Will Music Streaming Kill The Music Business For Good?

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Will subscription services, like Spotify & Last.FM obsoletize the need or desire to own music files, thus killing the lifeline of artist and record company revenue?

Some say not enough people will pay for music monthly (as if it were electricity) for it to be sustainable. Who’s being realistic verses who is being romantic can be hard to pinpoint if you don’t know the player’s agendas. In this three-part series internationally recognized music business expert Moses Avalon will try to bring clarity to this latest deep disruption to the music space.

 

See my interview on Fox Business about this piece  http://www.youtube.com/watch?v=GyEi7lgTjmI

Part I: Why Major Labels Love Getting Pennies Instead of Dollars.

Moses Avalon

In 2001 the Internet community declared the music industry DOA, predicating total decimation by illegal P2P file sharing services within five years. The major record labels disagreed.

Today, after a decade of lawsuits and lobbying major labels make about the same revenue from albums while selling 30% less units then they did in the pre-Internet era. (1989-2000: $48.6B, 2001-2011: $53.3B)

RIAA sales then and Now

Tortured album sales (which inched ahead since 2010 with the death of the two biggest illegal P2P services: Limewire and Kazaa) has inspired cost-cutting in the supply chain, thus reducing royalties and fees paid to music creators. Net result: the industry has hovered at $10 Billion a year and thus-far survived the Internet transition many other industries have failed to do.  Score one (a big one) for the majors.

But will it matter?

The latest music Armageddon theory is that subscription based streaming services like, Spotify, MOG, Last.fm and Rdio  (“Streaming”) will cannibalize recording artist’s main revenue: ownership, both of physical CDs and downloads from stores like iTunes and Amazon.

Why buy and maintain files if you can stream them on demand any time, anywhere, through any device for nine bucks a month?

The industry jargon for this is called going from an “ownership model to an access model.”

But, even if labels and artists saw half of that nine dollars from “access” and even if 1 in 2 people in the US subscribed (and those assumptions are optimistic) that would reduce the gross revenue down from $10 Billion a year to $6.3 ($4.50 X 150M X 12). More doom and gloom for the music trade, right? Nothing new here, except that this time–strangely enough–major labels are supporting this agenda.

Why? Streaming/access pays far less than direct sales and it contributed to only 0.3% growth in 2012 according to the IFPI. Yet the majors are embracing this fractional medium while the technocrats still call labels dial-up dinosaurs.

Can you ever make your critics happy or is there something more sophisticated afoot?

Let’s see.

 

WHO’S IN?

Anyone arguing that Streaming or “access” is better for music creators (or for the consumer) than ownership of your own music library, is someone who:

1) Would prefer music be valued/sold on a wholesale basis rather than on a individual artist or track-for-track basis.  Just like any commodity.

 

2) Has the facility to decode reams of data with little fear for a lack of transparency in royalty accounting.

 

3) Thinks music is a “service” or is in the pocket of someone or some entity that fits the above profile. (One example.)

So, who fits the profile?

Big Four major music distributors and their sister publishers for one (Sony, Warner, UNI and EMI) and the four US Performing Rights Organizations (ASCAP, BMI, SEASAC, SX) for another.

Both of these entities have teams of lawyers and accountants to handle and decode the data supplied by Streaming for royalty accounting.

Each make “blanket license” deals with Streaming services with advances in the undisclosed millions, which is virtually the same as selling music in bulk; they receive these healthy licensing fees to cover all activity in a given period rather than allowing Streaming services to “pay as they go.” (This does not include Pandora or Slacker which are not “access models.” They are non-interactive, or radio-like and do pay as they go.)

Even though it’s only fractions of pennies per stream it adds up to a notable profit when you own a lot of popular music rights.

Win-win, right?  Labels get more money up front and services get a price break for buying in bulk.

