Are rights holders missing the point with Twitch?

Twitch has apologised to its users for the growing volume of rights holder takedown notices for music used in Twitch videos. Twitch is in an awkward transitionary phase with music rights holders, not dissimilar to where YouTube was when it was acquired by Google. 14 years on from that acquisition, YouTube’s relationship with rights holders is in a better place but short of where it should be. Article 17, weaving its way between the competing lobbying efforts of rights holders and tech platforms, is just the latest mile marker on a long and winding rocky road. Twitch, like YouTube, does not fit the licensing norms of most streaming services, resulting in repeated stand offs. But just like the music industry still hasn’t grasped the full potential of YouTube, it may be making a similar mistake with Twitch.

Firstly, for sake of clarity, MIDiA firmly believes that copyrighted work should be used correctly and remunerated. We are not, in any way, suggesting that a platform should be able to use music without permission. However, the current licensing structures are:

1. Not flexible and agile enough to truly capitalise on user-generated content (UGC) music (a market which will be worth $4 billion by year end – download our major new FREE report on UGC music here)
2. YouTube and Twitch represent an opportunity to create new growth drivers, especially for artists, that can help fix the ‘broken record’

A lack of sync in sync

Let’s address the first point, well, first. Platform-native creators on YouTube, Twitch and TikTok create content so frequently they make the music industry’s volume and velocity problem look like child’s play. Usually, creators who want music in their videos have a choice: 1) get sync licenses, 2) get library music, 3) use music without permission and get taken down or demonetised. 

The problem with option one is that sync clearance is a lengthy process that can take weeks and cost a lot. Not a great fit for creators who create and upload videos the same day. Companies like Lickd are trying to fix this with catalogues of pre-cleared music, but the industry as a whole is moving too slowly. For the record, MIDiA’s preferred solution is for platforms securing large ‘sandboxes’ of pre-cleared tracks for creators and developers to work with. An early example of this is the NFL making all of its soundtracks available for creators on a Synchtank powered site.Unless music rights holders want to cede the growth in the music UGC space (which will be worth $5.9 billion by end 2022) to library music companies, they need to put alternative approaches at the core of their licensing strategy, not simply pursue them as interesting ‘edge’ experiments.

Going beyond the stream

However, the biggest music industry opportunity is not licensing music. It is monetising fandom. The #brokenrecord debate has shone a light on how streaming’s scale benefits do not trickle down at a sufficient rate to creators. Artists compete for tiny bits of highly valuable ‘real estate’ – playlists, artist profiles etc – but most often do not get enough to earn a living. While efforts like user-centric licensing and better songwriter rates will help, they will not change the underlying fundamentals of streaming economics. The counter argument is that scale will change everything, but:

• Average revenue per user (ARPU) is falling. Spotify’s premium ARPU fell 34% between Q1 2016 and Q3 2020, a 34% decline
• Streaming growth is slowing in developed markets
• Consumption is slowing – last quarter Spotify reported an increase in consumption hours to pre-COVID levels but as there were 49 million new monthly active users (MAUs) compared to pre-COVID this implies a reduction in hours per user
• Emerging markets are growing but a) ARPU is lower and b) domestic repertoire will drive most of the long-term consumption – so this means only a small uplift for Western creators

Before live stopped, streaming existed in a mutually beneficial ecosystem, giving artists more fans for concerts and merch. Now that live is out of the equation, streaming isn’t enough. 

This is where platforms like YouTube and Twitch can come in. They enable creators to build loyal fanbases of which they can monetise the loyal core to build sustainable careers. The idea of ‘1,000 True Fans’ was first put forward years ago by Kevin Kelly but now the dynamics of social platforms have made this a realistic possibility for any creator. Nevertheless, music artists are still way off the pace. 

Micro-communities

Twitch and YouTube enable creators to build (often small) loyal fanbases that can generate them income that far exceeds what artists get from streaming. MIDiA terms this dynamic ‘micro-communities’ and we think it will be one of the trends that will shape the music business in 2021 and beyond. As part of our creator tools research we will be exploring how platforms like Splice and Landr will be able to build their own artist-fan communities that can be as valuable to artists as Bandcamp is to many already. 

Streaming created a superstar economy where even within the non-superstars, superstars exist. For example, Tunecore states it has ‘thousands’ of artists that make more than $100,000 a year. A simple bit of arithmetic shows that this means the remainder make less than $100.

Micro-communities represent an opportunity for artists to fill the income gap that streaming leaves without live in the mix. This probably does not reflect a direct revenue opportunity for rights holders – indeed, that would be missing the point. Instead, they can ensure those platforms are supported to empower artist monetisation without speed bumps. Why? Quite simply, rights holders have a model that works for them (streaming), so now they need to support a model that works for their creators so that they can in turn continue to support the streaming model that works for rights holders. 

