Streaming Is the Future, Spotify Is Not. Let’s talk Solutions.

It’s not that streaming can’t work. It can. It’s that Spotify is a bad business model that has unsustainable economics and exploits artists because it is a wall street financial instrument and not a music company.

We’ve previously published a couple posts on streaming music where we explore how access models and windowing are working for the film industry and could serve as a guide to the record business. We’ve also shown how transactional music purchases have made legal music consumption the best value in the history of recorded music.

The key to building streaming business models that make sense and are sustainable is to increase the subscription fees, utilize well thought-out windowing models and experiment with new pricing tiers for access based services.

Historically the music business has employed the use of special markets such record clubs  (remember 11 CD’s for one penny). It’s not that record clubs were bad, in fact numerous studies found them to be great source of additional revenue if managed in a way that did not cannibalize front line sales. (Remember 12 month record club holdbacks?) Now we need to strike the same balance with streaming services.

So let’s get real, the Spotify business model and streaming math just does not work and can not work in it’s current form.

Here are five suggestions to get music streaming back on track as a viable business model.

1) Minimum Payment Per Play

You want to give your service away? Fine, but artists and rights holders are not going to subsidize your business by devaluing our work. No plays without a minimum royalty–including the “free service”–and all plays pay at paid subscription rates. If you can’t sustain your business doing this, then you need to rethink how your business works. Your bad business model is not our problem. Maybe an unlimited, non-graduated free tier is a really, really, really bad idea. 30 Day trial offer, ok. Virtually unlimited free access, no.

2) Windowing

The music business must embrace windowing to maximize revenues across all distribution channels and platforms. It’s so basic we can’t believe artists and labels are not utilizing this to greater effect. The first 30 days of a new release could be limited to transactional streaming access by the day, week, or the month at different price points. Likewise, perhaps only two songs from an album are made available on streaming platforms for the first year of release. There are many unexplored variations and options.

3) Transactional Streaming

The music business needs to embrace new models such as “transactional streaming” much like VOD exists for film versus transactional downloads or physical product. There is no reason why streaming distributors should have every title, ever released, for one fixed, flat price. Again, new releases in particular should be priced as transactional streams where the consumer can chose between low cost limited access to a new release, or pay more for a transactional download.

4) Tiered Pricing based on Access and Consumer Value Proposition

Just like cable tv and SiriusXM, one possible solution is to create price tiers based on access. For example, catalogs can be curated into genre and lifestyle packages. Creating bundled packages adds value to both the end user and the streaming service. Individual packages can be as little as $4.99 a month, and complete access could priced at $49.99 a month. Again, there are many unexplored variations and options.

5) Move Beyond Stockholm Syndrome

The answer to every attempt to introduce real world economics to the marketplace can not be met with “or else they’ll steal it.” We already know that. They have been stealing it for over a decade (thank you Mr. Ek for your contributions to uTorrent). The film industry is not approaching streaming with a gun to it’s head offering every title ever made on every platform for one low monthly fee. Itunes is the single most successful dedicated online music business ever, and it doesn’t have a “free-tier”.

Isn’t it odd that companies like Pandora and Spotify that are not profitable and don’t support artists are thought to behold some kind of gnostic wisdom of economics that defies all logic and reason? Last year Twitter lost $645 million dollars. Record labels have been profitable for over half a century with a sustainable ecosystem that invests in artists and new talent, while also creating hits and stars. It’s time to leave the rainbow unicorn school of economics and faith healing behind and develop real business models based on real economics.

Anyone remember the dot com bubble? Where is mp3.com now? Things can and do change fast in web/tech. Any talk of the “record industry” without MySpace in 2004 and you would have been laughed out to the room. Where is MySpace now? Spotify can (and very well may) quickly become MySpace. So let us all focus on how to make streaming actually work for all stakeholders and not only those with equity… it’s just math.

RELATED:

Who will be the First Fired Label Execs over Spotify Fiasco & Cannibalization?

Why Spotify is not Netflix (But Maybe It Should Be)

Mythbusting : Music Is Too Expensive!?