Not really. There are some important losers in this equation as can be revealed by answering a single, seemingly simple question:

“Didn’t the majors labels have that same advantage with downloading stores like iTunes, Amazon, Rhapsody, etc, who all paid huge fees up front and continue to pay for on-going sales?”

No. major labels hate digital stores, particularly iTunes.

They hate controlled pricing (which they only won ground on recently) and they hate getting paid one track at a time. They hate the pseudo half-baked DRM used to limit (but really encourage) transportability; they hate the “democratic” way that digital stores make favored-nations deals with every label no mater how small or big.  Also, they really, really hate paying 30% to the ghost of Steve Jobs, who they were never fond of.

But above all, there is one thing they really, really, really… really hate about digital stores more than anything mentioned above.  It’s a point that has been ignored by the press, yet it’s the key to understanding why majors are favoring the fractions of pennies paid from Streaming.

 

LATE ADOPTION via EARLY REJECTION

The Big Four have always paid their talent as little as possible. It’s not just a bad habit– its part of their business model.

While A&R exects get bonuses for signing acts that sell lots of tracks, their CEOs get bonuses by trimming the bottom line– especially in a time of crises.  And there is no easier way for a label to save/make money than by making it hard for your artists to figure out how much they are owed.

In the early 2000s Palo Alto thought majors would love virtual store technology because it provided faster payment and better accounting than brick & mortar retail.  Majors could not publicly admit why they hated this but it was not because they did not understand the Internet. It was because they realized the platform’s transparency in marrying a specific sale to a specific line of data– instantly.

This made the practice of “cleans” impossible. Cleans were CDs given away by labels to stores buying in bulk; the intent was that they be resold. Cleans allowed labels to create an artificial “discount” to stores and simultaneously pay their artists on 10% to 40% fewer unit sales by calling them “promotional give aways,” or “free goods.”

But digital stores made cleans impossible.  There is no inventory to manipulate.

Digital stores also allowed a new breed of major label competitor to blossom. “Aggregators,” like CD Baby and Tunecore who, for small amounts of start-up capital, could pipeline artist’s digital files to virtually any platform, offering an alternative to the traditional label distribution deal.  No auditors needed if retail will do the accounting reliably; no lawyers to retain if you are not defending copyrights; and no advances to convince artists to sign over rights.

It’s easy to compete with the big majors when you have a fraction of their overhead.

Conversely, Streaming is anything but democratic.  It has strict DRM and most importantly, it’s a royalty salad that puts control in the hands of the party with the confidential data-to-dollars formulas.

It will bring back the label’s days of shrugging at the artist’s manager when he shows up with a $26 royalty statement for 501,324 streams.  It will bring back the power they had over distribution, promotion and the edge they had over their free-wheelin’ indie competitors. In other words…

WHILE STREAMING/ACCESS MAY KILL PHYSICAL MUSIC SALES

IT WILL PARADOXICALLY RESURRECT THE MODEL THAT MADE THE MAJOR LABELS POWERFUL.

And with a little attrition over the consumer’s concept of “ownership” they hope to soon be back on top again.

THE NEW BLACK

Artist’s representation try to watch out for clauses in recording contracts that make auditing a label difficult. Instead of “manufacturing records” (that were off limits to auditors in the days of physical sales and were irrelevant for download sales) Streaming data contains a new void, “unallocated receipts”: money and other assets that is not easily assignable to a specific track or stream.

For example:

  • lawsuit settlements
  • advances
  • equity participation (stock)
  • Advertising

Although everyone hopes this changes soon, so far unallocated receipts (as opposed to revenue from subscriptions and streams) make up the lion’s share of the booty paid to majors from Streaming/access.

Yet auditors are rarely allowed to see this paperwork.

Royalty auditor, Cedar Boschan a partner in the firm Hurewitz, Boschan routinely audits major labels on behalf of artists. She wrote to me in an email:

Even when a label reports [to artists] its unallocated receipts, it doesn’t mean that amount is proper or fair.  For example, a record company may allocate a settlement payment it receives from a streaming service to unrecouped artist accounts, because the less it allocates to recouped artist accounts, the less it actually pays out.

