Streaming and the Music Industry: What it Means for the Artist

Ever since the advent of the record label concept, the journey from creation to revenue has been a long one: for the artist.

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Since 2003, users have been able, in some capacity, to stream music online without downloading the content to their device. This change has been hailed as a godsend for the music industry. Looking at the aggregate data, the numbers indicate a steady increase in revenue coming from digital music sales:

Streaming first came onto the scene between 2002 and 2003, but it did not take hold in the market until around 2010. Every year since then, the number of users has grown exponentially. Pandora has grown from 47.6 million active users in 2010 to 81 million by the end of 2017. Spotify, now the world’s second largest streaming site behind Youtube, has grown from 15 million active users in 2012 to an astonishing 140 million users by the end of 2016. With about 1 in 4 Spotify users paying for the premium version, the monetization of on-demand audio streaming has meant a sharp increase in revenue for the music industry. But the “music industry” encompasses all stages of the musical process, from the creator in the studio, to the studio operator, to the CEO of the streaming website. While revenue may be increasing for the industry as a whole, the distribution of this revenue is changing every year, with more money coming from streams and less coming from downloads. Here’s what it looks if streaming revenue is removed:

Single and album downloads, once a major part of a musician’s income, are trending downwards. Singers and musicians are forced to rely on live performances and streaming revenue to make up for lost income.

So is this happening? Are musicians themselves taking in enough revenue from streaming to offset the losses in downloads? Let’s see what the math says:

According to a European Commission Report, for every 47 times a song is streamed on Spotify, that same song is not illegally downloaded once. Music pirating has been a problem for the industry ever since the advent of the personal computer, so this is good news for the industry as a whole. In terms of revenue, this is less significant: those who weren’t legally downloading music before are still using methods of consumption other than legal downloading, and so the real impact of this decrease is slim to none for the musician. That statistic is one used by the streaming industry to make the positive impact seem greater than it truly is. The important figure here is how streaming affects legal downloads. This is revenue diverted from the artist’s pocket into the hands of streaming services. While some money eventually finds its way back to the content creator, it all depends on who owns the rights to the content. This is what separates an unsigned artist from a signed artist. While unsigned artists owns the rights to their music, signed artists often sign away a portion of those rights to the record label in exchange for the use of record label infrastructure including recording studios, tour support, and marketing and promotion. Understanding the structures of these deals is crucial when exploring the changes in musician revenue when a song is downloaded versus when it is streamed 137 times (the accepted ratio from the EU): 

At first glance, this change looks to be positive. Every 137 streams, the rights holder(s) are actually taking in an additional 13.7 cents versus if that same song had been dowloaded. For an unsigned artist who holds the full rights to his/her music, this additional 14 cents can be counted as gains. However, this is not the reality for many musicians who choose to sign to a record label. For those who choose (or have no choice but to choose) to work with a record label, the reality is much different:

The way record deals are structured, artists are often given a significantly smaller percentage of streaming revenue when compared to download revenue. The chart above compares the average cut for signed and unsigned artists from three different sources.

Taking into account these figures, which you can see for yourself in David McCandless’s infographic, the picture looks quite different for the signed artist. With artists only receiving about 16% of streaming revenue versus approximately 28% of digital download revenue. So what can a signed artist expect from the streaming revolution?

This means that for every 137 streams:

  • On Spotify, signed artists are losing .0793 in revenue
  • On Youtube, signed artists are losing .1889 in revenue

Keep in mind these are aggregate numbers and industry averages. Nonetheless, the data show just how much artists are losing from this new form of consumption. With the streaming revolution taking the music industry by storm, record deals have not yet caught up. Until artists begin to restructure their deals, revenue will continue to dry up as more and more users switch to the streaming model.

But what about the exposure these artists receive from placement on streaming sites? This is extremely hard to measure, but it is a factor that should be taken into consideration.

The Exposure Factor

A critique of streaming cannot be done without examining the potentially positive effects that streaming has on artist success. Many musicians have hailed streaming as the leading cause of their growth in popularity. For many artists, this could very well be the truth. A survey conducted by Edison Research posed the question, “How do you stay up to date with music?” to 2,000 US residents above the age of 12:

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Data collected by Edison Research and Triton Digital show how streaming services have not caught up to traditional means of music discovery. However, while they may not be the most popular, sites like Youtube, Spotify, and Pandora are still playing a major part in how consumers find new music. As Spotify continues to gobble up market share, many expect that 33% number to continue to grow in the coming years.