If the industry does not support this new virtuous circle ecosystem, then it could bring the streaming model crashing down due to creator discontent. 

Streaming’s remuneration model cannot be ‘fixed’

The #brokenrecord debate continues to build momentum and new models such as user-centric are getting increased attention, including at governmental level in the UK. But as Mat Dryhurst correctly observes, there is a risk of the market falling into streaming fatalism; that the obsession with trying to fix a model that might not be fixable distracts us from focusing on trying to build alternative futures.

I have previously explored what those new growth drivers might be, but now I want to explain the unfixable problems with the current streaming system for creators and smaller labels. Streaming’s remuneration model cannot be ‘fixed’, but that is mainly because of its inherent structure. Tweaking the model will bring improvements but not the change artist and songwriters need. Instead of exploring sustaining innovations for streaming, it is time to explore new disruptive market innovations

Product remuneration versus project remuneration

Smaller independent artists and labels are outgrowing the majors and bigger indies on streaming, so why are we having the #brokenrecord debate? Why isn’t it adding up? The answer lies in how artists and songwriters are remunerated. In all other media industries other than music and books, creators are primarily remunerated on a project basis. An actor will be paid an appearance fee for a film or TV show; a games developer will be paid for their time on a project; a sports star paid a salary; a journalist paid for a story. In many of those cases the creator will sometimes have the opportunity to negotiate a share of profit too, an ability to benefit in the upside of success. But, crucially, the media company has assumed all of the risk. Also, of course, the media company owns the copyright.

Artists and songwriters might get an advance, but that is a loan against future earnings, not a project fee. Artists and songwriters, like authors, are remunerated via product performance. They shoulder the risk, and most of the time they do not even own the copyright. Actors and sports stars do not have to worry about slicing up a royalty pot; they have been paid for their creativity whatever the outcome of the project. Any royalty splits are an upside, an ability to benefit from success rather than a dependency for income.

The consumption hierarchy has become compressed

Music used to be split into a neat hierarchy, with radio and social being about passive enjoyment and generating usually small royalties, while albums were about active fandom that generated large income. Streaming fused those two together into one place and created a royalty structure that, in artist income terms, resembles radio more than it does album sales. The problem does not lie with how much streaming services pay (c.70% of income is a hefty share to pay out), but instead:

1. how those royalties are divided up
2. the way they monetise consumption
3. the fact royalty rates are determined by how much streaming services charge

Streaming rates are going down because users are listening to more music and streaming services are charging less per user due to promotions, trials, multiple-user plans, telco bundles, student plans etc. Even before you start thinking about how the royalty pie is sliced, it is getting ever smaller in relation to consumption – and there is no onus on streaming services to protect against rates deflation because they pay as a share of income rather than a fixed per-stream rate (for subscriptions).

Monetising fandom

Music fans care about artists and songwriters, and given the opportunity and the right context many fans will support them. But that context is often artificial and happens outside of the normal consumption experience; for example, a music fan listening to a band on Spotify then going to Bandcamp to buy an album. It requires a conscious decision for the fan to say ‘I want to support this artist’. No such decision is necessary for a sports fan or movie fan because the remuneration system already ensures the talent has been adequately remunerated. On top of this, most music consumers are not passionate fans of most artists, so most will not make that step.

There are two natural paths that follow:

1. Build fandom monetisation into the streaming platforms, e.g. virtual artist fan packs, virtual gifting, premium performances, creator support etc. I have written at length about how Chinese streaming services do well at monetising fandom, but there it is the platform that benefits most, not the artists. Western streaming services have an opportunity to monetise fandom for the creators, not for the platforms.
2. Create new models where consumers pay for artist-centric experiences. These will always be more niche and have the challenge of building new audiences rather than tapping into existing streaming audiences, but the decision does not need to be ‘either/or’.

The third way

There is additionally a less obvious third path, that would reframe the entire basis of artist/label/publisher/songwriter/streaming service relationships: direct licensing for creators. No streaming service is going to want to do this (they already prefer to negotiate with aggregators rather than small labels) and labels and publishers are unlikely to want to cede such power. But a pragmatic compromise could be a new generation of artist and songwriter contracts that provide for the creators to set stipulations for royalty floors to ensure that they do not pay for streaming services cutting their prices via promotions and multi-user plans. This would also require rightsholders to ensure that streaming services set a royalty floor which in turn would compel streaming services to start pushing up the average revenue per user and perhaps even introduce metered access for users.

Options 1 and 3 are not exactly easy to do and they would require seismic industry change with wide-reaching impact. But if the industry wants a significant change in creator remuneration, then it needs to embrace truly disruptive innovation rather than spend its time tweaking a model that simply cannot change in the way many want it to.