Who will be the First Fired Label Execs over Spotify Fiasco & Cannibalization?

We don’t know if the rumors are true, but we’re hearing rumblings from the upper echelons of the music business that top management is very unhappy with the cannibalization of the transactional business that is being accelerated in a death spiral towards a $3b record industry.

Did you guys get this headline on the midyear sales figures, U.S. Music Revenues Down Nearly 5%, Says RIAA. Early end of year estimates are that 2014 could see a double digit year to year drop by as much as 12%. As we’ve said before (and others are catching up) it’s just math.

We’re also hearing panicked and desperate distribution executives wanting to double down on streaming by reducing the subscription fees to accelerate scale (not everything Apple says is good for you, remember?).

So we have to ask, are you kidding us? The only thing that is going to accelerate is how fast you lose your job as you kill what’s left of the transactional business.

If you own a calculator, let’s just do the math one more time, real slow and simple like…

1) Spotify and former uTorrent CEO Daniel Ek says Spotify only needs 40m paid subscribers for streaming to be sustainable for artists. But that math just doesn’t work.

2) $10 per month subscription = $120 per year per subscriber

3) $120 per year, per subscriber paying out 70% of gross to rights holders equals $84 per subscriber, per year.

4) $84 per subscriber, per year x’s 40 million subscribers equals $3.4b per year in top line gross revenue to ALL rights holders. That’s $3.4b for labels, artists, publishers and songwriters combined.

5) $3.4b per year is HALF of the current revenue of $7b per year where the domestic business has been flat lined.

6) Assuming you could DOUBLE the subscription base to 80m PAID in the USA within two years by dropping the price in HALF to $5 per subscriber per month you still only gross (wait for it…) $3.4b a year in revenue.

We know this is shocking to the math impaired, but doubling scale (imagined as it is) while cutting the subscription fees in half, actually nets you the same amount of money. Shocking the things one can learn with a calculator or a spreadsheet.

Do you know how else you can achieve scale faster? Free. Free scales fast.

Free scaled fast for Napster.

Free scaled fast for Grockster.

Free scaled fast for Kazaa.

Free scaled fast for Limewire.

Free scaled fast for BitTorrent.

Free scaled fast for The Pirate Bay.

Free scaled fast for YouTube.

All of these have three  things in common.

1) Infringement as a business.

2) Fast scale.

3) Subsidized by artists and rights holders who are not compensated.

The con men have been conned and the only way out is an exit strategy that is so disconnected from the monetization of music that there is literally no longer a connection between the artist and the revenue they create.

So how realistic is that magic number of 40m paid Spotify subscribers in the US?

Here’s what subscription based services look like right now. Netflix only has 36m subscribers in the US, no free tier, and massive limitations on available titles of both catalog and new releases. Sirius XM, 26.3m in the US as a non-interactive curated service installed in homes, cars and accessible online. Premium Cable has 56m subscribers in the US paying much more than $10 a month and also with many limitations. Spotify… 3m paid subscribers in the US after four years. Tell us again about this strategy of “waiting for scale.” Three Million Paid… Three…

* 3m Spotify Subs Screen Shot
* 26.3m Sirius XM Subs Screen Shot
* 36m Netflix Subs Screen Shot
* 56m Premium Cable Subs Screen Shot
* $7b Music Business Screen Shot

Given the above it’s not surprising that what we’re hearing is that the adults have let the children play with their Silicon Valley toys and they have been left alone along long enough to see the house burn down. And adding insult to injury, Spotify has been a complete artist relations disaster.

We’ve got bad news for digital distribution/ label folk.  The Silicon Valley lifeboat doesn’t have that much room in it for ex-record company executives who are bad at simple math. We know five guys who are not concerned about the future of the record industry and their names are Jimmy, Dre, Trent, Ian and Dave… the rest of you are probably not going to be so lucky.

What is perhaps the greatest irony in all of this is that the great rock & roll swindle has been on the record industry instead of by the record industry, but that’s another post.