Wow!  So the more successful an artist has been at recouping their advance the less likely that a portion of the unallocated receipts will apply towards reducing their debt.  A new scam for my next edition of Confessions of a Record Producer.

FORWARD

For those scratching our heads as to why major labels and their mouthpieces love Streaming/access despite the fact that it pays far less than ownership, I hope this clears some things up.

In Part II, Is Streaming Sustainable, we’ll look at the realities of the “music everywhere” platform and I’ll explain why some tech giants are not supporting Streaming/access despite the fact that it’s embracing the technology they criticized labels for once avoiding.

Stay tuned.

PS: Other parts in this series will be emailed directly.  If you are not on my mailing list, it’s free.  Click here.

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34 Responses to “Will Music Streaming Kill The Music Business For Good?”

  1. Bob Kaminsky says:

    Interesting and informative take on this subject.I’ll be sure to spread this around….Obsoletize???

    Thanks for working so hard…much appreciated.
    BK

  2. sam says:

    I personally dont think that labels make money from streaming in a way that they make so much as described.
    As a pioneer in the digital music business i believe that every time someone hears a free stream , a possible sale was lost, so if the record label get a penny per stream ( which is probably not the case) they may have lost a sale which nets them .70 cents, how can a major label make more money from just streaming? its a 70 to one 1 odds.
    the only way you can say that majors make more money from streaming is if you decide that as they give very confusing sales reports, the major label may skip paying the artist what is due but that is still a fraction of what they make if they sell the music on itunes, hate it or not.
    you may look at amazon createspace program which pays from a 15 Dollars DVD a few cents which i think is far worst.

    • Moses Avalon says:

      “I personally dont think that labels make money from streaming in a way that they make so much as described.”

      What can I say, Sam? Read this part again:

      “Each make “blanket license” deals with Streaming services which is virtually the same as selling music in bulk; they receive healthy licensing fees to cover all activity in a given period rather than allowing Streaming services to “pay as they go.” (This does not include Pandora or Slacker which are not “access models.” They are non-interactive, or radio-like and do pay as they go.)

      Even though it’s only fractions of pennies per stream it adds up to tens of millions each year when you own a lot of popular music rights.”

    • David Parker says:

      Great insight! What the majors have shown us cogs in the proverbial wheel is very similar to our government, that is, time is on the majors side. They have shown that they can weather the digital storm albeit with a few dropping. And I also believe that those smart and nimble independent record labels with those genius entrepreneurial leaders will also survive (as they have) and do well. I pity those artists trying to do it on their own.

  3. Jay Willingham says:

    Do the major labels effectivelly control Spotify in the USA?

    • Moses Avalon says:

      Depends on what you mean by “effectively.” They are share holders. In the case of MOG they are outright owners, via Beats a subsidiary of Universal Music. But Spotify functions “autonomously.”

  4. mallerie says:

    ““Even when a label reports [to artists] its unallocated receipts, it doesn’t mean that amount is proper or fair. For example, a record company may allocate a settlement payment it receives from a streaming service to unrecouped artist accounts, because the less it allocates to recouped artist accounts, the less it actually pays out.”

    Wow! So the more successful an artist has been at recouping their advance the less likely that a portion of the unallocated receipts will apply. towards reducing their debt. A new scam for my next edition of Confessions of Record Producer.”

    I actually had to reread this a few times because my brain was just not clicking
    But when it did i was like *GAASSSSSPPPP* how trifling is that! With my dream of wanting to bea label exec, i pray these tactics are not the norm. Thats not why i want to bea get in the business at all! I guess i should just ponder starting my own label because this is shenanigans!

  5. Rand Bliss says:

    Always love you Moses and really appreciate the up-to-the-minute important music business related information vital to be aware of, plus your continued ‘knight in shining armor’ dedication towards a healthier balance and fairness in this crazy industry.

