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Spotify and streaming music: a black hole for artists

Spotify’s Australian launch makes the Australian music streaming market even more crowded. Paris-based Deezer launched in Australia in April, and MOG will bring its streaming service to Telstra subscribers in a couple of weeks, joining Rdio, Rara, Sony, Microsoft and JB Hi-Fi offering unlimited all-you-can-eat music to computers and mobile devices for a fixed monthly fee of between $8 and $15.

But do you know how much of that money an artist gets when you listen to their album on one of these new digital music subscription services? If you answered no, that’s fine. In fact, it’s the same answer given by the streaming companies that take your money each month in return for all that legal music.

Although they might not know how much ends up in the hands of those making the music, they do know they are generating about $150 each year for the music industry from each paying subscriber. For their part, they just pay the record labels and digital distributors to get the rights to offer you all that music and it’s then up to the labels and distributors to pay artists.

As David Hyman, of MOG, said last year, however, the share that ends up with artists is a “black hole” that they have no idea about.

How much it costs them to get that music from labels and distributors is something that they certainly do know. As is the size of the significant upfront lump-sum payments they handed to the major labels to get access to the catalogues in the first place — none of which has reportedly been passed to artists by record labels. These payments are protected by strict non-disclosure agreements so exact details are not publicly known, although in Spotify’s case the upfront fees paid to record labels in the US market were reportedly more than $100 million.

Add to this that the major labels also own substantial equity in many of the streaming providers — if not outright ownership via joint ventures — and there is further reason for artists to be suspicious. Sony, Warner, Universal and EMI own 15-20% of Spotify, now believed to be valued at about $US4 billion.

Even so, major labels and recording industry associations are optimistic about these new streaming services, seeing them as a big part of the answer to the problem of online piracy. A common theme is that if a listener currently spends less than $150 per year on music — either legal or illegally — and switches to a streaming service they will generate more value for the music industry. Indeed, some high-level numbers show that if one third of Australians took a streaming service at current rates it could drive wholesale music sales from last year’s $383 million back towards the record $600 million-plus levels of 2000 to 2004.

Clearly that would make labels happy — and also make them feel like they are winning their war on piracy. But what about the artists, the ones the industry has been so vocally telling the pirating public for so long they’ve been fighting for?

Right now, labels and streaming providers aren’t willing to divulge exactly how much subscription revenue flows between them or eventually to artists. But given these services have now been in the US long enough to start trickling through to royalty statements, artists are starting to get an idea.

Unfortunately, it doesn’t look good: according to my statements, in December last year Spotify generated $US0.00393 per stream. That’s about one third of a cent per stream — the equivalent of a few cents per album. The same royalty statement shows that iTunes downloads generated $US0.70 per song sold while a single play on US college radio generated just under five cents. For someone that would have previously bought a new album via iTunes, at current rates they’d need to listen to a new album 180 times in full via Spotify to generate the same amount of money for the artist.

The way things stand, streaming models massively dilute listener spend — even if their total spend is greater than it was back in the download world. For example, even if you only used to buy five new digital albums a year on iTunes — around half of what you’d spend on an annual Spotify subscription — that spend would have flowed towards those five artists. But with a streaming service such as Spotify, everything you listen to counts and that new album probably only equates to a very small percentage of your total plays over a month.

Clearly, the major labels’ huge back catalogues are very powerful in this new streaming paradigm where the share of overall listens dictates eventual payment flows.

Sure, it’s fine if you listen to that new album more than 180 times — maybe it’s just survival of the fittest and if the album is good enough it will get there over time. (Although taking a look at the play counts in your iTunes music library will shed some light on how many albums get to 180 plays.) Alternatively, there will need to be lots of reformed music pirates — who’d have never bought the album anyway — streaming alongside you to make up for the lost sale. Most artists would prefer the money now in one lump, not in very small chunks over many years.

It’s not surprising that Coldplay, Adele, The Black Keys and Tom Waits have all withheld recent releases from Spotify and other streaming services.

Those who see streaming as music’s legal future argue that it’s still early days for the new services and artists’ returns will get better when the user and revenue base grows significantly. But Spotify’s home market of Sweden — where streaming has been available since 2008 — doesn’t appear to support this argument. Even though streaming services accounted for about 42% of all record label revenues there last year, generating almost five times the revenue of downloads and almost the same as CDs, artist royalty rates are still uninspiring. According to my statements it would still take about 90 streams at the current rate of €0.0078 to generate the equivalent of an iTunes download for an artist in this well-developed streaming market.

For many artists, keeping their loyal paying downloaders amidst today’s sea of pirates might look better than this kind of streaming future. Even if Australian consumers now have multiple options for cheap and legal access to unlimited music, whether artists benefit from this increased spending is yet to be proven.

And if piracy was the new radio (as Neil Young said earlier this year), maybe Spotify is the new piracy. That would make Spotify’s CEO Daniel Ek — recently named to the Sunday Times’ Music Rich List top 10 — the biggest new pirate of them all, with a bounty worth almost $US1 billion  at current valuation levels.

Given the debate over artist royalties has been raging overseas for some time, it’s only a matter of time before Australian artists start questioning their share of the streaming pie now the big international streaming players such as Spotify and Deezer are entering the Australian market. Maybe Ed Husic could ask a question or two of the streaming providers and record labels on artists’ behalf at the same time he’s asking them why streaming prices are 20% to 50% higher in Australia than in the US, Canada and Europe.

*Andrew Harris is an independent telecoms and technology consultant and a member of band Beaten by Them. This article was originally published at Technology Spectator.

