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STREAMING MAKES MORE MONEY! THE DATA IS IN!

digital-music-report-UBJ*280In the great streaming royalty debate, the focus has been on tiny royalty rates per stream. Artists are up in arms, many are opting out of streaming services, and the noise and debate has been growing louder. Lost in that noise is a voice that is seldom heard: that of the record companies. There’s good reason for that: they’re making more money from streaming and the future looks extremely bright for them.

Buried in the Christmas Eve edition of the Wall Street Journal (which is itself a day to bury news) is a short column by esteemed writer Ethan Smith. And buried in HIS column (not the lead paragraph, but 8th paragraph) is the vital important nugget that shapes the future music business:

Data reviewed by The Wall Street Journal showed that one major record company makes more per year, on average, from paying customers of streaming services like Spotify or Rdio than it does from the average customer who buys downloads, CDs or both.

OK…let’s quickly digest this. On a per-consumer basis, a major record label makes more money from streaming services than any other format. This might be a figure to look at skeptically if these services barely reached a million people, but worldwide streaming services generated $1.25 billion dollars this year and Spotify alone has over 24 million active users (which jumped massively in the last week with app installs up 4x over the previous week). But how much more is being earned?

The average “premium” subscription customer in the U.S. was worth about $16 a year to this company, while the average buyer of digital downloads or physical music was worth about $14.

Let’s take a look at that. Year over year, the premium subscriber was worth nearly 15% more than the person who bought music either digitally or physically. So, if there’s more money to be made in the streaming hills, why are so many artists unhappy? Because the artist has to rethink the business on multiple levels.

IT TAKES LONGER TO MAKE MORE MONEY
As Ethan points out, it took an “indie pop/rock group” 34 months to make more money from streaming than they did from sales. Some artists will do it in less time, and others in more time. Either way, the artist has to take the long view. It’s certainly easier and much better to run a music business with the money coming in quickly with an up-front sale. However, if you believe in your music and have patience, the long run pays off. In this way, the recorded music business will quickly resemble its partners in publishing. In another way, with many artists being financially irresponsible, is it so bad for them to get their money slowly over a prolonged period?

THE MONEY GOES TO MORE ARTISTS THAN EVER BEFORE
A person buying $14 worth of CDs a year has the money going to 3 artists at the most (3 CDs x under $5). A person buying $14 worth of downloads a year has the money going to maybe 18 artists at the most (18 downloads x $.79). However, $16 worth of streaming revenue conceivably goes to as many as 3,200 tracks (3,200 streams x $.005). Even if you take an assumption that a person does 100 listens of one artist in a year, that’s still spread out over 32 artists in a year, or nearly double the max average for download sales. As I’ve reiterated before, the real issue facing artists with streaming is that the very access that allows them to make money means the pie gets sliced thinner. There’s more money, but it just goes to more artists.

THE SONG HAS TO LAST A LONG TIME
Disposability of a song only works if you work it extra hard while it’s hot. If an artist/song takes 34 months to make more money, then the song needs to be relevant for those 34 months. No longer can you stiff a consumer who buys something and only listens to it a couple of times. Now, those listens need to reoccur and do so over a prolonged period. This also means continually marketing content to ensure it stays relevant.

Longtime readers of my book Futurehit.DNA have already been making music that plays into these trends. I’ve been predicting for years that music revenues will be based more on repeatability, and that is now taking firm root. Those who embrace these new realities are more likely than others to rise above the mass volume of music released and are poised to thrive in this new age of the music business.

ROYALTIES SUCK, MUSIC SALES ARE DOWN, PIRACY IS RAMPANT AND OTHER LINK-BAIT TERMS FOR MUSIC PUNDITS

The royalties artists get on streaming services are pitiful! Mere slivers of pennies and a million plays barely buys you a pizza. These need to go up because music sales are in the toilet. Did you see that iTunes sales are down 1% this year? Panic in the streets! The real scourge is piracy which, a decade on, is still left unchecked and easily found with a Google search! So, your music is being stolen, not being purchased, and then devalued heavily on streaming services.

Sound like a familiar refrain? Sure, many artists and music business pundits have been spouting off about this stuff for awhile now. As well they should to keep the debate healthy…and grow their own business. Wait, say what?

A new MIDEM white label report called Content Marketing In The Music Industry, put together by UK agency Venture Harbour, found that those are the Top 3 topics to generate social sharing and backlinks to the author’s site.
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This is not a surprising finding to me. I’ve tried to write on some issues that I felt were intelligent and important and even downright helpful to the artists and the industry. Yet these posts seldom get close to the traffic I receive when I talk about Spotify royalties.

