Tag Archives: pandora

UNDERSTANDING SPOTIFY

Screenshot 2014-11-07 10.53.26Young people prize “access over ownership”. This sounds like the kind of thing a digital music strategist like myself would be saying to support streaming services like Spotify. However, that’s not where the quote comes from. This was said by Sheryl Connelly, who is the head of Global Trends and Futuring for the Ford Motor Company. That quote was in reference to cars and was made two years ago in an article in The Atlantic. If the access model is affecting the business model of automobiles, what chance does the music business have to change that tide?

The fear that causes an artist to withhold music from Spotify is based on emotion rather than fact. The access/streaming model is scary largely because consumers are given greater choice. A purchase model requires the consumer to make a decision on which artist to support, thereby distributing money into the hands of fewer artists/labels. The access model gives the consumer such a wide choice that they can listen to a greater variety, thereby distributing money into the hands of a larger number of artists/labels.

Yet when faced with the choices that Spotify provides, most consumers shut down and don’t choose much at all. This phenomenon is called The Paradox Of Choice, and was outlined in the book of the same name by Barry Schwartz. Many Spotify users deal with choice by defaulting into playlists that reflect their style or mood at the time they want to listen. In observing the Spotify charts over the last year, the major deviations in weekly play counts almost always correspond to being added or dropped by a playlist.

Spotify’s growth in 2014, like nearly every other digital company, has mostly been in the mobile space. What makes that interesting is that you can’t listen to a particular song on demand on Spotify’s free mobile service. You are forced to listen to music on a random shuffle instead. Most of that listening, by app design and consumer choice, goes to playlists. By extension, this means the majority of free plays on Spotify are just a different iteration of internet radio.

When you understand that, limiting music to the paid-only version of Spotify becomes an obvious mistake. That’s because much of the revenue generated in the free tier doesn’t come from the consumer’s choice, but rather the choice of the playlist creator. If an artist is not on the playlist, they wouldn’t get much of that free-tier money anyway. Conversely, a song chosen on a playlist creates new revenue that wouldn’t exist otherwise.

Screenshot 2014-11-07 10.54.59Therefore, looking at the “free tier” revenue thru the comparison to sales is incorrect. The much more accurate comparison is internet radio. By that measure, Spotify should be embraced as this tier pays a higher royalty rate than Pandora does. Furthermore, Spotify playlist choices are made editorially by either Spotify’s team or individual users around the world. Pandora’s choices are made by algorithm, which leaves exposure decisions to largely be made by machine. From this perspective, artists of all sizes should be embracing Spotify’s model. Pulling music from Spotify’s free tier is akin to dropping songs from a top radio company that appeals to listeners 25 and under.

By understanding this ecosystem, my label DigSin has been experiencing exponential growth from Spotify, and I know we’re not alone. Our marketing division, DigMark, is also being hired by both majors and indies to help navigate this brand new world. With any disruptive technology, emotional response to fear often creates counterproductive decisions. The usage patterns of both free and paid Spotify users show both ecosystems to be smart opportunities for all artists. I strongly urge the music community to not be blinded by emotion. Instead, understand the data and embrace the digital disruption.

“The only way to win is to learn faster than anyone else.” – Eric Ries

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:

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RADIO ROYALTIES: WHAT THE BIG MACHINE/CLEAR CHANNEL DEAL MEANS TO YOU

This week has been a big one for radio royalties. On Tuesday, the Big Machine Label Group, home to Taylor Swift and probably the largest independent record label, cut a deal with Clear Channel, the largest owner of radio stations. The deal allows the label, and subsequently the artists, to get royalties for airplay on the radio. Your average person may presume that your favorite singers are already getting paid when they hear a song played. The truth is that the U.S. is one of the last countries to NOT pay.

The deal breaks a long-standing log jam between radio stations and record labels. Yesterday, the deal dominated a Capitol Hill hearing run by the House Communications and Technology subcommittee. While there is still a lot of work for other labels to come on board, there’s a lot of positive talk coming from the hearing. Little details are known about how the deal is structured. However, the deal is largely viewed as a way for Clear Channel to move away from internet streaming royalties being a variable cost (pay per song played) and become a more reliable business model (likely a percentage of revenue). This is certainly going to be a great deal for both sides in the long run, otherwise they wouldn’t have struck it.

