Here is the text of a presentation I gave recently. Hope it’s informative!
Welcome to the Music Industry Hunger Games, where music industry combatants vie bravely for their piece of the ever-shrinking pie.
The difference between the old music business and the new one is quite stark. Technology has not only disrupted the traditional music business model, it has subsumed it.
At the turn of the last century, it would have been difficult to imagine the youtube.com explosion, the rapid ascendancy of mobile phone “apps” usage and creation, the introduction of cloud computing, the huge advancements in smartphones and other advanced personal computing products, and the impact these disruptive technologies would have on the music industry as it now stands.
Also, because this technological revolution occurred so quickly, with little warning, the law has yet to catch up to it to any meaningful degree. What are the rules? They do exist, but is anyone paying attention to them?
For one thing, copyright enforcement in the music industry has had its problems, to say the least.
Copyright stakeholders playing “global whack a mole” with piracy sites, and labels selectively enforcing their copyrights interests, for example, threatening the likes of Ms. Lenz or suing Ms. Thomas-Rasset while allowing Greg Gillis (Girl Talk) to get away with mashing up thousands of those same labels’ sound recordings with nary a legal peep makes for a pocked enforcement landscape.
On the other side of the street, Hip hop and other artists rip off sound recordings and compositions from vast numbers of indie artists who simply don’t have the resources to redress the infringements….and, of course, EDM artists and DJs are out there, remixing like crazy.
OTOH, as a result of free streaming services, and the advent of the Cloud, illegal downloading has pretty much hit a wall.
A study released in late 2013 by networking company Sandvine on Internet traffic trends found that peer to peer traffic is now below 10%, down from 31% five years ago and 60% eleven years ago. Less P2P traffic equals less piracy according to a report from Envisional.
YouTube is now the premier platform for consuming music for US teens according to Nielsen’s annual Music 360 report, with more than 64% of teens consuming their music that way. And, currently, it’s completely free.
And, are the major labels, the tech companies and the telecoms playing by the rules? Well, if no one knows exactly what they are, that makes them hard to follow.
In other words…..in the music industry Hunger Games, there really are no hard and fast rules; it’s a fight to the finish….whatever that may be. and… every music industry player is still fighting to stay alive.
So who will be the winners and losers? Let’s take a look:
THE WEAPONS
Subscription and Non-Subscription Services
Crowdfunding or “Fan Funding”
Licensing
Digital Distribution
The Internet and the Law
These are some of the weapons in the Music Industry Hunger Games arsenal. They can be wielded by many different music industry participants; but are they effective?
1 – Subscription and non-subscription services: are these weapons used by or used against the artists? The labels? The publishers? The consumers?
2 – Crowdfunding: this is a weapon wielded by the artist to keep the labels away from confiscating their property via the ubiquitous 360 deals, but…..do artists know how to handle this weapon?
3 – Licensing: are these weapons for the publishers? Or weapons for the music users? Sure, there are more music users than ever…..but…..there is more cheap and available music than ever as well. So, the licensing explosion and musical bounty have been forged into a two-edged sword.
4- Digital Distribution: Are these weapons for the artist/songwriter to get to their fans? Or a weapon with a dull blade? No doubt, the ability of artists to directly reach their fan bases via digital distribution was, and remains, a significant weapon in the music industry hunger games. But did it really level the playing field as it was supposed to do?
5 – Finally, there’s the Internet and the Law: Are these weapons used by tech companies to sue for lower rates (like in the Pandora/ASCAP legal dust-up)? Are they weapons wielded against copyright infringers for copyright owners? Are they weapons brandished by the large telecoms to impose ‘fast” and “slow” lanes on the Internet? The law, as a weapon, has been wielded by all, or should I say, by those who can afford this massively expensive weapon.
With battles engaged, for example, between Sirius/XM and the labels and artists over pre-1972 recording licenses to the Pandora/PRO scuffles, to the artists waging insurgencies based on their termination rights…and so many others in which this weapon has been used…the war rages on.
LABEL – WINNER OR LOSER?
CD Sales: Arrow Sailed Right Through Its Heart
Subscription Services: Bedding Down in the Swamp
360 Deals: A Construct Worthy of Pres. Coriolanus Snow
For a long time, more than a decade, it looked like they were going to be complete losers. Is this still true today? Let’s take a look.