In a lot of ways, this is a variation of the “Culture Of Fear” that permeates news broadcasting. If you watch the evening news, you’d think we’re living in some of the most violent and dangerous times. Instead, Chicago has the fewest murders since 1965, New York’s murder rate is the lowest since the 50s, and that we are likely living in the least violent time in mankind’s history.

This is not to say we should be complacent about artist rights and royalty rates. This is the music business, after all. It’s just that in the aggregate whole, things are much better than what pundits are saying. It just seems that it’s in their best business interest to continually tell you otherwise.

DAVID BYRNE: GREAT MUSICIAN, TERRIBLE MATHEMATICIAN

The latest anti-Spotify editorial screeching around the internet is David Byrne’s editorial on why he’s taking as much of his music off Spotify as he can. As an artist who owns their music, he’s totally within his right to do so. His personal reasons to do so are ones I can certainly respect. However, his public forum explaining his reasoning is full of gross inaccuracies, misrepresentation and bad math. In fact, this isn’t even the first time he’s used bad math to prove a point. Believing Byrne’s anti-streaming diatribe can be harmful to a musician’s own future earning potential. Let’s look at the facts.

Most of the misinformation is found in the fifth paragraph where Byrne mentions several previous artist posts about streaming revenue. To correct each point:
Damon Krukowski’s payouts for “Tugboat”, a 25 year old song that was not originally a hit, largely focused on minuscule songwriting revenue, while Byrne is referring to royalties from the master recording. Once again, an artist uses most people’s lack of knowledge of the different revenue streams to forward an anti-streaming agenda.
• David Lowery’s widely-distributed blog post on Pandora also referred specifically to his songwriting revenue. See: previous bullet point. Plus, I debunked this here.
• The number of streams quoted by Byrne to make minimum wage for a group of four people comes from data that is actually four years old. Based on royalties rate my own label receives, the figure in 2013 would likely be around 75,447,280 streams a year. This is 68% lower than the figure Byrne mentioned, and while still a large number, the decrease is an indication that Spotify’s royalties are improving as adoption increases.
• Similarly, based on Byrne’s presumption of a 15% royalty rate, each Daft Punk member would earn close to $42,000 each for “Get Lucky”, not the $13,000 Byrne claims. But the 15% is likely a very low figure considering that Daft Punk’s record was the subject of a major label bidding war that certainly resulted in both a high advance as well as a higher royalty rate.

The rate that I used for the above math is $.00533 per stream, which is the blended worldwide gross royalty rate for Spotify that my label personally received for all recordings in a sample month from 2013. The rates for each song vary depending on how many plays are from subscription vs. non-subscribers. The rates also vary greatly from country to country, which can be as low as $.002 in countries such as Poland and Estonia, and get as high as nearly a full penny per stream in many of the Scandinavian countries with large adoption rates.

One of the issues artists need to wrestle with in a new streaming world is their ability to attract a global audience. If our music catalog were only attracting a US audience on Spotify, our rate would actually be lower than our overall royalty average. However, we’ve been able to have music that attracts people throughout the world which raises our overall rates. This also occurs with iTunes revenue, which typically pays out at higher rates in first world countries than the US does.

Another issue is the need to have a large body of work. I have been an advocate of artists releasing more music more often. This both creates more opportunities for revenue as well as more possibilities for a song to become popular enough to sustain an artist. Complaining about Spotify’s royalty rates and focusing on individual song examples rather than whole artist catalogs is a classic misdirect. It’s similar to when news media describe a trend, yet focus on one individual’s story (as outlined in Barry Glassner’s great book ‘The Culture Of Fear’). Saying that each member of Daft Punk only got $13,000 for one hit song sounds scary. Yet add in the streams from the other tracks from the new album, and then add in the new Spotify streams for tracks from previous albums that almost always occurs with new hits (not to mention the correct math). Even with Byrne’s likely incorrect assumption of a 15% royalty rate, each member of Daft Punk is likely to be receiving over $500,000 this year. Each. Just from Spotify. Music royalties are part of the reason that Celebrity Net Worth cited the duo as the #2 richest electronic DJs in the world.

But part of Byrne’s doomsday scenario is a world envisioned by Spotify dominance. For my label, Spotify only represents 15% of all digital revenues, and gets smaller when other income streams are factored in. Logic would dictate that as Spotify’s percentage of sales increases with us, so would the amount of streaming because they also would bring along more music listeners. In the last year, this has indeed been the case.

Byrne, however, points out that he’s concerned about tomorrow’s revenues, stating that if Spotify’s growth continues, there won’t be other sources of revenue. A very similar argument made around similar technology shifts such as the advent of radio. Yet my royalty statements include revenues from brands such as EMusic, Nokia and Myspace, all brands that have been left for dead. The future will certainly see the royalty percentage mix shift, but it will likely be one where some people stream, some download, and they’ll all do it on a variety of different types of sites around the world.