The question, though, is what does this deal for radio royalties mean for the music? What does this mean for a song’s chances of getting played and earning the most money possible? This was something that readers of Futurehit.DNA have been long prepared for, and avid followers have already been creating music prepared for this reality. In Chapter 2 of my book, I discuss how inevitably the variable cost of “per play” would have to move to a more manageable structure. This has a significant impact on how an artist earns money from the internet, and now likely terrestrial radio. Here’s what I wrote on how an artist could inevitably prepare for this day:

If that loophole is, indeed, closed, it will likely put songs on more equal footing. But it only changes the strategy if you are a performer or songwriter. If this change occurs, a programmer will not care about the length of a song, as his cost structure becomes relatively static. The performer, however, will want to take up as much listening time as possible in order to collect larger royalties. Longer songs would simultaneously block other songs from playing at the same time, therefore depriving other artists from royalties.

For an artist and record label, as other labels and radio groups come on board over the next few years, the strategy shifts subtly. In recent years, one needed to push their songs to be slightly longer than the competition to make it more cost effective for internet radio outlets. Now, we will be moving to a scenario where the length of a song won’t affect the outlets. They can play thousands of songs and still have a fixed revenue target of how much they have to pay artists and royalties.

Some likely scenarios that will develop with online radio:

* Genres with high “skip rates” become more cost-efficient. Urban music formats tend to have a higher likelihood of people not listening to a whole song. This leads to an increased ARPH (Average Royalty Per Hour) and is cost-inefficient for an internet outlet. With that barrier removed, online radio will be more likely to promote Urban music and provide potential growth.

* Oldies artists will finally start seeing revenues. One doesn’t see a lot of promotion for oldies radio not so much for its lack of popularity, but for its cost. Songs prior to 1968 or so tended to be 3 minutes or less. This made those formats more costly to stream online, so their promotion was de-emphasized. These artists now stand to start making more money just from additional promotion. Add in the numerous traditional oldies radio stations that never paid, and this class of music now stands to benefit tremendously. Considering that many of these artists have had fewer sales in recent years (their audience tends not to buy as much), they stand to gain the most per capita.

Some scenarios that will likely occur with new music:

* Radio will be moving back to 3 minute songs. Between short attention spans, need for variety, and that ever present “more songs per hour than the other guy” liners, radio stations will be demanding shorter songs. Taking away the higher royalties per hour such songs incur online just adds to the incentive radio stations will have on asking for songs at that length. These songs will subsequently also research well. As radio’s power makes these songs more popular, it will have the dual effect of driving up demand on pure-play internet radio (such as Pandora) and driving up their costs when they can’t move to a percentage of revenue model. This will only increase the power of traditional radio companies in the music space.

* Intros will remain short for quite awhile. Clear Channel has been signaling for awhile that they take digital seriously. Their iheartradio has made significant traction against Pandora, for one. This airplay, and revenue, will be an ever growing percentage of the exposure their company can give a song. The research garnered from the app may actually be an influential element to the traditional stations. As they are more financially aligned to push customized stations, the need to have songs impact quickly becomes exponentially greater.

* Soundexchange will be a different business. As more deals covering multiple revenue streams come up, they will also circumvent digital revenues going directly to Soundexchange. For label artists, it will also mean direct payments from them will go thru the label first. To be competitive, Soundexchange will also likely need to find percentage of revenue solutions for many other online radio outlets or those services may go out of business.

For those who are long-time readers of Futurehit.DNA, none of this is new information. For those who are new to this blog, this information is only the tip of the iceberg of what’s to come in music in the next decade. The Clear Channel/Big Machine deal will not drastically change anything today. More labels need to sign up before that happens. But it is a clear sign of where things are rapidly heading for new music discovery. I hope you’ve read Futurehit.DNA to be prepared!

PANDORA AND SPOTIFY ARE NOT COMPETITORS

Last week, Pandora announced their first post-IPO earnings report. They did post a loss, but they had higher revenue than Wall Street expected. This was not only good news for Wall Street, but also for artists and labels who get royalties from Pandora airplay.

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