So who’s head is going to be on the block when the year end head count reductions start? Hmmm…

RELATED:

Spotify Doesn’t Kill Music Sales like Smoking Doesn’t Cause Cancer…

 

Why Spotify is not Netflix (But Maybe It Should Be)

 

Spotify’s Daniel Ek is Really Bad At Simple Math, “Artists Will Make a Decent Living Off Streaming In Just a Few Years”

 

 

c3 ‪”#thatsongwhen 10k people listened, the artist got paid $60 and the major labels got stock options.”

c3, The Content Creators Coalition is enlisting musicians and songwriters to share their true stories of Spotify plays, payments and thoughts to raise awareness around unsustainable digital service royalty structures. Join in.

If you care about the economic rights of artists in the digital domain, join us in hijacking Spotify’s new twitter hashtag campaign. Got your own numbers to share? Like so: Fun with new Spotify hashtag campaign: “#thatsongwhen 10k people listened, the artist got paid $60 and the major labels got stock options.”

We do believe in digital. But current rates are not sustainable. Spotify is using our music like venture capital and promising better returns later while they pay their employees and hire expensive ad firms to create the above hashtag campaign.

thatsongwhenSarahManningthatsongwhenTessaMakesLove thatsongwhenMarilynCarino

FOLLOW c3 ON FACEBOOK:
https://www.facebook.com/ContentCreatorsCoalition
https://www.facebook.com/pages/ccc-nycorg/

* BREAKING * Spotify Launches Secret ‘Information Tour’ to Convince Top Artists… | DMN

Breaking from Digital Music News:

Currently, we know of three confirmed dates in the US: October 6th (ie, today) at the Soho Club in New York, October 8th at City Winery in Nashville, and October 10th at a private residence in Los Angeles (complete details on these dates below).  The US-based sessions that we know about are being coordinated through the Music Managers’ Forum (MMF), with the Featured Artists’ Coalition (FAC) potentially bringing serious, high-wattage superstars to the table.

TO ATTEND PLEASE RSVP TO: fiona@thefac.org

READ THE FULL POST AT:
http://www.digitalmusicnews.com/permalink/2014/10/06/spotify-launches-information-tour-convince-top-artists

RELATED:

Five Important Questions For Spotify from Artists and Managers

A Tale of Two Pirates? Daniel Ek (uTorrent) and Kim Dotcom (Megaupload)


Music Streaming Math, Can It All Add Up?

Five Important Questions For Spotify from Artists and Managers

If artists and managers were to find themselves in a room in the coming weeks with representatives of Spotify there are some questions which should probably be asked and some issues which should probably be raised.

Spotify is working hard to convince musicians that they are not the enemy. We appreciate that the service is legally licensed. We also recognize that the major labels have a different relationship to Spotify than most artists ever will as it has been reported the major labels collectively have at least an 18% equity stake in the company.

What is particularly troubling about these equity positions (same for the Beats sale to Apple) is that we don’t know of any artists who benefit from their work being used as the leverage for the labels equity participation.

So with this in mind here are five questions artists and their managers could ask Spotify…

1) At what scale and price point is Spotify actually sustainable for artists? 

Daniel Ek says it’s 40m paid subscribers, but that math just doesn’t work. 40m Subscribers x’s $84 per year = $3.3b in annual global revenue to artists and rights holders (assuming they really are paying out 70% of gross). Here’s the simple math* : 40,000,000 x’s $84 = $3,360,000,000

* 10 a month per subscriber, x’s 12 months = $120 per year per subscriber. $120 per year per subscriber paying 70% to rights holders is $84 per year per subscriber.

The current domestic record business is bottoming out at about $7b annually.

When confronted with this fact, “Investor and Artist In Residence” D.A. Wallach recently responded publicly that “Itunes has more than 40m users.” Ok, fine. We showed you our math, how about you show us yours. Once that’s out of the way, let’s ask the second question…

2) When do you think Spotify can realistically achieve a sustainable scale for artists?