    And not to kill the messenger bringing bad news; but coming from a pro-musician/singer/songwriter now struggling like a salmon upstream as it is to become successful in this digitally dominated arena, it’s going from depressing to devastated with this latest news.

    It seems Gordon Gekko was right after all, “Greed is good.” Not that it’s the right way to behave but because it still works out that way…

  6. Dean Sciarra says:

    So let me get this straight – the majors are doing upfront deals and getting paid more than their artists will ever make from streaming and then they don’t pay the artists – new dog – old trick!

    But for those of us who run Indie labels and don’t get advances and only get $.0003 per stream, this is the end of the innocence, not to mention the music business, and the artists since there will be no royalties to pay them so that they can afford to make more music if they’re not so bummed out that they even want to. This redefines the downward spiral.

    And the majors can’t take the money and run for long. My artists make more money than they would if they were on a major. Once this becomes obvious to artists they won’t even bother with majors.

    • Moses Avalon says:

      Dean,

      You basically said it in about 140 words what took me 1500 words (of course you needed my 1500 words first to get to the point) Yes. This will “kill” the indie portion of the business. Sort of. Most indie exit strategies revolved around getting up steamed (or bought out) by a major. This will not change. It will only effect those indies who want to remain truly indie. Which in my 20+ years of experience is very few.

  7. Jason Miles says:

    For over 50 years the labels have screwed over artists. Now that they have figured out the 2013 model they will put the hammer down and make sure that they are taken care of and screw you to everybody else. Work hard,write great songs ? We want your money. This whole thing is one of the most criminal acts imaginable for artists. It took them a minute but they will always find a what to screw the artist.
    Now that every amateur in the book thinks they’re a professional it will get more clouded and cluttered. The professionals who have dedicated their lives to being an artist will go down the ladder even more. Very disheartening
    Peace,Jason

  8. Interesting. Spotify prefers a blanket license with major labels because it’s cheaper, and Majors prefer a blank license because it helps them hide fair royalty payments using creative accounting.

    And Spotify prefers pay-as-you-go payments to indie labels and DIY artists, presumably because there are no upfront payment costs to Spotify, and many indie/unsigned artists may never reach a level of streams to cover an upfront payout.

    I’m curious if you know of any artists that can demand the more transparent pay-as-you-go deal, or nothing. Obviously only the recouped artists would be in a position to negotiate such a deal, but there are still a handful of artists that have held out on Spotify, like The Black Keys. Do you know if all artists are forced to participate under a blanket license or be left off the streaming services?

    • Moses Avalon says:

      Great question Mike.

      My (educated) guess is that any artist signed to a major in the past 10 years has no choice but to be in the blanket licence salad. Ones singed before that might have some leverage as the language for this didn’t exist in many deals.

      Big artists, like the Beatles can certianly make a direct deal. Lets see what Kid Rock does.

    • Dean Sciarra says:

      An aggregator or an artist can opt out of Spotify thru their distributor but the if anyone who uses Spotify adds their files of that artist to their own Spotify the album is then published and made available for everyone on Spotify which kills the entire concept of opting out – and then the artist doesn’t get paid at all – as far as I know.

  9. Rio says:

    Now, this is a brilliant article.
    The streaming business model is preferred by the labels because it is less transparent, so the labels can play the old ‘unrecouped expenses’ trick more easily.
    Truly looking forward to read the next one.
    Thanks, Moses. Always eye-opening.

  10. Claes Olson says:

    I’m sorry, but this was definitely among the worst crap I’ve read in a long time…. Wake up, for heaven’s sake! Will the next step forward be music cassettes!?

    • Moses Avalon says:

      Well, y’see Claes, a little known secret of the music biz is that CDs are made from ground up recycled audio cassetts. And labels charge the artist a “conversion” for this process. And then they do it again when they recycle the CD into a digital file.

