Sitting In

Stream-O-Nomics: The Good, The Bad and The Ugly

Issue 130

Aerosmith and their lead singer Steven Tyler sang for years about “dream(ing) until your dreams come true.” Quite prophetic, for sure, as for musical artists, success requires being a dreamer and a believer, and, of course, possessing a fair amount of talent (and luck). In today’s paradigm, where musical artists are struggling to make a go of it with COVID-19 restrictions, combined with a greater reliance on revenue from streaming services, Aerosmith’s lyric could very easily, and perhaps more aptly, be modified to “stream on, until your dreams come true.”

So what’s with all the buzz about streaming services and concurrently, complaints about the lack of revenue artists are paid? Many artists today say they can’t make a solid living from streaming (see Dan Schwartz’s article in Copper 128), while others appear to be defying the odds.

It’s not like the issue of receiving fair compensation in the music business is a new topic. Artists signed to record labels have complained for decades about getting ripped off from bad contracts and “funky” accounting, where deductions are taken for artist advances, publicity, promotion, videos, publishing, legal fees, distribution and so on, in addition to returns and breakage on physical product.

Perhaps the biggest head-scratcher is how long it took the music industry, particularly record labels, to embrace new distribution platforms, when a key advantage of digital music delivery is doing away with so much of the overhead associated with old-school distribution of physical product. Yes, the CD era at first yielded a bonanza of higher prices the record companies could charge, along with enormous margins, but the future of evolving technology, first with file sharing, then digital downloads, and now with streaming, was quite apparent. It’s a classic illustration of how legacy industries frequently plod along and resist change, often to their own detriment.

Now fully indoctrinated, the irony is the three largest record labels – Universal, Sony and Warner Music Group – are experiencing solid revenue growth with global recorded music revenue exceeding 21 billion in 2019. Streaming revenue for labels now accounts for more than three times the revenue for digital downloads, physical product and licensing combined.

So, in theory, shouldn’t the new streaming ecosystem, where many artists control exclusive rights and their recording masters, be cleaner, easier to understand and more profitable? Yes, certainly in theory, but the rules, regs and royalty payments vary by streaming service. Plus, if a well-known popular artist is saddled with an unfavorable record deal, then that can complicate matters, which is only to the delight of forensic accountants, assuming an artist has the means and will to even explore such recourse. Lesser-known or unknown artists face a range of different and uphill challenges.

Today there are a number of streaming music services to choose from, including Spotify, Apple Music, Amazon Music, YouTube Music, Soundcloud, Pandora, Deezer, Tidal and Qobuz, to name a few. How the  so-called “largest” are categorized can vary by how the data is parsed, by the number of monthly active users (MAU’s), the number of premium vs. free subscribers, or the size and depth of their music catalog. For example, as of December 31, 2020, Spotify had 345 million MAU’s and 155 million paid subscribers. Of course, sound quality is of particular importance to those of us who want to enjoy music in the best-possible fidelity, with options that include CD-quality and even better.

A familiar sight for many. Courtesy of Pixabay/Deepanker Verma.

A familiar sight for many. Courtesy of Pixabay/Deepanker Verma.

Independent of differences in a service’s audio quality, pricing, search options, algorithms, user interface and music catalogs, each operates with a somewhat different compensation model, with royalties linked to frequency of play a song receives through their free (with ads) and/or pay tiers. (Royalty rates on free vs. pay tiers are different.)

So, what exactly is a “stream?” According to Spotify’s guidelines, a stream is counted when a song is played on their service for 30 seconds or longer. Anything less is like a baseball game lasting less than five innings, it doesn’t qualify for the record books, pun unintended.

It may be a surprise to you that an artist also can’t just upload their music directly to a streaming service or online store. The process requires working with a record label or a distributor, such as TuneCore, DistroKid or CDBaby, to facilitate placement. TuneCore, for example, charges artists a flat $9.99 per year fee for a single, $29.99 for year one album placements, and $49.99 on annual LP renewals.

Let’s take a quick look at some stream-o-nomic math. A smaller service like Tidal actually pays the highest artist royalty rates at $.01284 per stream, while Spotify pays about a third of that amount, or $.00438 per stream. So you’d think a million streams on Spotify would appear to be a fairly big success story, right? Nope, it’s bupkis. At $.00438 per stream that translates to $4,380 in gross revenue, an amount an artist may or may not also have to share with other stakeholders.

On the other hand, 10 million streams on Spotify equates to $43,800, or real money. If an artist has multiple songs, each with several million plus streams, then you can see how this can play out well financially for some, with their streaming revenue complemented by touring (once rekindled), vinyl, CD and/or merchandise sales.

In second quarter financial reporting, Spotify had a total of 43,000 artists in the service’s “top tier,” comprising 90 percent of all streams to the platform. That’s also a 43 percent increase in artist growth vs. a year ago. However, Spotify’s size and growth is both a blessing and curse for artists. Though very popular artists on Spotify may have tens or hundreds of millions of streams, given the low barriers of entry on both music production and distribution, there are many thousands of aspiring artists who have hardly any traction at all.

Consequently, the biggest challenge facing new artists on streaming platforms is being discovered, with the curation and allocation of top-shelf site real estate in the hands of the participating music service. Simply put, these days it’s awfully hard to get noticed.

 

Of course, there are always outliers. Five-time Grammy award winner Billie Eilish has close to 52 million monthly listeners on Spotify, which converts into a heckuva lot of streams. Her 2019 debut studio album, When We Fall Asleep, Where Do We Go? (hmm, perhaps the nearest bank?), was largely co-written by Billie and her brother, and then produced in her brother’s small bedroom. (Yup, that’s what you call bootstrapping.) Although Eilish is tied to Interscope/Darkroom Records, and hence, there’s revenue sharing between her and the label, there’s little doubt Ms. Eilish is cleaning up quite nicely in the streaming world. Popular artists, like Ms. Eilish, also have the leverage to negotiate more favorable revenue splits with their labels.

While the streaming industry has started to respond to the steep criticism of low-royalty payouts, when they do raise payments, the increases are only by a fraction of a cent per stream, not really moving the financial needle precipitously for many. But let’s not put the onus entirely on the streaming services that fundamentally operate low-margin businesses. The plain truth is the record labels receive the lion’s share of the monthly fees a subscriber pays to a streaming service.

Looking towards the future, to enhance their value proposition and to create differentiation, streaming music services are investing in original content to drive engagement and subscriptions. Podcasts are one alternative, and attractive because they’re low-cost content, and Spotify in particular is pursuing that avenue.  Developing “exclusives” with musical artists is another growth path, but that puts a streaming service in direct competition with record labels. With so many streaming services, in somewhat of a commodity business, the market frankly may not be large enough to sustain so many competing players.

One other possible growth option is to bundle music streaming with offerings from other non-music entertainment companies. Just think how movie theaters have been decimated by COVID-19. Will patrons eventually return to movie theaters, or will in-home first-run movie distribution and viewing continue to grow? If so, for example, could Regal or AMC, the two largest movie theater chains, partner with Spotify or another music service and create a bundled movies-plus-music subscription plan to create added value?

Yes, today’s streaming ecosystem is a real slippery slope. For up and coming artists, although they’re happy to be in play, having listeners discover their music is an ongoing nightmare. For these aspiring artists, each trying to develop a following and make a living, it can feel a bit like throwing Jello against the wall and hoping it sticks.

Header image courtesy of Pexels/Karolina Grabowska.

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