ON THE LOSING SIDE:
It’s no secret that the recording industry as we knew it is failing. The net value of the pre-recorded music product as a standalone sales item is rapidly approaching statistically zero. CD Sales have plunged by more than half from 2003 to the present, and the net value of the music industry itself is 50% of what it was in 2003. CD sales are down to just 3o% of music industry sales revenues.
The top 10 selling albums in the US shifted 56.4 million units in 2000. In 2013 the number was 14.7 million. It is widely accepted that such pre-recorded music products will never regain any discrete monetary value based on individual sales. Unfortunately, standalone music product sales have been the core revenue stream for record labels since their inception. This is no longer the case.
ALSO ON THE LOSING SIDE:
This steep decline in record sales, coupled with several major record label mergers over the last ten years, has caused record labels to not only terminate hundreds of recording artist agreements, but caused the labels to be extremely cautious and reluctant to sign agreements with new, untried artists.
BUT…ON THE WINNING SIDE:
Labels are managing to keep their heads above water by licensing their enormous sound recording catalogues to subscription services such as Spotify. The interests of the major labels and the streaming services are very similar. The major labels’ futures – and fortunes – are firmly embedded and wedded with technology and telecommunications companies. Major labels have acquired interest in these companies over the past few years. In the original, upfront licensing model, labels focused more on large, upfront guarantees in exchange for the rights to use their valuable catalogs. But that has shifted considerably.
Spotify, for example, pays the labels huge, multi-million dollar advances and/or equity interests; now, major labels own approximately a 20% equity interest in Spotify, for example. These equity percentages are awarded in exchange for content licensing. And they can reap great rewards.
As we know, Universal Music Group received $404 million from the sale of Beats to Apple. (Of course UMG will need it when all of those class action suits are finally settled in the wake of the FBT Productions v. Aftermath debacle). And, recently, major labels are pushing for a sale of Spotify north of $10 billion, even though the valuation has not yet reached that number, as of this writing.
This shift from upfront payments for licensing to the equity model is a result of labels coming to the realization that there may be a market for mergers and/or acquisition in the offing with respect to the streaming services, perhaps by a major telecommunications company such as Verizon or Time Warner or Comcast.
So, if Spotify and other services have “exits” as lucrative as the fledgling Beats Music did, wherein a large investor purchases the entity, then the payouts to the major labels will be quite generous.
And then…there’s the 360 degree deal or broad rights deals: a “must sign” if an artist – especially a mid-level artist – wants a major label deal.
In response to the decline in discreet product revenues, it seems that practically all record labels, including major, mini-major, and independent record labels, instituted the “360 degree exclusive recording artist deal”, a new recording artist agreement which entails record labels now requiring their exclusive recording artists to relinquish some percentage of any and all revenue streams in which the recording artist does or will participate during the duration of the agreement.
That means that the label will receive not only its traditionally large percentage of record sales revenue, but also, an agreed-upon percentage of revenue generated from the artist’s touring receipts, merchandise sales, publishing fees and royalties, book deals, acting activities, sponsorships, among other things. It can include every kind of entertainment activity.
The Turtles Rise Again:
A potential win for the labels – and artists who own their own old masters – happened recently:
In A California decision that came down in 2014, A U.S. District Judge ruled against SiriusXM, saying that it violated recording artists Flo & Eddie’s master recording rights by playing Turtles records without licensing them. Flo and Eddie owned these masters.
These Turtles masters were created pre-1972, and therefore, governed by CA state law. California state law, as it is written, gives the master recording owner exclusive performance rights, the court ruled. Consequently, the judge further ruled in Flo & Eddie’s favor on all causes of action as it applied to public performance, but not to alleged reproduction copyright violations.
So, at least in CA, it’s possible that labels have one in the “Win” column. We’ll see what happens on appeal. In the meantime, the ruling could have an impact beyond California. Legal precedent from a decision in a federal court in a suit with similar issues in another court is definitely a plus. But each state has its own copyright law, so the fight may still have to move on a state-by-state basis.
So, is the Label a winner or loser?
ARTIST – WINNER OR LOSER?
Artists and their Love/Hate Affair with Streaming
Label Deals: Few, Far-Between and Far-Reaching
The Gig Money Myth
Fan funding, Tip Jars, etc.: Begging for Dollars?
It was always an uphill climb for music artists to gain an audience within or without the corporate music industry structure – the new technologies haven’t altered that tenet. But the technological methods that an artist must now master and employ, the absence of a financial support structure, and the economic education now required to keep track of revenues and the social media acumen necessary for a musical artist to find her audience has created a new paradigm for both nascent and established artists’ development.
