Resetting Music Streaming a Test of Business Agility
Music streaming has become ubiquitous in the last decade and is now the default way that a vast majority of the public consume music. It’s also the way a vast majority of artists take their work to market. This area does not come without controversy, however. Recently, there’s been a growing movement afoot, primarily in the UK, to reset the entire business model that music streaming services use to pay the artists whose work appears on their platforms. This movement aims to get music creators a larger slice of the overall streaming music revenue pie.
I didn’t want this post to be too academic, so I will be painting a lot of this picture without works cited. But know that I’ve done a fair amount of reading in this area, so I’m not a neophyte. I’ll include a few links at the end for further reading.
One more thing — note that when I use the term “artist” in this post, I’m referring to a person who chooses to make and release original music.
Before music streaming services existed, there were three fundamental ways to consume music and pay artists.
The first was hearing it somewhere else — most likely terrestrial radio. Radio stations played songs. Artists were paid a certain amount of money each time their songs were played on the radio. A whole ecosystem exists to make sure that compensation is given to artists each time their music is played on the radio or elsewhere in public.
Purchasing of physical products is the second way people tended to consume music. 7” singles, LPs, tapes, and CDs were sold in a variety of stores. As a consumer, you often based your purchasing decisions on whether or not you’d already heard something from it on the radio. Making a decision to purchase something was often an expensive proposition. I can personally remember agonizing over whether or not to pay $20 for a CD that contained one song that I knew I liked. Sometimes you got lucky and there were more great songs on the CD. Other times you struck out and just kept playing that one song on repeat until you felt like you got your moneys worth. An ecosystem existed in the physical media space, too, whereby music was sold in hundreds of places — from department stores to actual record stores. Artists were paid a percentage of the overall cost of the physical product.
Live music is the third way people tended to consume music. In many cases, decisions to go see an artist perform was based on the first two consumption methods. If you liked a song enough to buy it, and you still liked it after you bought it, logic seemed to indicate that you’d be willing to go see that artist perform when they came to your town. Artists were paid a percentage of the overall cost of the concert ticket.
So as you can see, there were three fairly straightforward ways that people consumed music and artists made money from that consumption. The model wasn’t great for every artist, but it was a model that lasted for roughly 50 years before being upended by file sharing.
As the internet became more robust in the late 1990s, file sharing started to become popular. The mp3 compression algorithm was created, which effectively shrank the size of potentially large audio files without compromising (too much) on quality. This smaller file size allowed them to be shared quickly across nascent internet connections. Piracy had always been a concern of musical artists, ever since the advent of the home cassette recorder, but it became particularly pressing at the turn of the century. Being able to download any song for free and burn it to a blank CD was a fairly heady time for music fans. No longer were there decisions to buy $20 CDs. Instead, music could be had for the monthly cost of an internet connection. Legit download sites tried to fill the gap. Apple’s iTunes was a popular alternative and continues to fill a gap in physical download sales. But as internet speeds grew, and many of us started to carry internet capable devices with us every day, the idea of streaming music grew more possible. Nowadays, consumers effectively have the history of recorded music at their fingertips when they use any of the major music streaming services on their cell phones, tablets, or computers.
Streaming Services Overview
What follows is a very cursory overview of three major streaming services. This is intended to provide context for the remainder of the blog post. All three services more-or-less host the same content. Note that there are numerous smaller services that exist in the marketplace. Some exist to serve a particular niche, while others exist to serve specific geographic areas. For the purposes of this post, I’d like to focus on the three biggest players in music streaming.
Spotify is the first service that people think of when they think of music streaming. They’ve long been the biggest player in the field and have recently started to branch out into other areas like podcasts and live audio forums. The company is publicly traded and has a sky high stock price, but they’ve had a tough time turning profits consistently in their history. They offer a free option (with ads) and a paid tier (without ads).
Apple’s service is the newest one of these three. They came a little late to the streaming game but were certainly incentivized by the fact their iTunes service is no longer as profitable. They offer a monthly subscription.
Amazon Prime subscribers have access to the base tier of Amazon Music. This base tier often includes music from most major artists. The Unlimited plan is an extra monthly fee, and rounds out the catalog of those major artists, as well as many independent artists. The content that’s on the base tier changes with some regularity. Amazon occasionally offers free promos of the Unlimited tier to Prime subscribers.
How Streaming Services Pay Artists
Each of the above services have some slight nuances in how they pay artists that I will not be exploring here. There are two important thing to know about payments that these streaming services have in common:
Each stream pays out a fraction of a cent.
Monthly subscription fees are pooled and then divided amongst all artists on the service.
Some more context on the above items:
The fraction of a cent per stream doesn’t necessarily all go directly to artists. If an artist is signed to a record company, the artist has to split that fraction. If the artist didn’t write the song, or collaborated with another artist, they have to pay a part of that fraction to the other parties involved.
Monthly subscription fees do not go directly to the artists that you listen to most frequently. They are pooled together and the top streamed artists get a bigger cut of that pie than anyone else. In other words, if you are a paying customer of one of these services, it’s likely that your monthly subscription fees are going to artists that you didn’t listen to in a given month (and may never listen to).
The Promise of a Streaming Economy
At the start of the streaming era, artists were in a similarly vulnerable position as they are today. Their music was as popular as ever with consumers, but they were often being paid nothing by consumers for it.
