(Sharky Laguna’s recent post on the problem with streaming got me thinking about the issue again. I decided to probe a little deeper into the matter at UGA this week.   This is still a work in progress but I think this goes a long way to explaining the internal conflict within the music business over streaming.)

Apologies in advance to “generation tl;dr”  there is not a simple explanation here.   This is the best I can do: In a free market specialty or niche products generally cost more than mass market products.  So for instance a semi-ironic american flag tank top from walmart can be sold for $9 and the manufacturer still makes money.  This is in part because the fixed costs can be spread over a large number of buyers.  Compare that to a  Rockmount Ranch Wear hand stitched western shirt.   It’s impossible for this maker to sell this shirt at $9 and stay in business.  Now if through a combination of government mandates and cartel price fixing all shirt makers were required to sell each of their shirts for $9 the Walmart american flag tank top would stay in business.  Rockmount Ranch Wear would go out of business.

I’m simplifying here but, on-demand streaming pays a more or less fixed rate to rightsholders per spin. For Spotify it’s around  $0.0049.  For YouTube (Content ID)  it’s on average less than $0.001 ( YouTube is a much bigger problem for artists than Spotify!!).   This fixed price per spin was the result of a combination of government mandates and cartel price fixing.

So what has happened?  I’m generalizing here, but niche market artists (and their labels), even middle class artists  have a difficult time recouping fixed costs of recording and are generally unhappy with this sort of deal (not all).    Meanwhile pop stars, their labels and managers are generally happy with this deal because it’s easier for them to recoup their fixed costs (but again not all).   Both groups of artists/labels and managers are acting rationally from their own perspectives.

But if you really look at my chart you see that something much more troubling is going on. Niche products should be more expensive, while mass produced products should be less expensive.   But here the reverse is true.  Because of the fixed price per spin, the most popular artists look like they are being overpaid.  While the the niche and middle class artists look like they are being underpaid.    So in effect this is a transfer of wealth from the niche and middle class artists/labels  to the biggest pop stars and their labels.

++++++ tl;dr stop reading here+++++++++++++++

Assumptions:

My curve is   Y= Average Fixed Cost Per Song ÷X

Y = fixed cost per spin.

How do I know what the average fixed cost per song is?   I don’t.  I was trained in abstract mathematics -and I realize this is gonna drive the applied math and engineers folks crazy- but you don’t really need to know that.

It doesn’t matter whether the average fixed cost per song is $500 or $50,000 dollars you are still gonna get the same shape in the curve.   You will still have the biggest artists being overpaid and the niche artists being underpaid.

Further because spins of songs appear to exhibit  non-guassian variation the “break even” point is still gonna be up towards the top tier of artists whether fixed costs are $500 or $50,000.   My “break even” point for this version of the chart was just subjectively chosen. Its where I thought the “pain” seemed to be kicking in.  Artists in the below 10 million spins seem to be complaining.  Artists above 100 million spins, not so much.

UPDATE 1

One side of the scale (X axis) is log scale compressed, because spins/sales exhibit wild variation and I couldn’t properly  draw the curve on the chalkboard.  Unless the chalk board was several miles (?) long.   This misrepresents the size of “overpayment” region.    But the “underpayment” region isn’t really represented properly either.   My intent is not to have you compare the “area” of these regions. Just that there is an aggregate underpayment to smaller artists and an aggregate overpayment to very popular artists.  If you look very very closely it says “log?” on the Y axis.  The Y axis is not supposed to be Log compressed, though i did make that note.  I’m not really sure it would make much difference either way since I’m asking the reader to NOT compare size of regions.  Not compressing the Y axis helps make the curve more “readable” but distorts the size of regions.   But I am open to suggestion on this.

UPDATE 2

Finally remember I am talking about the hypothetical average song and the average artist.  There clearly will be individual exceptions. Of particular importance is that many small artists some new, some  semi-professional, others hobbyists (no negative connotation implied) will happily offer their music for free, and the low per spin rate is not a problem.   New artists especially, have always given away their music for free. It’s a competitive advantage and a key part of any new artist marketing strategy.  I’m sure you can find any number of small artists that don’t feel underpaid and instead feel that streaming services offer them an opportunity to reach a mass market.  The odds are long for these artists as the consumer is faced with a tyranny of choice, but it is still a rational choice for many artists.  And I am all for artists choice.   What concerns me the most is that this streaming model seems to underpay the vast middle class of working artists that are really the backbone of the music industry.

Is the video below a glimpse of what the future looks like without this middle class of artists 🙂 ?

I welcome sensible and polite comments. I hope this provokes a conversation that leads to a better and more accurate model of this phenomenon  and eventually that leads to sensible solutions.

As David pointed out, Merlin’s Charles Caldas has gotten himself sideways again over Spotify.  Well he’s nothing if not consistent.  Will someone just give this guy a CBE, please?  Maybe that will calm him down.