The average musician is underemployed. According to a musician survey conducted by the Future of Music Coalition (FMC), just 42 percent of musicians are working full-time in music. The rest are complementing their music with day jobs that have little or nothing to do with music.
Musician salaries are intractably low. According to the FMC survey, the average musician makes $34,455 a year from music-specific gigs, with overall incomes (music+non-music) averaging $55,561.
So is there a winning side here?
LET’S LOOK AT STREAMING SERVICES:
There are two kinds: interactive and non-interactive.
FIRST, ON THE WINNING SIDE: SORT OF.
Non-interactive services, such as Sirius/XM, Music Choice, etc., are covered by compulsory statutory licenses. Pandora is more a “semi-interactive” service, however, and doesn’t neatly fit into either non-interactive or an interactive service, although it’s been officially classified as “non-interactive”.
In general, these licenses for non-interactive music streaming services, where the listener can’t pick the song, have been a net positive for the independent music label community because all music label copyrights, whether those of the major labels or those of independent labels or artists, are treated equally and paid the same rate amount for each stream – play – of that music.
Those rates are set by the Copyright Royalty Board (CRB) and administered by SoundExchange. SoundExchange has the authority to aggressively pursue the best possible statutory rates and handle all of the administration, including processing and auditing; this results in having a central group and voice to protect indie rights. It offers indies a major benefit, and revenues are indeed accruing and being paid out more than ever before for these rights.
And Internet Radio of all stripes keeps growing. Within nine years, Pandora has established itself as a major radio network with 77 million listeners and more than 9 percent of total U.S. radio listening as of May 2014.
In a deal signed between Merlin’s 20,000 plus indie labels and Pandora, Pandora agreed to assist their newer artists get discovered using Pandora’s discovery techniques to increase exposure to fans, and relying on playback data to decide on set lists and tour locations. On another note, TuneIn is trying to connect traditional radio stations, artists, and podcasters with their fans and create a platform where hosts and listeners can communicate directly.
SECOND, ON THE LOSING SIDE.
INTERACTIVE: For music streaming services not covered by compulsory statutory licenses, like Spotify, or those that have an audiovisual component or allow greater customer interactivity to select the songs or create playlists, a direct license is required between the music service and the sound recording copyright owner. These services may equally be valuable to the independent music label and artist community but the deal terms are trickier, i.e. less money for the indies.
While Compensation packages under these agreements (generically) might include a combination of a per stream rate, revenue sharing, equity in the service, minimum guaranteed revenues, and an advance for the major labels, the indie labels are given short shrift here. This means less $$ for the indie artists in the “trickle-down” label world.
But it doesn’t mean that major label artists fare any better.
If an artist has a major label deal, If the advance or minimum guarantees exceed the amount earned during the licensing period the label will earn “breakage” in excess of the earned amount. Artists generally do not share in this breakage amount that is retained by the label if the streaming revenues don’t reach the advance.
For example, if a label receives $100,000 advance against streaming revenues, and the streaming revenues only reap $50,000 during the licensing period, the label keeps the additional $50,000. But the artist will not see any of this, pro-rated or not.
Additionally, if a buyout of one of the major techies occurs, the major labels who have equity shares could reap billions (see: Beats Music). But the artists will reap much less than that, i.e., zero.
AND AS A ANOTHER LOSING POINT:
Interactive Streaming services like Spotify offer very little transparency on their payout structures, which makes it a low-trust partner for artists. Even worse, Spotify is suspected of completely misrepresenting its per-stream payout structure, based on discrepancies with extremely low rates infamously and publicly published by actual artists.
Also, Google recently announced that Youtube’s new music subscription service, currently or maybe named “Youtube Music Key”, set to launch any day now, and the understanding is that it, has onerous payment provisions for independent artists and labels in their deal, and those that do not agree with Youtube’s terms will be removed from Youtube. That for any indie artist, would be a disaster considering youtube’s huge traffic.
So…What does this transition from sales to streams mean for artists? Artists are going to feel pain as the transition is occurring, but will the artists just have their scars to show for all of this pain? Perhaps ONLY when more than 100m people are paying to stream music, but that’s’ not around the corner.
ARTISTS AND THE RECORD LABELS\
ON THE LOSING SIDE: Because record labels are no longer expending large or even modest funds to support the artist unless that artist has already proven herself to be viable in the marketplace, this creates a catch 22 for the recording artist, as they now must gain a high level of viability on their own to potentially gain a label’s financial and marketing support .
