Income comparisons are not binary.  A comparison of the amount of money earned (across all rights holders) from a paid stream (c.$0.01) versus that of a paid download (c.$0.70) is always going to look catastrophic.  But these rates are points on a much larger scale, with the download at one end and terrestrial radio at the other.  In the US terrestrial radio does not pay anything to record labels and in Europe rates are far, far smaller than streaming services.  The assumption has always been that radio is so important a discovery channel that paltry rates are tolerable.  But if music sales are diminishing then radio has the same ‘journey as destination’ problem as YouTube.  The challenge for artists and songwriters is to work out where the sweet spot on the scale is for them. Where is right balance between discovery and income generation?
  10. Rethinking the life-time value of a song.  In the past the commercial value of most songs peaked during the course of a few months, tailed off steadily for another few months and then nearly flat-lined thereafter.  For big artists and big hits the tail off would be longer and the flat-line would be replaced with a steady after life.  Streaming changes that in three ways: i) fewer song purchase transactions occur, meaning less money up-front, ii) money is generated direct from listening long after the original release iii) streaming services drive strong consumption of catalogue.  So artists will see a shift from immediate big income to long-term steady income. The question of whether one will equal the other will become clear in the next 2 to 3 years.  See my consumption analysis for a view of where it may get to.
  11. The listener net widens. While it is clear that an album being listened to a dozen times on Spotify is much less valuable to an artist than if it had been bought on iTunes, that comparison assumes it is a case of one or the other.  But what is becoming increasingly clear is that more artists are getting listened to by more people.  The absence of the price barrier means people are eagerly trying out new artists.  And in many cases the listener would never have bought the album anyway.  What’s more, after having streamed it a few times, they may even realise they just don’t like it that much.  In the analogue era that would have just been a disinterested listen to a single on the radio, with streaming it is direct revenue. The artist is thus getting money from a consumer that does not even like them enough to proactively spend money on them.  It may be small revenue, but it is ‘found revenue’ that would not have existed anywhere else.
  12. Things will get much worse unless more change happens.  Digital music revenue is not growing quickly enough, in fact growth is slowing.  Global digital revenues grew more slowly in both absolute and percentage terms in 2012 than they did in 2011. Globally digital is still only 38% of music sales and in Japan, which may become the world’s largest music market this year, 80% of sales are physical and digital has been in decline since 2009.  It is wrong to assume that the market will naturally ‘go digital’.  At the current trajectory it will not.  Experimentation with new models and products is crucial.  We are back in the ‘throw it all at the wall and see what sticks’ phase we were in during 2007-9.  This time though artists and songwriters are part of this, both because they have found their voice and because DIY/Direct-to-Fan services are part of the mix.  The next five years will be the most important phase of change the music business has ever gone through.  The last 10 years has given us a solid foundation of options but it has also created a hornet’s nest of inequities, mistrust, misgivings, threats and disruption.  Labels, publishers, songwriters, artists, music services, tech companies must all learn how to create a sustainable music ecosystem that benefits all parties.  A naïve aspiration?  Perhaps, but the current ‘what’s in it for me?’ ethos will only result in unnecessarily dismembering an industry that is perhaps finally ready to start on the path to recovery.

10 thoughts on “Streaming’s Dirty Dozen

  1. Re: “when everything’s in the cloud who needs local storage capacity?”

    I find that I need a bigger iPhone every year and I’m currently on 64GB. BECAUSE OF the cloud: When it’s so easy to click ‘sync to mobile’ in Rdio for multiple whole playlists and albums you have even a vague interest in (you HAVE to sync music you really want to listen to: to save data usage, for the underground, for planes, …) and with the local caching of even your ‘iCloud’ photos and other things, it fills very very quickly! Even with full reliance on the cloud.

    On-device storage isn’t going anywhere soon.

  2. Interesting point – which is why of course Apple want to ensure that games, videos etc (ie large volume files) are central to their cloud strategy. Because for most people accessing music in the cloud will be much less hard drive hungry than porting their music collection onto their device.

  3. Very good article.

    The ‘delay’ point is huge – and a lot longer than you suggest for songwriters. In some markets it can take 18 to 24 months and if you have an old school publisher, he’ll sit on it for another six months before paying through.

    ‘Tail snapping’ and ‘distribution cut offs’ by the rights administrator are also worth considering, because if your didn’t receive a cheque from your society the. Your none the wiser and have nothing to complain about.

    Good work!

  4. Will – interesting to hear just how delayed the reporting can be in some markets.
    John – thanks, will do!

  5. Nice summary Mark. The price issue (your point 8) will be key but is also almost impossible to address in a universal way (other than through bundling). I wonder what the motivation was for the current take down ? It is doubtful if Atoms for Peace have even seen a royalty statement yet for that last album ?

    I had so hoped we were over all this.

  6. Very nice summary!

    On your first point, about access models being ready for prime time, in terms of customer enjoyment, I think there’s no question about it, but as long as Spotify keeps losing $60M a year, shareholders might not be as bullish in the years to come. In Deezer’s case, they had struck a partnership with Orange in France before their expansion, which secured them with steady financing (something like 20M€ a year, I seem to recall), making for a very appealing customer acquisition tool for the telco. But if those kinds of deals are the only ones capable of keeping the streaming services afloat, then Spotify, Deezer, and all the pure-players are going to become “portfolio investments” for bigger financial players like Access Industries. And they’ll be stacked up against Apple and Google (and Amazon) who won’t mind losing money on streaming to draw more customers to their hardware and other paid services.
    Not sure this heralds a bright future for payouts to artists with the current streaming model…

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