      :-)

  11. Ghost of Morris Levy says:

    The Death of the Music Business!!! I love how everyone is so quick to claim that new technologies will effectively destroy this industry. The main problem with complaints like these is the fact that the arguments always seem to revolve around the sale of a recording, as if there are no other revenue streams to draw from.

    The recording has lost all it’s value and I think the major labels are the direct cause of this. I remember buying CDs at Best Buy for $17 because there was 1 or 2 tracks that were worth listening to. Most likely, the song that drew me to the sale was as a result of radio, or in other words, the major labels telling me what to listen to (PAYOLA BABY). After a couple weeks of listening, without fail, the disc would start skipping and I’d be left with a useless piece of trash.

    The internet is more over saturated with music than ever. Any average Joe can record an album in Garage Band, pay a small fee to an aggregator, and start selling music worldwide. Sure this is great for artists, but for consumers it just leads to an unnecessary wealth of music to pick through. Out of the bazillions of songs out there, how can a consumer justify purchasing something on iTunes? Especially when it’s available on a myriad of free streaming services.

    It’s the same bullshit I hear at every conference. “How to we fix the music industry? Anyone?”. Maybe the core problem is that the industry has always been broken. When you have guys like Lyor pulling in close to $3m in salary and another $3m in bonuses, you have to wonder where their true motivation lies. It’s another cyclical change in the industry and I for one would love to see the majors go under and leave the industry in the hands of the creatives and true innovators.

    • Moses Avalon says:

      Ahh, I knew it would not take long before a Grooveshark freetard posted comments on this. Yes, for those reading who cannot see the meta-tags, the email above named “Ghost of Morris Levy” has a Grooveshark origination. And it’s very interesting that he states that music has no value when it is companies like Grooveshark that have done so much to contribute to that perception.

  12. bunky says:

    what ever happened to the $100 million dollar advances that record companies received from “Record Clubs” every three years back in the day? That never got allocated to artists either. Or to unrecouped artists.

    Same shit, different asshole.

  13. Tom Green says:

    Interesting take, thank you for that. Though personally my days of working with the majors are long gone (and even then, it was only at one remove) – as are my days of ‘making records’ in any properly serious fashion. It’s ‘media music’ paying the rent these days. Yes, my ‘art’ stuff is up on Spotify (some but not all of it) and out on iTunes etc via a big industry aggregator- but it’s my Bandcamp site that makes the most cash. What cash it makes, which isn’t a lot… but it is in profit, and that ain’t bad, these days. If you keep the costs right down but the basic quality (of writing as much as the sound) as up there as you can, it’s amazing how many people will pay you x2 or even x4 as much the price tag you’ve put on it. Quality still sells, and via Bandcamp you get 85% of retail- and you’re out of all the games. You’re also out of all the promo advantages of labels, though, so don’t get expect too much …

    In the end, though, it’s a hopelessly saturated market where the buyer always has the option of sourcing your product for free, and the majors pretty much have total control over any form of mass promo. If you want to get to the masses, I still think you still have to sup with the devil…

  14. Happy Anderson says:

    It still “all begins with a song”. Ever heard of songwriters going on strike? It could happen. Maybe that’s what it’s going to take to straighten out this mess.

  15. Hyun Soo Lee says:

    I really enjoyed reading your article. In my opinion, I think you did a great job in walking through the reader about the recent progresses that the music industry went through from the point where the Internet started playing significant role in the entire business. As we all know, the streaming services have been rising as the new technological juggernaut to change the phase of the game, and your discourse about how the streaming services works, and its general aspects made it further clearer for me about the actuality of them. Especially, the way you explained why the labels have gradually grown inclined towards the streaming services from digital retailers, namely iTunes, provided me with a convincing reason why it was inevitable for the streaming services to flourish under the current conditions of the industry.