As a result, artists are forced to expend their personal funds to create the music product and marketing. Since they must financially self-support, they often find themselves in a negative economic situation. Considering the huge upfront risk factors of releasing new music into the marketplace, this is a formidable obstacle for artists, especially emerging artists with few resources, to overcome.
In addition to financial self-support, each artist must now create self-sustaining music industry business structures. Without record label support, they must perform all of the attendant functions previously done by music industry professionals.
The dramatically changed market conditions and landscape resulting from leveling requires artists to not only create excellent music and offer audiences stellar live performances, but also become their own marketers, promoters, lawyers (with sometimes dire consequences), web designers, graphic artists, videographers, publicists, producers, audio engineers, booking agents and publishers.
However, it would be unrealistic to expect that any artist can effectively perform and juggle all of these specialized tasks while also achieving excellence in their art. This current environment has given rise to a “jack of all trades, master of none” crop of artists because artists simply don’t have the time and diligence to finely hone their art.
ON THE WINNING SIDE:
Recording artists now have widespread access to digital music creation and manipulation software and technologies (such as Garageband, Logic Pro Express and Pro Tools, all software-based recording and editing programs). This inexpensive and efficient software is not only pre-loaded into shipped computers, but rapidly improving in sophistication and ease of use.
This software is available literally at artists’ fingertips. Therefore, the cost of creating, i.e., engineering and producing, a decent recording has sharply declined over the past few years. SO, this allows artists to be their own record labels.
THE GIG MYTH:
Just 15% of people regularly go to gigs. And even for these consumers, live performance consumption is, in terms of total time spent, just a small fraction of their music consumption. So the paradox is that artists still needing to make a recording in order to drive live and merchandise income.
The live music value chain is an incredibly complex one with multiple stakeholders taking their share (ticketing, secondary ticketing, venues, booking agents, promoters, tax, expenses etc.).
The share of live revenue that artists make from live performances has declined every year since 2000.And, the secondary ticketing market is often fed before the actual market, thanks to bots, aggressive scalpers, or the artists and ticketing providers themselves.
Musicians are increasingly playing free shows, in the hopes of getting paid work down the line. According to a recently-released report from the UK-based Musicians’ Union, more than 60 percent of artists have played at least one free gig in the last year.
And, even worse…for many venues, artists have to either pay the venues in order to play them, or pre-sell a pre-set number of tickets in order to be able to gig at that venue.
So, gigging, as we all know, costs money upfront.
CROWDFUNDING OR FAN-FUNDING.
Crowdfunding is a MIXED BAG of winning and losing. Yes, an artist can raise funds for a new recording. But oftentimes, the artist has no clear idea of what to do with the marketing aspects of the recordings’ release. Moreover, over-promising to donors can be a problem.
In other words, are independent artists equipped to know how, where and when to expend the funds they derive from Fan Funding sites once they have it in hand? Do artists do a financial analysis of the costs involved in sending out the “gifts” associated with the donations they’ve garnered thru the Fan Funding site?
In most cases, the answer is NO.
So, are artists winners…or losers? Hm….
PUBLISHER – WINNER OR LOSER?
PROs + DOJ + Publishers = ?
Copyright Enforcement
Streaming Services v. the Publisher v. the PRO
Publishing Industry is experiencing major legal changes that will result in paradigm shifts in their business models, centered around the performing rights organizations and their relationships with technology companies, specifically, Pandora.
We know that ASCAP and BMI each represent over a half a million songwriters and music publishers for performance rights. ASCAP and BMI each function under consent decrees entered into with the U.S. Justice Department.
The current consent decrees require that ASCAP and BMI must grant a license to any potential company or service that wants one. They do not have the right to say “no” to any potential licensee, among other things.
A major earthquake event occurred when EMI/April Music decided to pull its digital performing rights from the PROs, and negotiate direct digital performance licenses with streaming services such as Spotify and Pandora. Other publisher’s followed. But Pandora was not happy with this.
The music publishers were in disagreement with a judicially set rate of 1.85% of Pandora’s Annual Revenue. In fact, the music publishers thought the combined PRO rate of 4.3% was also too low. The reason?
