There is much talk, especially by music streaming services, about streaming being the future of the music business. Even major labels, initially resistant to the effects the digital revolution, have come around to the access model by investing in streaming services such as Spotify. These services use the “freemium” business model in which users can either listen for free with the occasional advertisement mixed in or pay a monthly subscription fee and listen uninterrupted.
Streaming services contribute an increasingly sizable slice to the music business revenue pie. Technology companies, labels, artists, and music lovers alike agree that they are the future of media consumption, but this is where the consensus ends. The debate over how streaming service revenues should be distributed garnered public attention when Derek Lowery wrote a moralistic public letter to NPR intern Emily White in response to her admission that she had pirated most of the music she owns. Mr. Lowery’s letter has been hailed and criticized in equal measures, but, whatever your opinion of the letter, it has generated a great deal of rich debate on a subject that is far from settled.
The chaotic early days of music piracy, as well as the time lag before quality legitimate download and streaming services became available, created a significant downward pressure on the value of recorded music. People got used to the idea that recorded music was free. So much so that now the music industry finds itself in the difficult position of trying to compete with free.
This competition and downward pressure on recorded music value has resulted in a streaming service business model that has yet to turn a profit and that leaves all but the most popular artists questioning whether participation is worthwhile. The services argue that they are creating a new substantial revenue stream for rights holders, that their distributions to right holders are increasing as their markets grow, that labels and publishing companies must be held accountable for the portion they deduct from artist payments, and that their services generate additional revenue for artists by spurring physical album sales and digital downloads. Some of this is true, some of it is an optimistic projection, and some of it is wishful thinking.
So how much do streaming services pay rights holders? The numbers are kept confidential by those services, but several artists have published their receipts in attempts to show that the distributions are insultingly small. These insights reveal that payments vary based on agreements between the rights holders (artists, publishing companies, and labels) and streaming services. The portion that artists receive from labels and publishing company also varies depending on their agreements.
Despite the lack of payment transparency on the part of streaming services, disclosure by artists reveal that they get paid fractions of a penny each time a user listens to a song. The per song stream payment is somewhere between $.004 and $.009. While this sounds small, the services are quick to point out the business model’s aggregate opportunities. Micro-payments can create a great deal of revenue on popular titles and offer the possibility of artists getting paid more per song per user than traditional downloads if the user listens to the song a great deal. Traditional downloads only offer a one time payment per user per song, while streaming offers the possibility of payments in perpetuity.
Independent artists, like Derek Lowery, who don’t get enough plays for the aggregate model to pay a living wage are skeptical that the industries hopes of increased market share and artist payments will come to pass.
The Policy Debate
Since the digital revolution the music industry has been plagued by declining revenue and an uncertain future. More people are working for a piece of a smaller pie. In this climate artists are often promised “exposure” instead of money and reassured that eventually the former will produce the latter. Everyone agrees that artists should be fairly compensated for their work, but where will that money come from? Streaming services are telling artists that their business will grow, increase payments, and bolster traditional revenue streams. Artists are skeptical.
Competing with Free
Service providers lean heavily on the theory that streaming plays will ultimately usurp up front revenue from digital downloads. Their hope is that eventually enough users will join to provide sufficient advertising and subscription revenues to become profitable and pay artists fairly. The services maintain that the freemium model (and the low payments it generates) is necessary to compete with free by bringing in free users that would otherwise pirate music.
The Tipping Point
Streaming services also lean on the theory that once they reach a critical mass of users the royalties will meet or exceed other traditional income streams like physical purchases, digital downloads, and radio play. But how many users need to participate in a service to reach this tipping point? Due to services’ lack of transparency and hesitancy to talk about data other than yearly total distributions the tipping point is difficult to pin down. The amount of competitors coming to market with similar services creates additional doubt about whether and when any one of them will reach this elusive tipping point. While artists continue to complain about the income these services provide many continue to participate with cautious optimism. In a market crowded with competitors and typified by uncertainty about the future, their caution seems warranted.
Who Are the Rights Holders and Why Does it Matter?
Music copyright law is complicated. There are many parties that participate in making a successful album, including, but not limited to, artists, producers, labels, and publishers. This fact often leads to a situation where there are several rights holders in one recording. Traditionally, when musicians sign record deals they agree to turn over the copyright to their recordings to labels in exchange for royalty payments. Similarly, when songwriters sign publishing agreements they agree to turn over the copyright to their compositions to publishers in exchange for royalty payments. Streaming services pay the rights holders, which is often not the artist, then rights holders pay artists according to their agreements.
Due to the above described nature of music rights, payments are often delayed and significantly diminished by the time they reach artists. Labels pay between 15 and 50 percent of their income out to artists as royalty payments. Streaming services like to point out this fact when artists complain about the timing and amount of their payments. Artists, especially independent artists, who own all of the rights to their recordings, have pushed back, claiming that the payments are still insufficient.
Does Streaming cannibalize or Bolster Traditional Album Sales?
Streaming services claim that their services bolster traditional album sales and digital downloads, but because of the fast paced change of music consumption this claim is impossible to back up with concrete data. The best that can be said is that the introduction of streaming has not killed record sales. However, our increase trend towards media access rather than ownership make it almost a logical certainty that eventually it will have a negative effect on traditional sales and there are some recent indications that this may be true.
The Transparency Problem
Despite their best PR efforts, streaming services are getting a great deal of negative press about this issue. It is hard for an uninformed public to side with a streaming service that pays $1.62 on 27,900 song streams. If the services were more transparent about their ownership conflicts, current payments, and targets for profitability and increased artist payments they may turn the tides on their PR problem by easing the minds of the artists involved. While confidentiality and business considerations obviously limit their ability to be totally transparent they could do better than they have to date.
The Debate Continues
The debate over payment levels will continue until the market settles and we have more concrete data on streaming’s effect on the music industry. Until then artists, especially independent artists, will have a tenuous relationship with the services that they can’t afford to ignore.