    Nonetheless, among the overall argument that you established in your post, there was a point that raised me a question, which happened to be the last point you made. At the last part of your post, you argued that the labels hold the advantage of manipulating the amount of payment they owe to their artists, which are generated from the streaming services, and thus, the artists would be the ones are to be exploited while the labels and the streaming services will continue to strive. As you suggested, it maybe true that there was a considerable leeway for the labels and the streaming services to deliberately conceal the information and data that are directly related to the artists’ payment. However, I would like to expand on that perspective by highlighting the fact that most of significant streaming services are actually heeding to the artists’ appeals about the payment methods, and reforming themselves accordingly. Chiefly, these streaming service companies are attempting to aid the artists either by facilitating the artists’ utilization of their services, or by adding more transparency in their payment calculation for the artists. In addition, in my opinion, the possible detriment that can be caused in artists’ payment due to the labels’ manipulation seems rather temporary. As Passman states about the current phase of the streaming services in the New York Times article that you incorporate in your post, “Artists didn’t make big money from CDs when they were introduced, either… They were a specialty thing, and had a lower royalty rate. Then, as it became mainstream, the royalties went up. And that’s what will happen here.” In other words, I believe that the concern raised about the artists’ payment from streaming services will be easily appeased as time passes, just as it happened for different mediums for music in the past.

    • Moses Avalon says:

      “Artists didn’t make big money from CDs when they were introduced, either… They were a specialty thing, and had a lower royalty rate. Then, as it became mainstream, the royalties went up.”

      You have clearly never participated in an audit. The amount of money that is hidden from view in CD sales is massive. Starting with manufacturing records. That’s right, when an artist audits the label he does not get to see how many records were reproduced. This is done for one reason: to prevent the artist from knowing how many records are given away and for which he is not paid.

      The point of my piece is that with digital sales label needs to find new ways to obfuscate traceable data. “Access models” provide this in spades.

  16. Frank says:

    I just signed up for the newsletter and would love to read the other two parts of the series. Could you please send/post them?

    Thank you!

  17. Patrick Landreville says:

    From the artiste perspective streaming is disastrous as payments can never scale. As more tunes are added to the service the percentage paid to individuals goes down, the more successful the streaming service the worse the payout as royalties are based on percentages of the aggregate of streams. Add to this the lack of transparency in payment structure, clients are precluded from access to information regarding any normal percentage points so there is no way to make comparisons for negotiation of rates, and it is a dismal proposition indeed. The major labels on the other hand are co-owners of the major streaming services and as such are paid from total revenues, no matter the number of streams any artistes on their rosters contribute to the total number of streams, in effect the majors are being subsidised by the indies and truly freelance artistes. In addition the majors received huge upfront sums which they are not required to distribute to their artistes. In short, streaming is a good deal for the major labels and streaming services; but a terrible deal for artistes.

  18. Val Gameiro says:

    Live365 claim to pay royalties to artists, etc.

    I wonder how true that is!

  19. Uh Oh Mr. Moses.. Get ready for the big flow of members/book purchases/ and fame!!! :D You’ll prolly end up as Fox News’ Music Commentator!

  20. Mr. Mr. says:

    Moses. The majors are shareholders in Spotify right? They receive advances on streams too? Isn’t that “double-dipping”.

  21. Lari White says:

    Moses – thank you for putting your kick-ass mind in our small but beautiful world. You’ve nailed the real crime: the Standard-Industry-Smoke-and-Mirrors-Accounting that INSURES that corporate entities controlling creative content will ALWAYS profit at the expense of content creators. My question is this: WHAT DO YOU THINK WOULD HAPPEN IF A TRULY INDIE (self-published, self-owned) SINGER/SONGWRITER AUDITED GOOGLE?

  22. LOL – ROTF ,
    Dynamite, Moses wails, Avalon rules, keep up the good work, thanks, Iris & Charles

  23. Moses –
    Thanks for your hard work and artist advocation! How does one avoid getting their work getting sucked into streaming if a user can add an artist’s tracks on Spotify, for example, per Mr. Sciarra’s comment?

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