8
  • 1
    andrew
    Posted Wednesday, 23 May 2012 at 1:43 pm | Permalink

    Publishers screwing Artists to maximise their share of the profit.

    The more things change, the more are they stay the same…

    As problematic as it may be, the answer may be lie in developing an effective way to self-publish and avoid dealing with the majors (at least until you have some negotiating leverage).

    The industry has spent the last century building frameworks and legal protections for the publisher. At least it is now financially and technologically feasible to self publish and take advantage of that.

    You’re then just left with a marketing and business model problem as a self publisher. Which is no different to any other small business.

    And that’s when you begin to fully understand that it really is a rich mans (company’s) world.

  • 2
    Kelvin
    Posted Wednesday, 23 May 2012 at 2:36 pm | Permalink

    I can’t disagree with any of the facts stated in the article but I can’t help but feel as though the consumer shouldn’t be put in a negative light for using these legitimate services just because the artist is not being properly rewarded for their work.

    Isn’t this more to do with the contracts that bands sign with record companies?

    I agree with Andrew that now, more than ever before, has it been easier to self publish and be independent. Goyte and John Butler Trio spring to mind as immediate examples as successful independent artists.

    The diversifying of all these streaming services means more channels that up-and-coming and established independent artists can have their music heard. Especially when a lot of these services contain social apps. It also means the cost of distribution is reduced to essentially zero.

    The record labels are out to screw you over, don’t blame the (legal) consumers for that.

  • 3
    Barvardage
    Posted Wednesday, 23 May 2012 at 2:52 pm | Permalink

    Tell it like it is, Andrew!

    btw, Gotye is on Universal.

  • 4
    Audio Azur
    Posted Wednesday, 23 May 2012 at 5:39 pm | Permalink

    I think your calculations might be incorrect. iTunes aren’t that generous
    You are correct that for a US$0.99 track Apple takes 30% leaving 70%
    However the remaining 70% doesn’t go directly to the artist it goes to the label. The actual royalty isn’t 70cents but more like 10cents.
    So if the artists earns 0.00393 cents per stream their song actually only needs to be streamed ~25ish times to generate the same amount of money.
    Unless that 0.00393 is just what goes to the label and the artist themself gets even less…
    The point is though, even through legal iTunes sales, the artists aren’t earning that much.

    I love Neil Young’s statement. I for one think the quality of music has been much stronger in recent years because of piracy. Now instead of listening to the radio where you are told who or what the next greatest track/artist is, many enthusiast actively seek out music and listen to things they would never have purchased (or heard on radio). I have fallen in love with music that if I hadn’t pirated I would never have listened to. And where does the artist earn their money? Live performance. (and maybe through use in ads, movies and TV shows)
    Good artists will still earn money, just not their labels
    Gotye’s song sweeping the world is a perfect example of this. I am positive he is earning a lot from his song - not all through sales but from sell out shows.
    Gotye’s song sweeping the world is a perfect example of this. I am positive he is earning a lot from his song - not all through sales but from sell out shows.

  • 5
    Stevo the Working Twistie
    Posted Thursday, 24 May 2012 at 2:19 pm | Permalink

    The majority of suits in the music industry are there for the wrong reasons. Some may have been bright-eyed once upon a time, but by the time they make the boardroom it’s all about the percentages. Seriously guys, if you wanted to deal in commodities why didn’t you get into a commodities business? One pork belly is pretty much the same as the next, they don’t have tantrums because they aren’t top billing and most importantly they don’t expect a cut of your take.

  • 6
    Andybob
    Posted Thursday, 24 May 2012 at 3:33 pm | Permalink

    As Kelvin says the devil seems to be in the contracts the artists have with the music publishers and associated record companies.

    The raw material of the music industry is not music, its people. They pop up, inspired by talent, naive and unadvised. They sign anything in order to get a break and then regret it when/if they succeed. Typically they assign all their copyright in future works to a publisher associated with the record company which is a member of the collecting societies who cut deals with Spotify and the like. Rarely does an artist get the commercial clout to renegotiate. Depending on the terms of their contract they may be able to terminate it as regards future works.

    The power of the back catalogue is enormous. The only time a competing society has really been able to establish itself was when Broadcast Music Inc (BMI) rode the waves of radio and country music in the 30s to compete with ASCAP.

    Perhaps it could happen again with the internet. All it would take is artists signing up to an internet distributor before they cut their publishing deals.

  • 7
    Meski
    Posted Friday, 25 May 2012 at 5:02 pm | Permalink

    You need to compare this with how much they get/got from traditional (cd) markets. It should be more.

  • 8
    JimDocker
    Posted Friday, 15 June 2012 at 12:33 pm | Permalink

    I subscribe to Spotify.

    When I hear of a new artist that I may be interested in, I do a search and have a listen. If I like what I hear, chances are I will buy the CD. So the stream of the music has made money than just the one third of a cent.

    Some artists I have listened to but decide that I do not like it enough for me to buy. They get one third of a cent for me doing the equivalent of going into a record shop and listening to a CD on headphones prior to buying like I have done for decades, for free.

    In fact, I just earnt the author and his band one third of a cent by checking them out. Not my cup of tea to be honest and sadly, I shall not be rushing out to buy an album, but I have been exposed to them now and probably would not be otherwise.

    Kris Kristofferson is doing ok out of me today though. I am listening to his stuff at work and I already own every song on CD at home. It is just convenient to listen to whatever I want depending on my mood at work without bringing my 1000s of CDs to work.

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