Streaming promised an end to piracy and that people would ultimately listen to more music. It’s fair to say that both of those have come to pass. But that hasn’t led to more revenue for artists. In fact, with the plethora of music being produced these days, it’s likely that most artists are earning less in a streaming world than they were when piracy was at its’ peak. Instead of getting paid literally nothing for their music, artists are figuratively being paid nothing (fractions of cents).
The Challenges with Resetting Streaming
I see three distinct challenges when it comes to the debate around how streaming companies can reset streaming and make the ecosystem more amenable to artists. Each of these challenges ties into the overall agility of these three streaming services.
From a technical perspective, these services have been built to support the status quo, whereby funds are pooled and distributed to the most popular artists. Their algorithms are crafted in a way to recommend the bigger artists. There’s even a whiff of old school radio “payola” when it comes to some of the playlists that appear on these platforms. The idea being that streaming services get paid by labels to feature their artists on popular playlists on the service.
Shifting to a model, for example, where a customer’s subscription fees go directly to the artists that they’re listening to, would almost certainly require some significant technical work. Refactoring or rearchitecting are the words that I think of when I think of this topic. Worst case, it might require a company to completely rewrite their platform, release a new application, etc.
It’s possible that resetting streaming would require completely new products to be developed. Spotify recently launched a new live audio product, Greenroom. They made the decision to launch this as a separate application and have marketed Greenroom as a separate product from their main application, which hosts their music streaming and podcasts.
Changing the current streaming status quo will require some significant product management work. This is because consumers will undoubtedly be affected by any uptick in payments to artists. They’ll either need to pay more for the service, or have different concerns while using the service. This will require a significant amount of attention from product managers at these companies.
The Question of Risk
One of the things that’s worth examining in this whole debate is the question of where and whom the most risk falls upon.
Artists are the entrepreneurs in this equation. They determine that they produce a “good,” which other people are willing to pay money for, and they focus on producing that good instead of doing other things (for example, pursuing a career in a different field entirely). They bear a lot of risk. Percentage wise, very few people who decide to pursue a full time career in music actually end up having a full blown music career. Or at the very least, it doesn’t end up being the music career they thought they’d have when they started out. There’s numerous stories of artists who found success early on in their careers with an album or a single and ended up never equaling that same success. Some found another area of the music business to specialize in (for example, writing songs for other artists), while others get out of the business entirely.
There’s a distinction to be made here between being a full-time artist and a part-time artist. A full-time artist is someone who pays their bills with their music. A part-time artist may also put a lot of their energy into music, too, but it’s not their primary source of income. In the conversation around risk, a full-time artist is clearly a notch above a part-time artist in terms of how much risk they take on.
Record Company Risk
Record companies essentially serve as financiers and PR in this equation. From a finances perspective, record companies take the initial risk of signing an artist and paying them a certain amount of money to record or release music. They then attempt to recoup that money over a longer period of time. There’s a multitude of horror stories out there about these practices. Suffice to say, the majority of record deals never recoup. Yet, record companies remain highly profitable. This is mostly due to the contracts they sign with artists, as well as the fact that the most successful artists effectively end up paying for the ones who never find success. From a PR perspective, record companies excel at getting the word out about their artists. Whether it’s on social media, or getting spots booked on television shows, the PR piece of this equation is really one of the only reasons that an artist would consider signing with a record company.
In terms of risk, record companies are indeed exposed to some risk when signing new artists, but it tends to be low. The gambles they take on new artists are known from the outset and offset by the bigger artists in their stable, to say nothing of the “legacy” artists and records that they still have in the fold.
Streaming Service Risk
Streaming services bear the smallest amount of risk in this equation. They have effectively become the distribution engine for modern music. Their risk would certainly be greater if they had to manage inventory of physical products, but they don’t. They effectively manage a library of digital music files and come up with creative ways to serve them up to their customers. Their biggest challenge is how to scale their services around the world. The risk they shoulder is more technical risk than anything.
“Where do we go from here?” is a fascinating question and one that’s squarely rooted in the realm of business agility. Which company will be the first to make their revenue distribution more equitable to artists? And which company will lag behind the rest? Do any of these services even have the ability to pivot their business models to more equitably distribute streaming revenue to content creators? And if so, how long will it take them to do it?
In general, I would expect that each of the above three services will need to raise their monthly fees to be able to distribute more revenue to content creators. It will probably happen slowly, and the amount of time this takes will most likely be measured over years (not months). I would also expect that Spotify will have the most difficult time with this transition, since music is at the core of who they are as a company. While Amazon and Apple do offer solid products, if those services ceased operations tomorrow it would not put a significant dent in either company’s bottom line.
Here are some further purely speculate predictions:
Spotify — Their ad supported free option will go away in favor of a base level tier that requires a lower monthly payment but includes ads. They’ll embed more ads throughout their service and find new and creative ways to sponsor content.
Apple Music — They will be the first to increase the amount they pay per stream to artists.
Amazon Music — They will get rid of their two tiers in favor of one tier. Amazon Prime subscribers will pay less for access to Amazon Music than non-Prime subscribers.
The world of music streaming is a great place for consumers, and generates a lot of revenue for the streaming companies and record companies. But it’s never been a great revenue generator for the people who actually make the music. This is not a new problem, but it’s one that’s been exacerbated by the lack of other income (touring, specifically) due to the COVID-19 pandemic.
To rebalance the system, the streaming services will effectively need to pivot their business model — shifting profits towards artists and away from themselves and their record company allies. It will be a journey that involves potentially major technical challenges, and definitely product development and product management challenges.
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