Music Streaming Math, Can It All Add Up?

Music streaming is clearly a challenge for the recording industry and even more so for the new generation of artists hoping to build professional careers in music like Zoë Keating. This new report from the New York Times, “As Music Streaming Grows, Royalties Slow to a Trickle” is the latest to reignite controversies about music streaming royalties.

We’ve leveled our own criticism of streaming sites in the past perhaps focusing unfairly on Spotify. But as we reported in the, Music Streaming Price Index : Pay Rates as of 12/31/11 our complaint is more with the revenue models and royalty payments than with the services themselves.

To be clear, we like Spotify and the people we’ve met that work there. We’d just like to see better royalty rates and the kind of transparency requested by Zoë Keating, and/or the kind we get from Apple’s Itunes.

We also like that Spotify and other music streaming services are legal and licensed. Spotify (Rhapsody, Zune and Napster) are far more ethical businesses than YouTube and Grooveshark. There are no unauthorized copies of an artists material on Spotify and no massive DMCA issues. We’d love to see more brands spending their money with legitimate services than the shady ad networks that feed advertising to pirate sites.

It’s now clear that the brands themselves are a big part of the problem by supporting piracy when they could be supporting the legally licensed sites. Brands, advertising networks and payment processors are driving the race to the bottom in the “optional payment” and “Illegally free” world of exploiting musicians through online piracy.

In a recent interview for Hypebot, music and technology veteran Ted Cohen sums it up well,

Do you still favor subscription over advertising-based music services?

Yes, I do. I don’t think that the advertising model so far has proved to be sustainable. I think that we have undervalued subscription. I am paying $150 a month for cable. I watch 20 or 30 hours of TV a week. I probably listen to 50 to 60 hours of music a week. I’d argue with you that music is worth more than $10 a month subscription service.

The labels were so concerned about (piracy)—and I was there at the time—that we had to come up with a price that was just a little bit more than free to convince people that they should pay. So far, we have not been able to raise the price. I think that music is worth at least $20 or $25 a month.

In the chart below calculations are created in tables to illustrate the simple math required to determine the revenue opportunities in different streaming models. For example, lines 5, 6, and 7 detail how much revenue Spotify can generate to artists, songwriters and rights holders paying out 70% of their gross at 1m, 30m and 90m paid subscribers.

If Spotify can capture what most believe is an optimistic amount of paid subscribers in the USA (30m) that would only generate $2.5b in revenue for rights holders. Line 2 represents the revenues of the record industry in the USA between 1999 when it was $14.6b through 2009 when it had plummeted to $6.3b leaving a loss of $8.3b annually since that time.

Maybe we’re missing something. If streaming is the future how does $2.5b in revenue from a massively successful Spotify replace the loss of $8.3b in annual earnings?

streamingmath

So in 2012 when Spotify has claimed 1 million paid subscribers in the US, that’s a payout to artists and rights holders of only about $84m. In simple math, this is about 12m albums at $7 wholesale each (what iTunes pays on a $9.99 album).

Additional food for thought is that Spotify is currently valued at 3 billion dollars. That’s just a little less then half of the entire earnings of the entire US record industry in 2012 at an estimated 7 billion dollars. This means that if the same valuation method is used for both Spotify as a single company, and the domestic record industry as a whole, than either Spotify is overvalued or the record industry is undervalued.

But there are larger problems here than Spotify. As you can see in the chart above YouTube also represents a challenge for artists and rights holders. The site was born of infringement as a business model, and despite policy changes at Google (YouTube’s parent company) the situation is still completely unacceptable for artists as East Bay Ray of The Dead Kennedy’s explains to NPR.

YouTube really deserves it’s own post, and there will be several forthcoming.  In the new “exploitation economy” artists seem to be willing to trip over transactional dollars attempting to pick up streaming pennies. Again, one of the most important distinctions between Spotify and YouTube is that Spotify does not have a massive DMCA and rights management issues that cheats artists of their due. Additionally, YouTube is paying a fraction of what Spotify is, so if this is the future, everyone is really in trouble.

Artists Rights Watch – Sunday Jan 20, 2013

Grab the coffee!