Even though the Pandora rate is slightly more than traditional radio broadcasters pay for their ASCAP licenses, and commensurate with what other streaming services had been paying, services like Spotify and iTunes Radio pay significantly higher rates, ranging as high as a combined 10% of Annual Revenue.
Further, the rate that Pandora pays the record labels for the master rights (the artists recording of a particular song) is in the range of 50% of Annual Revenue. The publishers found this inequity not tolerable.
Publishers targeted the consent decrees, stating that these consent decrees interfered with their ability to charge fair market value rates, which is why some of the larger ones first began withdrawing their digital rights. The only way to get a higher rate, they conclude, is to pull the digital rights licensing away from the PROs’ control and make direct deals with digital services.
This would allow the music publishers not to be governed by the consent decree in matters dealing with digital performance rights licensing.
Some of the major music publishers and independent music publishers were in this process of pulling their digital rights with the PROs, and EMI, Sony/ATV and UMG Publishing even negotiated direct deals with Pandora as they were the first music publishers to pull their digital rights licensing from the PROs.
This process was moving forward for many publishers and then Pandora went to the ASCAP and BMI rate courts, asking those courts to rule that the publishers’ rights withdrawals did not apply to digital services like Pandora that had applied for licenses under the consent decrees.
Pandora also alleged that the major music publishers and the PROs were working together to make changes to ASCAP and BMI by-laws that would allow for partial withdrawals, yielding higher performance royalty rates for all music publishers.
Both rate court judges ruled that the music publishers could not pull just one set of licensing rights (e.g., digital rights) from either ASCAP or BMI. The judges said if the music publishers wanted to license directly, they would have to pull all performance rights licensing from the PROs. No music publisher wants to do that.
However, the ASCAP Judge ruled that Pandora had an interim consent-decree license, which is good through Dec. 31, 2015. On Dec. 18, 2013, in opposition to the ASCAP ruling, the BMI judge agreed that publishers had to be all in or all out, but in his judgment, he ruled that there was no interim consent-decree license, which meant that if publishers decided to withdraw from BMI after Dec. 31, 2013, Pandora’s BMI blanket license may no-longer cover some of the pubishers’ songs. . But he added that, if withdrawn, these publishers’ songs still reside in existing blanket licenses until they expire.
The result was that both UMG (on Dec. 31, 2013) and, more recently, BMG, made direct deals with Pandora for their catalogues. The reason they can do it and still stay with ASCAP and BMI: under the PRO rules, the PROs can represent publishers only on a non-exclusive basis.
These “Pandora issues” heralded in some of the most significant upsets, and potential changes in the publishing industry that will reverberate throughout the music industry; it also led to the Department of Justice reviewing the Performing Rights Organizations’ long-standing “consent decrees”; the DOJ is in that process now.
Now, the PROs, the music publishers and others are asking the DOJ to agree to change the consent decrees so that it is clear that digital rights licensing can be pulled from the PROs.
This will mean all digital companies, including Pandora when its current license is up in 2015, will have to negotiate with multiple music publishing companies either to get their services up and running, or to continue to offer their digital music services, because they won’t be able to clear digital performing rights at the PROs alone if the music publishers withdraw their digital rights.
It will add a whole new level of rights clearance issues and liability to the process because the lawyers for these new digital companies will have to engage in these direct deals and ensure that they are covered for all of the music repertoire in their client’s digital services.
If the PROs and the music publishers are successful in modifying the consent decrees, they’ll indeed have a business solution for getting a higher rate, but it really isn’t a solution for the health and development of building new digital music companies and services. Because the rates will be higher.
So who are the winners and losers here? The battle continues to rage.
SONGWRITER – WINNER OR LOSER?
Publishing Companies Pulling Out from the PROs
Cacophony due to Oversupply
The License Battle – Screaming in the Dark
And…the songwriters…out there by themselves, lost in the forest with few arrows left in their quiver.
ON THE LOSING SIDE
1 – There are few to no more publishing deals for developing songwriters.
2 – There is an oversupply of songs lead to a downward decline in licensing fees
3 – There is an oversupply of songs, which leads to placement services taking larger percentages for placement, and less time spent with each songwriter, i.e., no development or feedback.
4 – Songwriters are increasingly getting left behind by digital formats, including Internet radio. In one disclosure, songwriter Desmond Child reported more than 6 million plays on Pandora for “Livin’ On a Prayer,” only to receive a check for $110. Ellen Shipley, a songwriter whose biggest hit was “Heaven Is a Place on Earth,” received $39 for more than 3.1 million plays.
