What is the value of exposure when exposure is all there is?

There is an existential debate going on at the moment, around whether streaming is paying artists enough. It may feel like a rerun of old debates but it is catalysed by COVID-19 decimating artist income. These are some of the key narratives: here, here and here.

In this piece I lay out the underlying economics of the argument. I also focus wholly on artist income as songwriter income is another topic entirely.

COVID-19 has reset the debate

The latest streaming royalty debate is not an isolated event. It is happening because COVID-19 has decimated live income, leaving many artists worrying about how to make ends meet. Last week, just before this whole debate kicked into gear I wrote:

“Live’s lockdown lag may have the knock-on effect of making artists take a more critical view of their streaming income. When live dominated their income mix, streaming’s context was a meaningful revenue stream that built audiences to drive other forms of income. It was effectively marketing artists got paid for. Now that artists are becoming more dependent on streaming income, the old concerns about whether they are getting paid enough will likely come back to the fore. It is in the interests of both labels and streaming services, that labels use this as an opportunity to revisit their streaming splits with artists. Labels cannot afford to have artists united against the labels’ primary income stream.”

None of this makes the debate any less important, but it explains why it is happening now, and with live revenue potentially set to take years to fully recover, it is a reality that streaming services and labels need to adjust to. It is in the interests of both labels and streaming services that artists feel like they are being treated fairly. But it is crucial that this debate is grounded in a firm understanding of streaming economics and that we do not return to the mudslinging of more than half a decade ago. A debate which, by the way, did not result in any fundamental change to how artist royalties are paid and was eventually followed by labels negotiating smaller revenue shares with Spotify and others.

Where streaming has got us to

Firstly, let’s lay some ground markers:

  • Streaming has driven half a decade of recorded music revenue growth, with the market now 42% bigger than it was in 2014
  • The wider streaming economy has globalised fandom and engagement
  • More people are listening to more music now than before

Streaming has been the change agent that turned around 15 years of decline. But it also completely reframed artist income from recorded music. In the old sales model artists would get a large sum of money in a relatively short period of time. Streaming income is more like an annuity, a longer-term return where the music keeps paying long after release. In the old model artists had smaller but high-spending audiences. With streaming they have larger but lower-value audiences.

For example, a recouped independent artist might expect to earn $4,500 for selling 1,500 copies of an album. That is roughly how much an artist would get from 5,000 people streaming the album 20 times each. The average revenue per user (ARPU) has gone from $3.00 to $0.90 for streaming. The artist has traded ARPU for reach.

This model worked fine when live and merch were booming because more than three times as many monetised fans meant three times more opportunity for selling tickets and t-shirts. This of course is the ‘exposure’ argument streaming services are fond of, which works until it does not. Now that live and merch have collapsed, as the trope goes ‘exposure does not pay the rent’. The previously interconnected, interdependent model has become decoupled.

Put simply, artist streaming economics do not work without live.

midia streaming royalty payments

The question is: what levers can actually be pulled and what effect can they have? In the above chart I have used Spotify’s 2019 premium revenues to illustrate how changes in royalty shares can impact what artists earn. I have used a total per stream rate of $0.06 as the base case, which could look on the high side for some artists, but the purpose is to show the relative change. Whatever amount the base rate is, it will increase by the same percentages.

The tl;dr of the chart is the most radical of the options (label rate returns to 55%, podcast dilution is removed from the royalty pot, a 25% increase in retail price and therefore royalties) results in a very meaningful uplift of 42% in royalties for artists from today’s current state. But, the three problems here are:

  1. Such measures could damage the commercial sustainability of streaming
  2. It does not change the underlying annuity model shift that streaming represents
  3. We are about to enter a recession. Music subscriptions are at risk, increasing the prices right now could accelerate subscriber churn. Meaning a bigger slice of a smaller cake for artists.

Let’s take the first two points in turn.

1) Spotify lost $184 million in 2019. With this royalty model it would have lost more than $1 billion. Spotify would have to reduce its operating costs by a fifth just to get back to losing $184 million. Critics would argue this represents trimming the fat. It might, but it would also likely lead to Spotify:

  1. Cutting back on product development
  2. Cutting back on growing its subscriber base
  3. Finding new ways to charge labels and artists for additional services

None of these are reasons not to pursue the strategy but they are prices that labels and artists have to be willing to take. Spotify revenue growth will slow. Furthermore, it will skew the market towards Apple, Amazon and Google who can afford to make music loss leading. In the mid term this may benefit artists, but in the longer term (i.e. when Spotify is sufficiently squeezed) these tech majors are likely to follow their MO of ‘reducing inefficiencies in the supply chain’. So be careful what you wish for.

2) Taking an artist straw person, with 20% of her total income coming from streaming, if live and merch only gets to 25% of its previous level, the 41% increase in streaming income would still see her total annual income fall by 40%.

No streaming lever can be pulled hard enough to offset the decline in live revenue.