This time Caldas is reacting to statements by Lucian Grainge and Doug Morris that they’re taking a relook at their deals with Spotify on ad supported streaming.  Sidebar: Let’s not forget something–Grainge and Morris ARE REALLY LATE TO THE PARTY on questioning the value of the ad supported model.  So the fact that it took Taylor Swift to get these guys focused is the real story.

But Caldas wades steps right into it by giving a quote to the tech press:

“Treating consumers like children and telling them that everything they’ve enjoyed about these streaming services is going to be taken away because the biggest record companies don’t like it, that’s another Napster moment,” Charles Caldas, the CEO of Merlin Network, the global licensing agency for independent music labels, tells Quartz. “The major labels screwed Napster and screwed the market by killing what was potentially the biggest opportunity the industry could imagine in getting into the digital space early. If they follow through with this, they are going to do it again”.

So here’s a fact check–Napster may have had a license from AIM labels, but Napster did not have enough licenses to launch a commercial version of the Napster platform.  It also takes two to tango, so if there was any screwing of Napster, Napster was the one that got themselves in that position, so to speak.

Despite Daniel Ek’s connection to Bit Torrent, Spotify is nothing like Napster so Caldas is really reaching to jam Spotify into that box.  Almost all the labels and a bevy of independent artists have licensed Spotify as have songwriters.  Again, nothing like Napster.  If you have a license with a music service, that deal eventually comes to an end and then you get to decide if you like the deal and want to renew.  You also get to decide if you want to renew on the same terms or different terms.  And guess what?  The service gets to decide if they want to take your renewal terms.  If they don’t, you’re done.  The service has to get along without you.

We’ve long complained of Spotify’s absurdly low royalty rates.  Here’s how it works.  The major labels–and possibly Merlin–got extra goodies that they may or may not share with their artists like equity, breakage (unrecouped advances that don’t roll over) “technology fees” and other nonrecoupable payments.  And a royalty rate that is artificially low because all those goodies are not included in the value of the royalty rate.

When independent artists or labels (presumably that are not part of Merlin) license to Spotify, we don’t get those goodies, but we get the shit royalty.  So if Caldas wants to talk about “screwing the market”, we think this little structure qualifies.  And as far as we can tell Merlin went right along with it and still is.  To Merlin’s credit, many of the Merlin member labels have adopted the “Fair Digital Deals Declaration” to promote sharing of the “goodies” with artists.  There will be a time to discuss how the majors treat the pass through of the goodies, but that time is not today.  Everyone should be very clear that is a discussion that will be had the easy way or the hard way.

But make no mistake–they’re sharing because they got the goodies in the first place.  Just like the majors.  And we’re still taking the shit royalty because of it.

Here’s the larger point.  License deals eventually expire and according to Billboard and others, it looks like Universal’s and Sony’s  Spotify licenses are coming up for renewal.

Stop picture for a second–when Daniel Ek got into a public argument with Taylor Swift in October, he had to know with 100% certainty that he was publicly dissing the most successful artist on his biggest label partner over what was sure to be the biggest selling record of the year.  All because she didn’t like his deal.  How was that supposed to help him renegotiate with Universal on terms favorable to Spotify’s stockholders?

NOT!!

What Ek should have been telling his team was that Spotify needed to be in business with Taylor Swift PERIOD.  END OF DISCUSSION.  MAKE IT HAPPEN.  SCREW THE PRECEDENT.  But no, his strong move was to insult her publicly.  He should be summarily fired for this reason alone.  Which makes you ask, who’s in charge over there?

But back to the Universal and Sony licenses that Ek knew were coming up for renewal.  Here’s the issue:  Ek sold everyone on the idea that he could convert ad supported users to subscribers.  He has tried, but if you ask us, he hasn’t tried very hard.  You may disagree, and if you do, you leave your music on Spotify.  If you don’t, you pull it down.

Or you reach some compromise in the middle.  There’s no reason for people to get in a huff over this.  It’s nothing personal, it’s just business.

Here’s the interesting part.  When we look at the calendar and the history, it’s possible and maybe even likely that the major label deals are up before the Merlin deals.  If the majors get the terms they want–and they almost surely will, one way or another–Merlin labels may find themselves suffering under the old terms for quite a while.  We can’t know that for sure, but that might be motivating the invective.

What is hopeful about the Universal and Sony position on Spotify is that they are focused on the shit royalty.  Having raised that point, it’s probably not going to get lost with some under the table payment.  And far from “screwing the market” that could have the affect of boosting the market and boosting the actual royalty rate paid to all artists.

For the first time we’re hearing the majors talk about the royalty rates and not the “industry” payments.  Spotify is fond of touting the total royalty it pays out to labels and publishers, independent artists and songwriters.  For the individual artist, that “total” is a largely unpersuasive number, practically irrelevant.  What matters to us is what we get in our stocking.  Spotify is fond of trying to push the blame for low royalty rates onto labels, but we know better because we know what the independent artists get who receive the label’s share of the ad supported service.