More evidence can be found from the same Edison/Triton report: according to a similar survey, 10% of respondents used Spotify as their number one source for keeping up-to-date with music, compared to 4% the year before. That same number is an astonishing 20% for 12-24 year olds. It’s clear from these numbers, coupled with anecdotes from individual bands, that streaming is making bands more visible to listeners. This change in the musical landscape can be boiled down to this: If you’re an above average musician/band, streaming makes breaking from the pack less difficult. If you’re just like everyone else, forget it; exposure means nothing if the audience doesn’t like what they’re exposed to. 

So streaming benefits those with talent versus those without, as it should. But does the effect also differ between signed and unsigned artists? The possible differentiating factor lies in the role record labels play in a band’s existence:Screen Shot 2017-12-10 at 2.52.51 AM

Today, 3 major record labels (Universal, Sony, and Warner) control about 78% of the total market. For these labels, the standard practice is to throw money at newly signed artists in hopes that a handful will make it big and turn a profit for the label. The general estimates for the sizes of these investments were calculated by the International Federation of the Phonographic Industry. Of course, for any singular band, these figures can vary widely depending on artist age, current fanbase size, and type of group (boyband vs jazz trio). After this initial investment, artists are indebted to the label, and large percentages of earnings go straight to the label until the initial investment is recouped. So, in a roundabout way, artists are paying for “marketing and promotion,” otherwise known as exposure. Before the internet and streaming, being attached to a label was the most effective move to get your name out there. Nowadays, for the unsigned artist who is using a more grassroots approach to marketing, he/she is able to connect with consumers at little or no cost to him/her.

The effect of streaming as a tool for exposure is more powerful for the unsigned artist apposed to the signed artist for two reasons. For one, while both are not paying Spotify for the exposure their bands receive, many signed artists are already paying for this service elsewhere. the unsigned artists are getting for free what others are paying thousands of dollars for. Secondly, the exposure received from Spotify will have less of an impact on the signed artist because their potential audience is already being tapped into by targeted marketing. Assuming record labels are doing their jobs, fans of Mexican music may have already been presented with your new mariachi Christmas album, so seeing it again on a streaming site is not likely to turn them into a fan. But, as they say in the entertainment industry, there’s no such thing as bad publicity.

Conclusion: What Can Artists Do?

When Taylor Swift dropped her 2014 album entitled 1989, it was nowhere to be found on any streaming service that offered a free tier for users. The reason for this was, according to her TIME magazine interview, “I think there should be an inherent value placed on art. I didn’t see that happening, perception-wise, when I put my music on Spotify.” At the time, she vowed Spotify would never feature her music. But today, you can find her entire catalog on the site. So what changed? Spotify has grown at such a rate that even the biggest artists with the most loyal fanbases cannot afford to keep their catalog off the site. But Taylor’s camp didn’t just hand over everything at once; they employed a tactic known in the business world as price discrimination.

The Taylor Swift Tactic:

For her most recent album, Taylor waited until two weeks after the album’s initial release before making Reputation available on Spotify. Doing so encouraged fans to download the highly anticipated album; for an artist like Swift, many super fans (known as Swifties) simply could not wait for the album to be released on streaming sites. This is an example of third-degree price discrimination, when a producer separates customers into different groups and charges them different prices according to their demand elasticity. One group, the Swifties, paid $13.99 for the album, or $1.29 per song. The other group, the casual fans, paid indirectly through streaming revenue weeks after the release. Artists must the right inflection point for streaming release in order to maximize profits. The more rabid your fans are, and the more highly touted your release is, the more effective price discrimination will be.

Restructuring Deals:

As discovered earlier, artists signed to a record label are, on average, receiving 28% of the rights holder cut from iTunes downloads while only receiving 16-17% of the rights holder cut from streaming services. As streaming services continue to represent a larger share of the music market, artists will be left for dead if these deals are not restructured. Yes, this is easier said than done, but the new age of music also brings about more artist autonomy.

In the 20th century, record labels owned infrastructure that artists required in order to have a career in music. Today, with a small investment, unsigned artists can put together their own recording studio and promote themselves through social media. This gives artists more bargaining power in contract negotiations. It is tough to make predictions at this point with the landscape so rapidly changing, but we could be heading for a time when artists choose en masse to ditch the major labels and use the tools of streaming and social media to chart their own course.

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