Artists are Learning How it Feels to be a Songwriter

The ‘broken record’ streaming debate that continues to rage on is a natural consequence of the instantaneous collapse of live music revenue following lockdown. As soon as it was clear that live was going to be gone for some time, MIDiA predicted that the artist backlash against streaming royalties would be a natural, unintended consequence.

With many artists used to live comprising more than half of their income and streaming by contrast a sizeable minority, it was easy for them focus less on whether streaming paid enough and more on how many extra fans it was bringing to their concerts.

In the absence of live, all eyes are on streaming. As I’ve written previously, there isn’t a silver bullet solution to what is a complex, multi-layered problem. But there is a really important issue that artists’ lockdown plight shines a light on: the long-term plight of songwriters. Here’s why.

Streaming did not grow in a vacuum

The streaming economy did not grow in a vacuum. It rose in the context of a thriving wider music industry where artists were earning good money from live, merch and (for some) sponsorship. Nor did streaming ever consider its relationship to live as being neutral. Spotify in fact is vocal in its belief that it  ‘supports and extends the value of live’.

This matters because it encourages artists to think about streaming delivering a wider set of concrete income benefits than the royalty cheque alone. The streaming case is that without it, artists would be playing to smaller crowds and selling less merch. A high tide raises all boats.

Without the halo effect benefits though, artists would have found it much more difficult to adjust to the shift of paradigms from a series of large one-off income events (i.e. selling albums) to a longer-term, more modest monthly income, namely trading up front payments for an annuity. Artists would have found it as difficult as…well…as they are now. This is how it feels not to have live music and merch paying the bills. This is how it feels to be a songwriter.

Songwriters only have the song

Professional songwriters (i.e. not those that are also performing artists) may have many income streams (performance, sync, mechanicals, streaming) but they all depend on the song. The songwriter lives in a song economy. The artist lives in a performance/ recordings/ clothing/ collectibles/ brands economy. Songwriters do not tour or sell t-shirts. As a consequence, they have been paying closer attention to streaming royalties over recent years than artists have. Now that artists are also unable to tour or sell shirts (at least in the same volumes) streaming royalties suddenly gained a new importance to them also.

The good news for artists is that live will recover (though it will take until late 2021 to be fully back in the saddle). The bad news for songwriters is that there is no easy or quick fix and things will get worse before they get better. One of the key imbalances is in streaming. Music publisher revenue is around 2.8 times smaller than label revenues but streaming royalties are four times smaller. As streaming becomes a progressively larger part of the wider music economy, if the current royalty mix remains, songwriters will earn a progressively smaller share of the total.

A generation of whom much is asked

Artists are fighting an important fight now, but when live picks up post-lockdown, songwriters will still be fighting their fight. This is not to in any way diminish the importance of artists getting a fairer share from streaming services and record labels, but it is to say that much of their pain will ease when their other income streams come back online.

Be in no doubt. Songwriters have a long and windy road ahead of them.

Songwriter’s streaming era plight reminds me of Franklin D. Roosevelt’s 1933 quote:

“To some generations much is given. Of other generations much is expected.”

But just as streaming does not exist in isolation, nor do songwriters. They are the foundations of the entire industry. There is a well-used saying that ‘everything starts with the song’. It doesn’t. Everything starts with the songwriter.

Quick reminder: if you are an artist and you haven’t yet taken our artists survey, then there is still time! We are keeping the survey live for a few more days. All individual responses are 100% confidential. All artists get a full copy of the summary survey data so you can benchmark yourself against your peers, including how they are dealing with the impact of COVID-19. The survey questionnaire is here.

Songwriters Aren’t Getting Paid Enough and Here’s Why

Music Business Worldwide recently ran a story on how Apple has proposed a standard streaming rate for songwriters, with Google and Spotify apparently resistant. Of course, Apple can afford to run Apple Music at a loss and has a strategic imperative for making it more difficult for Spotify to be profitable, so do not assume that Apple’s intentions here are wholly altruistic. Nonetheless, it shines a light on what is becoming an open wound for streaming: songwriter discontent. In the earlier days of streaming artists were widely sceptical, but over the years have become much more positive towards the distributive medium. The same has not happened for songwriters for one fundamental reason: they still are not paid enough. This is not simply a case of making streaming services pay out more; rather, this is a complex problem with many moving parts.