So, let’s pull together all the pieces:

  1. Streaming royalties can be increased meaningfully if prices are increased and rates revisited but it may slow the streaming market
  2. Now is probably not the best time to be increasing streaming prices for consumers
  3. Even a big increase is not going to offset the fall in live income

There is not a simple, single answer to fixing the current crisis in artist income. A blended, pragmatic solution would be:

  1. Increase royalties at a middle option rate (do not increase prices until after the recession)
  2. Artists push their fans to buy their music at destinations like Bandcamp
  3. Professionalise and commercialise the livestreaming sector, with a strong focus on charging for events in order to create some live income
  4. Innovate virtual fandom products to drive new, additional income streams

It is not going to be easy for artists for some time yet. The hard truth is that income levels will not return to full strength until live does, and that is a way off yet. Streaming is more important now than ever so any solution must balance maintaining its momentum and scale with sustaining artist careers.

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:

songwriter streaam income

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.

Creator Support: A New Take on User Centric Licensing

User-centric licensing (i.e. stream pay-outs based on sharing the royalty income of an individual user split across the music they listen to) has stimulated a lot of debate. I first explored the concept of user-centric licensing back in 2015and stirred up a hornet nest, with a lot of very mixed feedback. The big issue then, as now, was that it is a very complex concept to implement which may well only have modest impact on a macro level but may also have the unintended consequence of worsening income for smaller artists. Fans of smaller artists tend to be more engaged listeners who generate a larger number of streams spread across a larger number of artists. The net result could be lower average income for smaller indie artists, and higher income for mainstream pop acts who have listeners with lower average streams spread across a smaller number of artists. Since then, Deezer has actively explored the concept and it continues to generate industry discussion. It is unlikely there will ever be consensus on how user-centric licensing should work, but the underlying principle of helping artists earn from their fans remains a valid one. So, here is an alternative approach that is both pragmatic and far simpler to implement: creator support. A new way to solve an old problem.

Creator support is gaining traction across the digital content world

In the on-demand world, monthly streaming income for creators can be both modest and unpredictable. Amuse’s Fast Forward,YouTube’s channel memberships and Patreon are illustrations of how the market is developing solutions to give content creators (especially artists, podcast creators, YouTubers and Twitch streamers) an effective way to supplement income. But it is Epic Game’s ‘Support-A-Creator’ model that provides the best example of an alternative to user-centric licensing. Epic Games enables Fortnite players to choose a favourite creator to support (which typically means YouTube and Twitch Fortnite players). Epic Games then contributes the equivalent of around 5% of all in-app purchases that the gamer makes to that creator.

How creator support can work for music streaming

Using Spotify and a selection of artists as an illustration, here is how a creator support approach could work for streaming music:

  • All Spotify subscribers get given the option to ‘support’ up to two of their favourite artists
  • For each artist that a subscriber supports, 1% of the record label royalties derived from that subscriber’s subscription fee goes directly to the artist, regardless of how many streams that user generates
  • The label of each artist then pays 100% of this ‘support’ income

creator support midia streaming model

To illustrate how creator support can work, we created a model using Spotify and a selection of diverse artists. We assumed that 75% of Spotify subscribers support an average of 1.5 artists. In the above chart we took five contemporary frontline artists across major labels and label services, and we assumed that 10% of their monthly Spotify listeners support them. Factoring the different types of deals and royalty rates these artists have, as well as the ratios between average monthly streams and monthly listeners, there is an intriguing range of revenue impact that creator support delivers. For Taylor Swift (on a major deal, but one in which she held the negotiating whip hand), Lauv and Rex Orange Country (both on Kobalt label services deals) the creator support income is between 18% and 22% of their existing streaming royalties from Spotify. For Billie Eilish and Circa Waves, both on their first major label deals, creator support income would represent a much larger 78% and 65% of streaming royalties. The rate is higher for Billie Eilish as she has a higher streams-to-listeners ratio.

Artists get paid more with minimal impact on the wider royalty pot

Putting aside the irony that this approach would help put many major label artists more on par with what label services and independent artists earn from streaming, the clear takeaway is that creator support can be an effective way of fans ensuring that some of their streaming spending directly benefits their favourite artists. Because we have structured the model to be just 1% per artist (rather than Fortnite’s 5%) the net impact on the total label royalty pot is minimal. Applying the above assumptions to Spotify’s 2018 label payments, the royalty pot (and therefore per-stream rates) would reduce by just 1.13%, meaning that non-supported artists would feel negligible impact.

We think the creator-approach model enables labels and streaming services to deliver on the ambition of user-centric licensing without the complexities and unintended inequities. But perhaps most importantly, it helps put artists and fans closer together, bringing the pledging model to the mainstream.

Let us know what you think. Also, we’ve added the excel model to this post for you to download and test your own assumptions against it.

MIDiA Research Streaming Creator Support Model 4 – 19

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.

spotify netflix pricing inflation

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.