Will Music Streaming Kill The Music Business For Good?
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.
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)
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?
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.
- lawsuit settlements
- equity participation (stock)
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.
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.
PS: Other parts in this series will be emailed directly. If you are not on my mailing list, it’s free. Click here.