Songwriters don’t sell t-shirts

Streaming fundamentally changes how creators earn royalties, shifting from larger, front-loaded payments to something more closely resembling an annuity. In theory, creators should earn just as much money, but over a longer period of time. If you are a larger rightsholder then this is often wholly manageable. If you are a smaller songwriter or artist, then the resulting cash flow shortage can hit hard. Many artists, especially newer ones, have made it work because a) streaming typically only represents a minority of their total income, and b) the increased exposure streaming brings usually boosts their other income streams such as live performances and merchandise. Professional songwriters however – i.e. those that are not also performers – do not sell t-shirts. Royalty income is pretty much it. There is a greater need to fix songwriter streaming income than there was for artists.

The four factors shaping songwriter income

There are four key factors impacting how much songwriters earn from streaming, and most of them can be fixed. To be clear, though, just fixing any single one of them will not move the dial in a meaningful-enough way:

1. Streaming service royalties: Songwriter-related royalties are typically around 15% of streaming revenues, which represent around 21% of all royalties paid by streaming services – around 3.6 times less than master recordings-related royalties. This is better than it used to be, when the ratio was 4.8. However, there is clearly still a large gap between the two sets of rights. Labels argue that they are the ones who take the risk on artists, invest in them and market them. Therefore, they should have the lion’s share of income. Publishers, on the other hand, argue that they are increasingly taking risks with songwriters too (paying advances) and working hard to make their music a success, e.g. with sync streams. They also argue that everything is about the song itself. Both arguments have credence, but the fact that streaming services have historically negotiated with labels first helps explain why there isn’t much left of the royalty pot when they get to publishers. There is clearly scope for some increase for songwriters, but if there is not an accompanying reduction in label rates – not exactly a strong possibility – then the net result will be reduced margins for streaming services. Given that Spotify has only just started generating a net profit, the likely outcome would be to weaken Spotify’s position and skew the market towards those companies who do not need to see streaming pay – i.e. the tech majors. If the market becomes wholly dependent on companies that thrive on squeezing suppliers… well, good luck with that.
2. CMOs: Many songwriter royalties are collected by collective management organizations (CMOs). These (normally) not-for-profit organisations administer rights, take their deductions and then either pay to songwriters directly or to publishers who then pay songwriters (after taking their own deductions). It gets more complicated than that, however. If a songwriter is played overseas, the local CMO collects, deducts and then sends the remainder to the CMO where the songwriter is based (however there are a good number of exceptions to this with a number of CMOs not deducting for overseas collections). That CMO takes its deduction and then distributes. It gets more complicated still – some CMOs apply an additional ‘cultural deduction’ on top of their main fee before distributing. So, if a US hip-hop artist gets played in Europe, the local CMO will take its cut, and an administration fee. Then it goes to his local CMO which takes its fee before sending it to the publisher which then takes its own cut (typically just 25%) which however is much better than label shares.
3. The industrialisation of song writing: With more music being released than ever, songs have to immediately grab the listener. To help ensure every part of the song is a hook and to try to de-risk their artists, bigger labels commission songwriter teams and hold song writing camps, where many song writers get together and write the tracks for albums. This means that the royalties for every song are thus split into small shares across multiple songwriters. Drake’s ‘Nice for What’ has 20 songwriters credited. That means the already small royalties are split 20 ways.
4. The unbundling of the album: When music was all about selling physical albums, songwriters used to get paid the same mechanical royalty for every song on the album, regardless of whether it was the hit single or filler. Now that listeners and playlists dissect albums, skipping filler for killer, a weak song simply pays less. Tough luck if you only wrote the filler songs on the album. On the one hand, this is free market competition. If you didn’t write a song well, then don’t expect it to pay well. Some songwriters argue that it should go the other way too, though – if they wrote the song that made the artist a hit, then shouldn’t they be paid a larger share? 

Here’s another way of looking at it. With the above analysis, this is how many streams the songwriter needs to earn income based assuming the songwriter is equally sharing income four ways with three additional songwriters:

It is incumbent on all of the stakeholders in the streaming music business to collectively work towards making earning truly meaningful income from streaming a realistic objective for songwriters. No single tactic will move the dial. Increasing the streaming service pay-out from 15% to 20%, for example, would still see the above-illustrated songwriter only earn 25% of that. All levers need pulling. Until they are, songwriters will feel short-changed and will remain the open wound that prevents streaming from fulfilling its creator potential. Ball in your court, music industry.

Note – since originally publishing this post I have had useful feedback from a number of rights associations and publishers. My assumptions actually translated (unintentionally) into a worst case scenario that was not representative of usual practise. The post has been updated to show a more typical revenue flow. The underlying arguments of the piece remain unchanged.

Playlist Malfeasance Will Create a Streaming Crisis

Streaming economics are facing a potential crisis. The problem does not lie in the market itself; after all, in Q1 2019 streaming revenue became more than half of the recorded music business and Spotify hit 100 million subscribers. Nor does it even lie in the perennial challenge of elusive operating margins. No, this particular looming crisis is both subtler and more insidious. Rather than being an inherent failing of the market, this crisis, if it transpires, will be the unintended consequence of short-sighted attempts to game the system. The root of it all is playlists.