Given that Netflix only has 36m subscribers in the USA and that there only 56m premium cable subscribers in the USA why does anyone really think Spotify will have more than that anytime soon? Spotify is reporting only 10m paid subscribers, and that’s for the entire world. Sirius XM as a mature business, which is installed in homes, cars and is also accessible via the internet only has 26.3m subscribers across all platforms.

Does anyone really think that Spotify is going to ramp up to over 80m paid subscribers in the USA alone anytime soon? We’ve detailed this math before, it’s not pretty and it’s right here.

3) Why not publicly show the full tables of equity participation’s and the distribution of payments, including the rate of pay to all stakeholders? If Spotify is really paying out 70% of revenues, let’s see where it is really going and who is getting what share.

We already know that majors (and possibly Merlin) are getting preferred rates.  Say what you will about Apple but everyone knows that take a flat 30% across the board. It’s a transparent business. If Spotify wants to talk about transparency and openess, they should lead by fully disclosing this information.

4) Why should artist trust a business created by the same person who profited massively from the illegal distribution of artists work, without compensating them?

According to Wikipedia, Daniel Ek the CEO of Spotify was also “CEO of µTorrent, the world’s most popular BitTorrent client with more than 100 million downloads.” uTorrent makes its money the same way The Pirate Bay does, by monetizing the distribution of infringing works with advertising revenue.

5) Why not publicly and vocally join the fight against Ad Funded Piracy? Why not publicly endorse and support legislation (like SOPA) that would stop illegally operating businesses like uTorrent from destroying the lives of creators?

Well, this should be pretty obvious given that the CEO of uTorrent is now the CEO of Spotify. We all know there is a lot of money being made in the distribution of music online. Unfortunately that money is not being paid to artists in a meaningful and sustainable way. In the case of uTorrent artists don’t see a penny. Spotify paying fractions of a penny to artists per play is functionally of little difference to most artists.

The simple truth is that the fundamental problem with Spotify and other businesses like it, is that the cost of goods is grossly undervalued. In other words, the only way that streaming really works is to increase both the price of subscriptions and the number of paid subscribers. Of course we understand the appeal of having musicians subsidize their business, but in a word that is just unsustainable.

One last point… Stop with the misleading press and stories about Spotify growing the transactional business. It’s not. It’s not going to. Spotify is cannibalizing the transactional business into accelerated decline without replacing the revenue that is being lost. If this trend continues we’re knowingly pursuing a death spiral from a current $7b annual business in the US to a $3b annual business.

It’s not that complicated, it’s just math.

RELATED:

A Tale of Two Pirates? Daniel Ek (uTorrent) and Kim Dotcom (Megaupload)

 

A Detailed Explanation on Why Streaming Has Failed…

 

Streaming Isn’t Saving the Music Industry After All, Data Shows…

 

Sorry, Streaming Isn’t Saving the Music Industry In 2014…

Spotify Doesn’t Kill Music Sales like Smoking Doesn’t Cause Cancer…

This just in from Digital Music News, we’re not surprised. The death spiral towards the $3b annual record business is accelerating… One word to artists and music executives reading this post… “WINDOWING”…

May 10th, 2013:

“We have data that’s proving and demonstrating the fact that streaming revenue is additional to actual unit download consumption or physical music sales…”

Katie Schlosser, Spotify Account Manager of Label Relations, speaking at NARM.

September 12th, 2014:

“Streaming consumers are buying few albums.  30 percent of consumers are music streamers and a fifth of these consumers pay to stream.  Streaming has driven new market growth in countries such as Sweden but in larger markets such as the US it is denting digital music buying.

READ THE FULL STORY AT DIGITAL MUSIC NEWS:
http://www.digitalmusicnews.com/permalink/2014/09/12/research-now-shows-streaming-kills-download-sales

RELATED:

Why Spotify is not Netflix (But Maybe It Should Be)

Spotify’s Daniel Ek is Really Bad At Simple Math

Merchants Of Doubt in Silicon Valley : What Every Musician Needs to Know About Ad Funded Piracy

Spotify’s Daniel Ek is Really Bad At Simple Math, “Artists Will Make a Decent Living Off Streaming In Just a Few Years”

The future of music for artist revenue streams seems more uncertain than ever. Digital Music News is reporting a quote from Spotify’s Daniel Ek on CNN Money which appears to show the failure of the companies CEO to perform simple math.