Recent Posts:
* Well this is Embarrassing, a Tunecore Ad on 4Shared…
* Don’t Get IRFA’d: Westergren’s Fake “Tour Support”
* Golden Globe Winner Adele Exploited by American Express, AT&T, British Airways, Target and Nissan

From Around The Web:

COPYRIGHT ALLIANCE:
* The Silver Lining of the SOPA Debate

ADLAND:
* Youtube and Google have money problems

GRAPHIC LEFT OVERS:
* Creatives Stunning Revolt Against Big Bad Business

As best I can determine, none of the creators of these images were asked to participate in a program that paid them peanuts (a one time payment of $12) and gives away their work hundreds of thousands of times. This is a great deal for Google and its users and a complete disaster for the photographers who participate against their will.

“D-Day” (Deactivation Day) is set for February 2nd and a growing number of contributors are pledging to deactivate their portfolios or pull large numbers of images until the one million image mark is met.

MICROSTOCK POSTS:
* Photographers plan to remove images from iStockphoto

THE CURTIS AGENCY:
* More Horror Stories from the Digital Book Bazaar

I have often written that piracy is the biggest threat to the e-book business. (visit Pirate Central). This is a good instance why. – Richard Curtis

DIGITAL MUSIC NEWS:
* Study: A Majority of Americans Would Support Moderate Piracy Enforcement…

MEDIABISTRO:
* How to Stop Piracy: Carnegie Mellon Professor Michael Smith at DBW

“The shutdown of Megaupload caused a statistically significant increase in digital sales,” he said, comparing numbers between countries with high Megaupload usage to countries with low Megaupload usage.

LAS VEGAS REVIEW JOURNAL:
* At adult expo, fans hunt autographs while pros battle piracy

PHILSTAR.COM:
* TFC Japan all-out in its anti-piracy campaign

“We have an office here that provides em- ployment as it serves the community it is in. We are grateful that the new anti-piracy laws in Japan recognize the ‘sensur- round’ value of the busi- ness that we bring and the empowering impact of the content that we deliver to our target audience,” says Olives.

“There are naysayers who said that piracy is an unwinnable war,” narrates Lopez. “But we believed that piracy should be treated like a disease that needs to be eliminated. You always start effective disease preven- tion through mass information. People need to know what the disease is and what it does. And you need partners who share the same faith in the cause. We found one in OMB chairman Ronnie Ricketts.”

SE TIMES.COM:
* Balkans need better intellectual property protection

“Potential investors are not much interested to invest in a country where intellectual rights are not protected,” Blagojevic said, adding that infringement of these rights has caused substantial losses to Serbia’s economy.

Citing International Data Corporation statistics, Blagojevic said the value of pirated software in Serbia in 2011 was estimated at nearly 87 million euros.

“If the piracy rate would be dropped 10 percent, the state budget revenues could increase $20 million [14.9 million euros] and some 10,000 jobs could be opened, primarily in the IT industry,” Blagojevic said.

AD AGE:
* If Pandora Can’t Monetize Mobile, Can Anyone?

MUSIC TECH POLICY:
* What’s all this then? Google’s “Ad Cops” Are Missing the Point
* How the Rate Court Cottage Industry is Leading to the Destruction of Collective Licensing
* Brand Sponsored Piracy and Award Shows: British Airways Delivers the ultimate insult to Adele

TECH CRUNCH:
* Keen On… Incubus: Limousines, Feeling Dirty and Being Kicked In The Balls (TCTV)

HYPEBOT:
* Ted Cohen On Music Tech And The Music Industry [INTERVIEW]

Do you still favor subscription over advertising-based music services?

Yes, I do. I don’t think that the advertising model so far has proved to be sustainable. I think that we have undervalued subscription. I am paying $150 a month for cable. I watch 20 or 30 hours of TV a week. I probably listen to 50 to 60 hours of music a week. I’d argue with you that music is worth more than $10 a month subscription service.

The labels were so concerned about (piracy)—and I was there at the time—that we had to come up with a price that was just a little bit more than free to convince people that they should pay. So far, we have not been able to raise the price. I think that music is worth at least $20 or $25 a month.

THE PRECURSOR:
* The Google Lobby Defines Big Internet’s Policy Agenda

READ WRITE:
* Is Kim Dotcom’s New Site, Mega, The Wild West Of Piracy?

UPDATE FROM THE CES “PRO-ARTIST” PANEL:

CES Panel Moderator and CNET writer Declan McCullagh discloses artists and creators representatives were not actually invited despite CES claiming they were. As we reported, the panel was comprised of anti-artist and anti-copyright publicly acknowledged Google paid shills.

MARIA BUSTILLOS:
* Yes and No (Lessig, Swartz and Society)