Streaming makes casual listeners ‘more valuable’ than aficionados

Streaming took the most valuable music buyers and turned them into radio listeners. Now, as the market matures, it is taking more casual music consumers and also turning them into radio listeners. Although curated playlist penetration is still low (just 15% of streaming consumers listen regularly to curated playlists, fewer than listen to podcasts), the impact on listening over indexes.

While a lean-forward, engaged music listener may select an album or a handful of tracks to listen to and then move on, casual listeners might put on a 60-track peaceful piano playlist in the background while studying, doing housework etc. The paradox here is that casual fans have the potential to generate more streams than engaged listeners.

With casuals being the next wave of streaming adopters, their impact will increase. But despite being ‘more valuable’ they will also reduce royalties, because more streams per user means revenue gets shared between more tracks, which means lower per-stream rates. The music industry thus has an apparently oxymoronic challenge: it is not in its interest to significantly increase the amount of media consumption time it gets per user, but instead it will be better served by getting a larger number of people listening less! 

Current market trajectory points to more streams per user, which – for subscriptions, where royalties are paid as a share of revenue – means lower per-stream rates.

Playing the game

Against this growing background consumption trend, streaming services, labels, songwriters and artists are all making matters worse by gaming the system whether that be by structuring songs to work on streaming, creating Spotify friendly soundsor simply gaming playlists.

With playlists being so important for both marketing and revenue, it was inevitable that people would seek out ways to attain any possible advantage. Consequently, playlists are becoming gamed, whether that be major labels getting more than their fair share of access to the biggest playlistsor ‘fake artists’filling them out.Most recently, Humble Angel’s Kieron Donoghue identified a cynically constructed playlist called ‘Sleep & Mindfulness Thunderstorms’(all terms optimised for user searches) that contained 330 one-minute songs of “ambient noise of rain and a few thunder storms thrown in for good measure”. The one-minute track length ensures they are long enough to qualify for a royalty share, but short enough to ensure that a typical listening session will generate a vast quantity of streams, thus generating more royalties.

The twist to this story is that this playlist was created by Sony Music and the artist behind all these tracks appears to be a Sony Music artist. Crucially Sony isn’t the only one doing this, with UMG getting in on the actand Warner Music signing an algorithm.

Playlist deforestation

This sort of activity may make absolute commercial sense but is creatively bankrupt. It certainly makes record complaints about ‘fake artists’ ring less true. Just because you can do something does not mean that you should. This model works until it doesn’t. In fact, there are parallels with deforestation. A logger in the Amazon will likely not be thinking about the destructive impact on the environment he is directly contributing to. In similar manner, it is unlikely that the people creating these playlists realise that they are contributing to a market-level crisis. This is because, the more of these types of playlists that are created, the lower per-stream rates they will generate for everyone.

Well, not ‘everyone’. If overall streaming revenue rises but stream rates decline, then the companies with large catalogues of music, especially those that are also creating arsenals of playlist-filler ammunition, will still feel revenue growth. For individual artists and songwriters, however, royalty payments could actually fall.

Fixing the problem

The casual listening problem will not fix itself. In fact, despite labels worrying about declining ARPUthe only way they can keep ahead of declining streaming rates is by increasing their share of streams. That means more of this sort of playlist gaming activity, which further accentuates the problem.

There is however a simple solution: reduce per-stream rates for lean-back playlist plays.This would ensure the songs people actively seek out get better pay-outs. The demarcations between lean back and lean forward used to be elegantly simple (e.g. Pandora versus Spotify), but now curated playlists and other forms of streaming curation are supporting radio-like behaviour on the same platforms as on-demand. It is time for royalty models to catch up with this new reality.

Here’s How Spotify Can Fix Its Songwriter Woes (Hint: It’s All About Pricing)

Songwriter royalties have always been a pain point for streaming, especially in the US where statutory rates determine much of how songwriters get paid. The current debate over Spotify, Amazon, Pandora and Google challenging the Copyright Royalty Board’s proposed 44% increase illustrates just how deeply feelings run. The fact that the challenge is being portrayed as ‘Spotify suing songwriters’ epitomises the clash of worldviews. The issue is so complex because both sides are right: songwriters need to be paid more, and streaming services need to increase margin. Spotify has only ever once turned a profit, while virtually all other streaming services are loss making. The debate will certainly continue long after this latest ruling, but there is a way to mollify both sides: price increases.

