The argument goes something like this…

Streaming companies are paying 70% of their revenue but artists are not getting paid enough. This must be the result of record labels and rights holders not passing on the right amount to artists.

The first question is, how do we know that streaming services are actually, really paying 70% of their top line gross revenue to rights holders? We know what the revenue of a transaction is on iTunes, because it is factually transparent – it is the list price being charged. We all know this, and we can all verify this. A $9.99 album on iTunes pays out $7.00, or 70%. Same thing for a $.99 song that pays out $.70, that’s also 70% of revenue.

But when if comes to streaming services however we do not know what the revenue is that should be credited to artists and rights holders. This is what is actually of concern. There is a big black box at the top of the waterfall from which all other money flows downstream.

So if streaming services are paying 70% of revenue, what exactly is that revenue? Let us see it. So here we are with the issue of transparency. If we can’t actually see or know what that number is then yes, the low payouts are very much of concern and have very little to do with intermediaries.

We can disagree about how the 70% of revenue is passed onto artists from iTunes and other transactional sales. But one thing is clear, we all understand the transparent economics of how much money is generated on each transaction. This is not so with streaming. So without transparency at the top of the waterfall, everything that follows is suspect.

More importantly, and more to the point, if there are established retail and wholesale rates for each stream, the calculations become immediately transparent in the same way they are with Itunes. See, the issue here is not what is going on downstream, but rather what is happening at the top of the waterfall.

“WE HAVE A MONETIZATION PROBLEM”

The truth is by now (and everyone should be able to agree on this), we know that streaming creates too little revenue relative to the value of the product. In other words the product is being sold to the consumer for less than the cost that it takes to create and produce it, and still remain sustainable.

In simple terms this is expressed as selling a Porsche for one dollar. It doesn’t matter how many Porsche’s you sell for one dollar while paying out 70% of the revenue, there will never be enough money to actually pay for the cost producing the car. Porsche’s, like professional music are expensive to produce. Despite the advances in recording technology, it is he cost of human labor that is the most important in the value chain.

This is the economics of music streaming in a nutshell, but with one added twist. The Porsche may be sold for one dollar one month, and be sold for only eighty cents the next month, and maybe the month after that sold for a dollar and ten cents. This is because of the fixed (and unsustainable) revenue pool that is divided by the total number of plays.

The common sense solution would be to establish a fixed per stream rate at each platform. This is the most simple way to encourage transparency and fairness as the revenue generated per stream can be transparently and easily calculated from top line data – no more black box at the top of the waterfall. The funny thing is, the people shouting the loudest for transparency also seem to be the most opposed to the easiest solution. Why is that?

So, if we are to have conversations about transparency let’s at least be clear about what it is that we actually need to see.