It should be noted that Daniel Ek was also the CEO of uTorrent, “the world’s most popular Bit-Torrent client” which is advertising funded.

Spotify CEO: “Artists Will Make a Decent Living Off Streaming In Just a Few Years” | Digital Music News

CNN: At what point can an artist survive on a Spotify income?

Ek: Well, I mean, the interesting thing here is that we’re just in its infancy when it comes to streaming. And we just last week had an artist announcement where we basically said if there would be 40 million subscribers paying for a service like Spotify, it would be more than anything else in the entire music industry, including iTunes.

We don’t want to say Mr.Ek is lying, but he does appear to be very bad at simple math and to be misinformed about the actual size of the record business and the revenue being generated by Apple’s Itunes.

Is anyone actually capable of doing simple math in a spreadsheet? Here goes. 40m Spotify Subs at $10 a month is only $3.3b in annual revenue to artists and rights holders at paying out 70% of gross. How is $3.3b “more than” the current $15b total annual global revenue or the $7b in domestic revenue in the US?

Here’s the simple math…

40,000,000 * $84 = $3,360,000,000

$84 dollars per subscriber annually is calculated at $10 per month per subscriber paying out 70% to Artists & Rights Holders or, $7 per month. $7 per month, multiplied by 12 months equals $84 per year, per subscriber payable to Artists and Rights Holders.

40m Subscribers x’s $84 per year = $3.3b in annual global revenue to artists and rights holders (assuming they really are paying out 70% of gross).

Simple math.

If you are an artist you might also read these links below:

Music Streaming Math, Can It All Add Up?

Venture Capitalist Admits Artists Can Not Make A Living On Streaming Royalties…

The Internet Empowered Artist? What 1 Million Streams Means To You!

Streaming Price Index : Now with YouTube pay rates!

It appears to us that music streaming can only truly be profitable to those with participating equity in the streaming company itself. Those with equity are leveraging their catalogs of assets against the potential revenue of an IPO (in which the catalog of assets is being leveraged for that equity). Thus far however, it appears that the artists and songwriters who have created those assets as the basis for that equity leverage do not participate in any profit sharing that the equity shares may earn.

So it’s not that music streaming can not be profitable, it’s just that it can not be profitable (or equitable) to artists.

Please tell us which artists are being compensated from the $3b sale of Beats music to Apple? Let’s see a show of hands… Bueller… Bueller… Bueller…

Remember when we were told that in countries where music streaming was the most successful that transactional sales also increased? We’ve got a bridge in Brooklyn to sell you too, and cheap. More food for thought below.

Streaming Isn’t Saving the Music Industry After All, Data Shows… | Digital Music News

Album Sales Hit A New Low | Billboard

No Surprise Here: Spotify Streams Soar While Track Sales Fall | Billboard

 

Van Dyke Parks on How Songwriters Are Getting Screwed in the Digital Age | The Daily Beast

Forty years ago, co-writing a song with Ringo Starr would have provided me a house and a pool. Now, estimating 100,000 plays on Spotify, we guessed we’d split about $80. When I got home, on closer study, I found out we were way too optimistic. Spotify (on par with other streamers) pays only .00065 cents per play.

There’s less support for all the arts today, and the blade gets duller with every cut in arts funding. It degrades dance, opera, even academia and, significantly, the art of journalism. As a result, in the U.S., public opinion suffers from what we call “infotainment.” That’s a genre of media news that is not informing, entertaining, or remedial. And it’s a direct result of a vacuum of patronage (and by patronage, I don’t mean just Medici-style sponsorship but the willingness of all arts consumers to pay for what they listen to, read, and watch, and for the industry to fairly recompense creators).