When Spotify launched in 2008, the industry music standard for subscription pricing was $9.99. So, when its premium tier was launched in May 2009, it was priced at $9.99. Incidentally, Spotify racked up an initial 30,000 subscribers that month – it has come a long way since. But now, nearly exactly ten years on, Spotify’s standard price is still $9.99. Its effective price is even lower due to family plans, trials, telco bundles etc., but we’ll leave the lid on that can of worms for now. Over the same period, global inflation has averaged 2.95% a year. Applying annual inflation to Spotify’s 2009 price point, we end up at $13.36 for 2019. Or to look at it a different way, Spotify’s $9.99 price point is actually the equivalent of $7.40 in today’s prices when inflation is considered. This means an effective real-term price reduction of 26%.

Compare this to Netflix. Since its launch, Netflix has made four major increases to its main tier product, lifting it from $7.99 in 2010 to $12.99 in 2019. Crucially, this 63% price increase is above and beyond inflation. An inflation-adjusted $7.99 would be just $10.34. Throughout that period, Netflix continued to grow subscribers and retain its global market leadership, proving that there is pricing elasticity for its product.

Spotify and other streaming services are locked in a prisoner’s dilemma

So why can’t Spotify do the same as Netflix? In short, it is because it has no meaningful content differentiation from its competitors, whereas Netflix has exclusive content and so has more flexibility to hike prices without fearing users will flock to Amazon. If they did, they’d have to give up their favourite Netflix shows. Moreover, Netflix has to increase prices to help fund its ever-growing roster of original content, creating somewhat circular logic, but that is another can of worms on which I will leave the lid firmly screwed.

If Spotify increases its prices, it fears its competitors will not. Likewise, they fear Spotify will hold its pricing firm if any of them were to increase. It is a classic prisoner’s dilemma.  Neither side dare act, even though they would both benefit. Who can break the impasse? Labels, publishers and the streaming services. If they could have enough collective confidence in the capability of subscriptions over free alternatives, then a market-level price increase could be introduced. Rightsholders are already eager to see pricing go up, while streaming services fear it would slow growth. Between them, there are enough carrots and sticks in the various components of their collective relationships to make this happen.

However – and here’s the crucial part – rightsholders would have to construct a framework where streaming services would get a slightly higher margin rate in the additional subscriber fee. Otherwise, we will find ourselves in exactly the same position we are now, with creators, rightsholders, and streaming services all needing more. When Netflix raises its prices it gets margin benefit, but under current terms, if Spotify raises prices it does not.

The arithmetic of today’s situation is clear: both sides cannot get more out of the same pot of cash. So, the pot has to become bigger, and distribution allocated in a way that not only gives both sides more income, but also allows more margin for streaming services.

Streaming music in 2019 is under-priced compared to 2009. Netflix shows us that it need not be this way. A price increase would benefit all parties but has to be a collective effort. Where there is a will, there is a way.

A Tale of Two Cities: What Sweden and the US Tell Us About the Outlook for Streaming

Streaming is the digital zeitgeist, that much is clear.  How it will shape the future of the music business, from artists through to labels is less clear and things are not helped by an increasingly confusing and diverse set of data, each suggesting a slightly different outlook.  A look at two very different digital music markets – Sweden and the US – gives some sense of what the next couple of years should hold.

Notes: for sake of readability the term ‘streaming’ is used to refer to subscriptions and ad supported streaming combined. Also all current year figures are 2013, extrapolating half year figures to create full year estimates.

Two Very Different Streaming Stories

Sweden is streaming’s heartland, home of Spotify and the stand out good news story for music subscriptions. Streaming now represents a whopping 95% of digital revenue in Sweden and 67% of all recorded music revenue while downloads make up a paltry 4%.  Streaming growth has been equally impressive (see figure one) and has propelled the total Swedish music market into growth for two successive years.  That growth came at the direct expense of downloads (which declined by 15%) and it accompanied a dramatic 51% collapse in CD sales.  But 2013 revenues look set to come in at just a little below 2003 levels, no mean feat.   Although we need to bear in mind that a surge in growth can easily reverse (as the experience of South Korea shows us) it is clear that streaming has been a strong positive force on total Swedish music revenues.

The picture is very different in the US however, where streaming has grown less dynamically and only represents 23% of digital and 14% of overall spending.  As I previously noted, the strength of Apple and the download sector have acted as a pronounced brake on streaming growth in the US.  Neither, however are invincible, and some of Spotify’s 2013 growth has come at the direct expense of download spending which looks set to decline by a percentage point in 2013 (see figure two).  Little wonder Apple has launched iTunes Radio, though ironically the app may well spur a resurgence in download sales.  So in the US streaming is becoming an increasingly important part of the market but shows no sign of suddenly acquiring Sweden-like ubiquity.  Which in part explains a 5% decline in total music revenues between 2010 and 2013.

