Jay Frank of FutureHit.DNA notes that for music labels, a streaming music customer is “now worth nearly 15% more than the person who bought music either digitally or physically.” In this third industrial revolution, that's not surprising. Streaming music services are the logical service for this age of abundance while purchasing music made more sense in the age of scarcity, however artificial that scarcity was.
Frank recommends artists face facts about the economics of this new age.
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.
The first two are just reality. The last one is curious: how does one create a song for repeat playability across the years? What are the qualities of such a song? One can ask the question another way: do some artists knowingly create music that is disposable? That would only seem to make sense if it was easier to do so, otherwise why wouldn't one want to create something longer lasting? All things being equal, you'd prefer the longer cultural relevance and a revenue stream that more closely resembles an annuity.
Despite the great consumer experience that is streaming music, I'm less bullish on the financial attractiveness of that industry. Companies like Pandora, Spotify, and Rdio will all suffer from the wholesale transfer pricing problem. The labels have a unique asset, the digital streaming rights to millions of songs, that all those companies require to survive, and the labels will continue to adjust the pricing to squeeze all the margin out of the business.
There is a path forward. Video sites like Netflix, Hulu, and Amazon all suffered through the same problem as studios licensed back seasons of shows for exorbitant fees, often to multiple buyers who ended up with undifferentiated offerings on which to charge meaningful subscription fees. Still, all of them had to license a meaningful enough library, let's call it tonnage, to serve as a base for a service. From there, all three turned to financing original content that they'd own exclusively as a means of differentiation.
The music streaming services may have to take a similar approach and compete with the labels head to head in working with artists directly to handle the jobs further up the value chain like production and marketing. I've long thought Spotify, as the leading streaming service in subscribers, should become a music label of its own.
It's a costly road, and the payoff is not immediate, but at least it offers the possibility of future profits which might never materialize given the terms the music streaming services have to work with now.