And guess what–it’s still shite.

If there’s any screwing of the market going on, we know where it’s really coming from.

We said it before and we’ll say it again:  Lars was first and Lars was right.  So spare us the Napster analogies, Mr. Caldas.

Look MERLIN the industry consortium that represents nominally “independent” labels is often held up as a spokesperson for the independent labels and artists.  You see this in the press all the time. First a comment from a major label spokesperson then a representative from MERLIN to give the “indie” viewpoint.   At the Trichordist we’ve long held the view that in  actuality MERLIN represents the interests of a tiny minority of “independents” that have some of the largest artists in the world. They DO NOT represent the interests of what most people would think of as “independent” labels.   The economics for those that produce mass market products (like pop hits)   is totally different than those that produce niche products (like progressive metal or indie rock). Yet time and time again we have seen MERLIN advocate for models and ideas that only work for the biggest players. Not independents.

Our suspicions were confirmed earlier this year when we saw MERLIN cut a payola- oops I mean “steering” deal with the famously anti-artist Pandora.   The history of payola clearly shows that it is a tool by which the entrenched players with substantial resources and market share keep the upstart independent players off of major media platforms.  We don’t see how this “steering” deal ends any differently.

Further MERLIN was so (there really is no other word to report the facts correctly) STUPID that they fell for a trick that Pandora’s Chris Harrison had previously used at DMX.   That trick was widely reported at the time. It’s jaw dropping that MERLIN was not aware it was being played. And exactly as we predicted Harrison took this “steering”deal a to the Copyright Royalty Board in an attempt to lower royalties for ALL labels.   Just as he did with the DMX deal. The pure incompetence of MERLIN regarding this deal should make independent labels reconsider their membership in MERLIN.

But this weekend at the  “Spotify House” at SXSW Caldas and MERLIN went further and made it abundantly clear where their loyalties lie.  Their loyalties lie with Spotify.   Caldas accused the major labels of having a “Napster moment” in regards to the free platform of Spotify.  While we are happy to see Caldas compare Spotify “free” to the original unlicensed Napster (because like the original Napster it pays jack shit to artists)  it seems a very very odd position for Caldas and MERLIN to take.  Why the hell does Caldas care that the major labels want to move away from the free tier and move it’s product to the premium tier?  Who the fuck is he working for?

If Caldas is right and the free tier is better for indie artists and the indie labels that he represents,  won’t the fact the major label product is behind a paywall help MERLIN labels?   Let them go dude!  Bigger audience for MERLIN labels.  But Caldas wants them to stay on the free platform?  Caldas position makes no sense. The only way this makes sense is if Caldas and MERLIN have some vested interest in Spotify.  Emotional, religious, ideological or otherwise, that is at odds with the interests of independent labels.   (BTW can’t wait for that Spotify IPO.  I bet there will be some artist attorneys interested in the who got stock.  Hell might even get an Eliot Spitzer type investigation.)

What’s really freaking bizarre about this whole episode, is within a few months we suddenly have the major labels taking a position against free streaming and letting artists opt out of the platform (despite their ownership stake in Spotify),meanwhile the leader of the consortium of independent labels angrily takes the opposite position.   What the hell is going on?

Tomorrow:  The math on why the current streaming model is a net transfer of wealth from small and middle class artists/labels to the big artists and labels.   

Ha Ha. Okay Charles Caldas was never in a Rap Metal band.  As far as we know of anyway. So maybe this was all a joke. Maybe the Spotify house party was actually a 1999 theme party. It’s entirely possible he could have been in character and we got this out of context.   But we think not.  We didn’t see many folks dressed in black cargo shorts nor was their a tribute to Limp Bizkit on stage.

For all you independent labels who are “represented” by MERLIN  and don’t know what I’m talking about?  At the Spotify house party at SXSW Caldas  helpfully compared free Spotify to the original Napster.  He said:

“The major labels screwed Napster and screwed the market by killing what was potentially the biggest opportunity the industry could imagine in getting into the digital space early. If they follow through with this (moving Spotify from free to paid subscription), they are going to do it again”.

Yeah that’s right Chuck,  Napster which paid zero revenues to artists and songwriters was such a great “opportunity.”  Well that’s not fair, it was a great opportunity for the Multi-Billionaire Sean Parker.   Not so much for the little people.

Who’s side is MERLIN on?  Shouldn’t we independent artists and  labels be represented by someone who isn’t so obviously a fawning sycophant for Spotify?

The RIAA has just released recorded music revenues for 2014. Many commentators are taking the raw figures and declaring recorded revenue almost flat.  Not true.  Revenues are down another 2.75% in 2014.

When you adjust for inflation and population growth we see a continuing decline in revenue per head from $22.12 in 2013 to $21.51 in 2014.