CONCLUSION: streaming can quickly drive strong growth in markets where downloads never got a foothold but takes more time to impact strong download markets.

The Impact on Total Digital Revenue

Streaming’s impact on the total digital market and indeed on total music sales is of course what counts most, and it is here we see a really interesting divergence between Sweden and the US. Over the last 6 years streaming drove a comparable rate of overall digital growth in Sweden that downloads powered in the US in the mid 2000’s.

But when we plot the growth of digital as a percentage of total music sales in the US between 2005 and 2010 against the same data for Sweden between 2008 and 2013 a stark contrast is immediately apparent (see figure three). Whereas digital share growth remained strong throughout the 6 years in Sweden it slowed markedly in the US.  Though growth returned later it didn’t ever replicate those pre-2008 levels.  The number one slowdown factor was the end of iPod sales growth (see this figure to see just how strong the effect was).  Interestingly digital share growth looks likely to slow moderately for both Sweden and the US in 2013.  In Sweden some level of slowdown is to be expected (there isn’t much physical market left to transition!) but there is still a lot of CD ground to be made up in the US.

CONCLUSION: streaming has driven market growth in Sweden and accelerated transition away from the CD and the download. While in the US the CD and the download both still hold much greater sway, culminating in something of a worst of both worlds, with streaming apparently eating into downloads but not having enough headway to transform the market.

The Artist Conundrum

But what does all this mean for artists?  It often feels that something doesn’t quite seem to add up when artist income is brought into the equation. For all the growth in streaming income, a vocal minority of artists and songwriters feel that streaming is damaging, destroying even, their ability to earn a living from music sales.  As I have argued before, a rounded understanding of streaming income for artists must both put streaming in a revenue continuum (i.e. compare it to radio not just downloads) and consider the life time value of a song (i.e. think of the income it will generate over a period of years instead of the revenue full stop a download represents).  In this context streaming is still worth less than a download, but nearer to 5.5 times less valuable rather than 280 times (see my Consumption Analysis piece for more on this).

There is however an added complexity, namely the amount of artists that get revenue from streaming versus downloads and streaming (see figure four).  If we take Spotify’s reported US metrics from 2012 as a benchmark and assume that the average subscriber listens to a modest 5 different artists a month then this is equal to 60 different artists per year per subscriber.  Working with an average total royalty pay out of $0.01 per stream this translates into an average royalty per artist per subscriber of $0.72 in the US.  When applied to the 3 million reported US Spotify subscribers this would equal an average annual royalty of $2.17 per artist.  (Though it is crucial to note that this refers to the total royalty payment made to rights holders and not to whatever share is eventually shared with the creators themselves). Also, there is of course no such thing as an average artist, and in practice a comparatively small number of artists would earn much more than that and most much less (there are after all 27 million tracks’ worth of artists so the tail is super long).

For downloads, extrapolating from Nielsen mid year numbers, the average downloader buys 2 albums and 27 single tracks.  If we assume each of these is for a different artist then we end up with 26 artists per downloader and an average royalty of $1.22 per artist per downloader (using a 70% royalty assumption).  This isn’t actually that much higher than streaming, but things change when it is applied to the total number of download buyers (which at 63 million far outstrips paying subscribers) and results in an average royalty per artist of $76.34 (again total royalty before distribution to creators).

In Sweden though, where there are more subscribers than downloaders the picture is very different.  Applying the same Spotify metrics to an assumed subscriber base of 2 million in Sweden (which feels about right based on survey data and IFPI numbers) we see an average royalty per artist of $1.44 compared to $1.22 for downloads.  (The average royalty per buyer is higher in Sweden because a smaller number of people are buying a smaller number of downloads resulting in the revenue being split fewer ways).

CONCLUSION: streaming can generate meaningful revenue at scale but will still be lower than downloads because of the above mentioned life time value factor and because revenue is split more ways across a wider selection of artists.

The Cost of Democratization of Artist Income

Thus artists are effectively paying the price for the democratization of music: more artists are getting listened to more regularly and as a consequence the pie gets cut into smaller slices. Which raises the interesting dilemma of whether artists speaking out against streaming are also indirectly speaking out against a more equitable distribution of income among artists?!  The core question though is whether the pie can get large enough for those slices to represent anything more than an apetizer for the average professional artist.

All of this extra data may appear to add as much fuddle as it does clarity to the debate, but it is crucial that debate is based upon reasoned understanding of the most complete grounding of data available.    The next couple of years will see streaming go from strength to strength but its impact on global music revenue will be less dramatic than it has been in Sweden, if perhaps more vibrant than it has in the US.