READ THE FULL STORY AT THE DAILY BEAST:
http://www.thedailybeast.com/articles/2014/06/04/van-dyke-parks-on-how-songwriters-are-getting-screwed-in-the-digital-age.html

David Pakman is Wrong on The Price Of Music (and streaming subscriptions)

Is there anyone left in the record business with common sense and a calculator?

David Pakman wrote an interesting piece asserting the problem with streaming services getting up to scale is a matter of pricing. He puts forth that $10 a month, or $120 per year is too much. He claims that the ability of these services to scale should be more in line with a monthly fee of $3-$4, or $36 – $48 a year to appeal to a broader base of the “average” music consumer. We think there are some serious flaws with this line of thinking not the least of which is that we can’t get the math to scale at $10 a month per user!

The first and most important error is that an “average” music consumer does not exist. Sure, you can average the total spending by the estimated number of consumers to find an average per consumer but no “average” consumer actually exists. Some spend many times the average, some spend far below it.

Pakman makes the assumption that music subscription services are over priced citing that the “average” consumer is only willing to spend $64 a year on music.  This completely ignores that the majority of highly active music consumers that have historically purchased much more than the average.

Those working in music distribution have always know that the most active consumers, contribute the greatest percentage of revenue to the total. In traditional terms this would be an expression of the classic 80/20 model where the top 20% of consumers represent 80% of the revenue. Conversely 80% of consumers only account for 20% of the revenue overall. This is of course an over simplification but it illustrates the point being made.

Here’s some simple math. Apple’s iTunes boasted 200 million users in 2011. Using Pakman’s own estimates at $64 per “average” consumer, the store should have generated a cool $12.8 billion in revenue. As we all know that’s not true, it quickly illustrates the problem with Parkman’s methodology of the “average music consumer.” Of course Itunes is not the only music retail outlet, and surely not all of those Itunes users were strictly music consumers. Again this is the problem with attempting to define an “average” music consumer to broader market economics.

Pakman also doesn’t fully account for the fact that while music prices dropped nearly in half from $19.98 compact discs to $9.99 downloads the volume of sales continued to decline. This is a decline that began with the introduction of Napster and has spread through the expansion of ubiquitous illegal file sharing networks such as the now defunct Kazaa, Grokster and Limewire.

The single greatest factor effecting both the price of music and the volume of sales, was and remains the illegally free supply of the exact same product available to consumers without risk, investment or consequence by those distributing it for profit without paying for the cost of goods.

But Pakman may have stumbled upon some other points of interest in his observation. First, is that the music business needs to learn how to window releases and build a transactional streaming model as the film business employs. We detailed this in our post “Spotify is not Netflix, but maybe it should be.” Second, there should tiered access on streaming services. A basic $4 a month subscription gets you the hits, say the top 200 current singles and the top 200 catalog albums. For $9 a month you get the hits plus all music more than a year old. For $20 a month you get everything available.

The narrow band thinking of music industry business people is stunning when we don’t need to look any farther than the film and tv industry to see a robust variety of different streaming products for different consumers needs and demands. The film and tv industry successfully window releases and have different pricing tiers based on access and there’s really no reason why these models would not, and can not translate to the record industry.

 

Amazon’s Streaming Contract Is “Entirely Unacceptable” | Digital Music News

Amazon is trying to bypass US Copyright law and define its own royalty rates

Section 115 of the US Copyright Act is the rate, set by the government, that defines the mechanical royalty rates. Most people know that the statutory mechanical royalty rate is currently 9.1 cents per download or physical “phonorecord” under 5 minutes (and then 1.75 cents per minute thereafter), but few know what the rate is per stream. That’s because the streaming rate is based upon the streaming service’s number of subscribers and users. More subscribers to the service equals higher mechanical royalty rates.

For the record, Spotify, Beats and the other streaming services all follow Section 115 of the US Copyright Act and follow the defined mechanical royalty rates.

READ THE FULL POST AT DIGITAL MUSIC NEWS:
http://www.digitalmusicnews.com/permalink/2014/04/10/amazons-streaming-contract-entirely-unacceptable