The real issue is the larger question that Byrne addresses about the overall effect free and cheap streaming has. But the issue is really about supply and demand. Spotify as a whole is paying out hundreds of millions of dollars yearly, which is a net positive for recorded music. But even with the claim that 4 million songs go unplayed, there’s still tens of millions that are, which means the collective pie of revenue is spread much thinner than it ever has. The good news is the new music business allows more artists in. The bad news is that most get paid less because the pool doesn’t grow proportionally.

The fundamental issue an artist has to deal with is not one of royalty rates, but this simple concept of supply and demand. If any service, download or streaming, is going to have millions of tracks at your fingertips, than there is an overabundance of supply. The only way to make money is to increase the demand by a significantly higher factor. By this simple definition of business, music is in the volume business game. Those who are able and willing to play that game are reaping enormous benefits.

The other way to combat supply and demand is by creating diversified revenue streams. Each artist I’m currently working with has a different mix of what those streams look like. But the important thing is that while there may be one dominant player in one revenue stream, that doesn’t mean that this is all recorded music revenue streams. Our label generates revenue from download sales of singles, download sales of albums, streaming transactions on demand, streaming transactions in radio players, online licensing revenue, sync revenue, performance revenue, direct sales from band websites, road sales, advertising, and even physical product.

So, in a way, I’m thrilled when artists choose to take their music off Spotify. Because in a small way, this limits the number of songs that may take attention away from songs in my catalog. We are still in the throes of a very disruptive period that is clearly resulting in winners and losers. There are many successful artists, both commercial and creative winners, who are not complaining about royalty rates. They are focusing on making amazing music that is desired by many people the world over. Rather than Byrne’s comment on the internet sucking “all creative content out of the world”, what’s actually happening is artists are finding even more creativity to succeed. Because that’s what artists do. Those that focus on improving their craft and growing their body of work are finding varying levels of success. At that point, the math starts to take care of itself.

PANDORA ROYALTIES: THE REAL ANSWER

Pandora royalties came under fire once again last week, with a firestorm of blog posts pointing a ton of virtual fingers. Facts become “facts” as each side is skewing the story to their benefit. All sides should take equal blame for misrepresentation. The truth is that online plays equal audience impressions, and this disparity causes confusion on both sides. When you do the actual math, Pandora is likely paying songwriters less than other broadcasters, but also has a royalty at an enormously higher multiple compared to others for their “all in” rates. Yet even if royalty disparities get fixed, it won’t solve the issue of low payments to artists and songwriters because Pandora’s enormous catalog means tiny slices to a greater range of creators.

For those who haven’t been following, here’s what happened:

Read More…

PATIENCE PAYS FOR SPOTIFY ROYALTIES

For several months, I’ve heard a lot of complaints on how little Spotify pays indie artists. So I was kind of surprised that very few picked up the story that Spotify is actually, well, starting to pay indies more.

Evolver.FM said that a confidential report from Merlin (the indie label trade organization rights agency) is showing strong revenue growth from Spotify. The reason is an increase in subscribers and usage overall. One would also suggest that the Facebook integration is starting to show up in royalty statements in recent months as well.

As an indie label owner, I get the pain of small micro payments. But I also get the concept of patience. We all dream that our song will be released, spread like wildfire, and generate huge instant digital revenues. Lately, Bob Lefsetz has been promoting the idea that great music finds its audience no matter what, further reinforcing a false notion that great things are instant successes.

But let’s take a look at one of the biggest songs of 2012: Fun’s “We Are Young”. This is the Google search trending for the song over the last year. The song was released in September 2011. This critically acclaimed song produced…barely a ripple. In fact, it didn’t do much until the spike in December which was the result of appearing on the show Glee. Then it dropped off, though maintained a higher popularity than before the show. But it wasn’t until the use in a Super Bowl ad that everything kicked into high gear and the upward ascent began. This popular hit did not go viral out of the gate. It took traditional TV placements for people to see it.

The success occurred because everyone was patient. In fact, the band’s manager Dalton Sim said as much in a Billboard cover story in March.

From my perspective, the success comes from the hard work the band, Nettwerk Records and Fueled by Ramen have put into the band for the last three-plus years to develop a real fan base.

So when it comes to services like Spotify, it appears that patience just might pay off as well. At one point, YouTube didn’t pay anyone. Now they are a top revenue driver for many artists. Financial success at any level is not an overnight story for artists or companies for that matter. However, working towards those greater successes can yield bright futures for all.

UPDATE: As Jim Mahoney of A2IM pointed out, Merlin is not a trade organization, but a rights agency.