Why the LSE’s Piracy Arguments Just Don’t Hold Water

The renowned LSE this week published a paper arguing against implementation of the UK’s Digital Economy Act and calling for policy makers to recognize that piracy is not hurting the music industry but is in fact helping parts of it grow.  To these academic researchers the findings probably feel like some dazzling new insight but to anyone with more than a passing understanding of the music industry they are as if somebody just time travelled back to 1999.  The piracy-helps-grow-the-pie / help-makes-the-sky-not-fall / actually-helps-the-industry arguments were common currency throughout most of the first decade of the digital music market.  In more recent years though, following perpetual revenue decline and the growing plight of struggling ‘middle-class’ artists and songwriters, most neutral observers recognize that the piracy=prosperity argument just doesn’t hold water anymore.  Though of course that won’t stop the pro-piracy lobby fawning over this ‘research’ as more ‘evidence’ for their case.

Why Live Is NOT Saving the Music Industry

One of the key arguments the LSE paper makes is that the total music industry is in fact growing or is at least stable, primarily due to the impact of growing live income.  The ‘artists can sell tickets and merchandize to make up for shrinking music sales’ argument is frequently wheeled out by the pro-piracy lobby but it is one riddled with problems (and of course doesn’t apply at all to songwriters):

• Live revenues are over reported: as impressive as global live revenues may look, they are not accurate.  Most often they include reseller revenue, which is income that does not go anywhere near the artists or any other part of the actual music industry.  A scalper reselling tickets at extortionately high prices on eBay doesn’t benefit an artist in any way but at a macro level can look like booming revenue.
• Price hikes drive revenue: Much of the live revenue growth is actually from increased ticket prices, both from venues and resellers.  The average ticket price has increased by 34% in the last 10 years.  Only a portion of this increase gets passed back to artists and their managers.
• Live income is unevenly distributed: Live simply isn’t working for many artists, those that do best are those are heritage acts.  According to Deloitte 60% of the 20 top-grossing US live acts are aged 60 or over.  This is where promoters and venues focus their efforts and it leaves little oxygen for the emerging acts.
• The live boom will suffer: The likes of Bon Jovi and the Rolling Stones sell out massive arenas because they sold so many albums in the glory days of the recorded music industry.  What will happen when the generation of artists that do not sell millions get to the age where they hope live will pay the bills? The likelihood is that there will not be another era of heritage live acts such as we are seeing today.

A dependence on live income for building the case for piracy is thus fraught with difficulty and misunderstood assumptions.

The Right to Not Earn a Living?

Any discussion of the music industry makes an assumption about what actually constitutes ‘the music industry’. There is no single right or wrong answer other than the bits that really matter are the artists and the songwriters.  Therefore any proposal or framework for ‘saving the industry’ needs to ensure they can thrive.  Diminishing music sales and the various above-stated issues surrounding live mean that for most ‘middle class’ artists who didn’t make it big in the glory days of the CD are finding it harder to thrive.

Another tired argument that the LSE paper rehashes is the idea that artists should just want to make music for music’s sake.  That because of platforms like Soundcloud they can just make music without expecting or wanting to earn a living.  Of course every single one of us could do the same for our job too. A call centre operative could offer to forgo their salary, a bus driver could drive for free, a doctor could refuse her pay. All of which sound ridiculous of course, so why doesn’t it when applied to an artist?  Well actually it does, and that’s the point. The idea that somehow because music is creative that artists should not pollute this with seeking to earn a living is an utterly insidious concept.  If the LSE scholars truly believe this then I recommend that they henceforth refuse their stipends and insist on lecturing for free for the rest of their careers. And if they start finding the bills stacking up maybe they can start selling t-shirts or something?

When I spoke to Marillion’s Mark Kelly for my forthcoming book he made devastatingly simple comment on the impact of free and alternative business models on artists: “Artists have choice, a choice of what? To not earn a living?”  Piracy is having a hugely tangible and real impact on artists and songwriters, and guess what, it is not a positive one for most.

Does the music industry still need to undergo dramatic change? Of course it does.  Do many record label practices still need changing? Of course they do?  Do Artists need to get even better at making alternative revenue streams work? Of course they do.  Should change be happening more quickly?  Yes, of course it should. But crucial progress is being made on all fronts and what matters most is that all responsible parties and stakeholders (and that includes government) do what they can to ensure that a fair and level playing field is created.  Not for the sake of an ethereal macro economic concept of ‘the music industry’ but for the the struggling indie label boss, the small gigging artist, the part time manager and the aspiring songwriter.  Ask them what they think about piracy and how it is impacting the music world.  That’s where you will heae the answer most grounded in earthy reality, not in an academic reworking of obsolete, half baked piracy lobby arguments from yesteryear.