5 – Publishers may get the opportunity to disengage some rights from the PROs; if so, songwriter’s shares will decline, because of cross-collateralization, net revenue models (and recoupment provisions), and no direct payment from PRO.
6- Even for library music composers, the landscape is becoming more hostile; the rise of RPF licenses (Royalty Performance Free licenses) have emerged as further threats to composers’ existences.
BUT: ON THE WINNING SIDE: More performing rights money is being paid out than ever before:
Recently, BMI reported $977 million in revenue for its most recent fiscal year, a 3.5 percent gain from the year before and the most the organization has collected in its 75-year history. After subtracting administrative costs, BMI paid out more than $840 million in royalties to its members, which include more than 650,000 songwriters and music publishers. That is up about 3.2 percent from last year, and also a record for BMI.
TECHNOLOGY COMPANIES -WINNERS OR LOSERS?
Pandora v. Spotify: Which is a Better Model?
The music industry is now undeniably the technology industry; more than 70% of the music consumed in the first six months of the year in the US was either downloaded or streamed, according to Nielsen SoundScan’s latest numbers. And internet industries tend to be “winner-takes-all” markets.
We can look at: Google in search, YouTube in online video, or Facebook in social media.
But that kind of dominance takes time to emerge, and streaming music has yet to reach that point.
Many players compete for ears (and wallets): from the music services like Pandora and Spotify, to offshoots of radio, like Clear Channel’s iHeart Radio, to new services from the biggest companies in tech—Apple, Google and Amazon.
So….who will be the winner in the technology hunger games? Or will it remain fragmented?
Let’s look at the streaming landscape by examining Spotify v. Pandora.
With the exception of vinyl records, online streaming is about the only part of the recorded music business that is growing at the moment.
According to Nielsen, on-demand audio streaming revenue in the US was up 52% in the first six months of this year, while digital track downloads were down 13% and CD sales slumped nearly 20%.
But it’s important to distinguish between “on-demand” streaming services (like Spotify) and internet radio services (like Pandora). They have different cost bases and are aimed at different markets.
As stated earlier, on-demand services like Spotify are interactive services, allowing users to choose individual songs and create their own playlists. They typically have a free, ad-supported version, and a subscription version without ads that allows for offline listening.
With 10 million paid-up subscribers, Spotify is the clear winner in this camp. Other prominent include Rdio, Deezer, and Rhapsody. Rdio just did a price drop to $3.99 for a “bare bones” type subscription.
However, as stated earlier, interactive services cannot get the benefit of the Section 114 statutory license for digital sound recording performances. Also, Spotify pays out 70% of its revenue for licenses and payments. And it must host over 20 million songs on its site many of which are never listened to!
On the positive side, Spotify can make direct deals, so it can be offered all over the world, unlike Pandora, currently.
PANDORA POSITIVES:
- It has the ability to take advantage of the statutory license, and
- It only has to maintain a catalogue of about 1 million songs
- PANDORA paid out around 50% of its revenue in royalties last year.
Pandora may be a better business model than Spotify, after all. It may be the winner.
Where Spotify is doing a good job of targeting the market for music ownership, i.e., albums and the like, which was worth roughly $14 billion globally last year (about $8 billion for physical sales and $6 billion for downloads), Pandora’s model targets instead the $16 billion in advertising dollars that advertisers will allocate and probably spend this year to regular broadcast radio.
On paper, though, nobody really has been able to make any significant money out of it. Not yet at least. So, even though Pandora is still not really making money, despite the fact that its founder extricated millions from it last year, could it still be the winner?
Since its IPO in mid-2011, Pandora has eked out a quarterly profit just twice. Over the last two financial years it has racked up more than $75 million in losses. Some believe this offers evidence of structural flaws in the Pandora business model. But others are convinced Pandora has a bright future.
Some argue that the Pandora model may have an easier way to generate profits: It pays most of its royalty costs on a per-stream basis, and so it can increase its profits by simply increasing the number of ads it plays every hour; this action would accomplish two things: (1) generate more revenue; and (2) slightly reduce its royalty costs (because it’s playing more ads and slightly fewer songs overall).
Pandora could also use the information it has about its listeners to target them with ads tailor-made to each user. This should increase the fees they charge for its ads than broadcast radio stations are able to do.
But if even Pandora’s ability to generate sustainable profits is still debatable, then what about Spotify, given its even higher content costs?
On-demand music services like Spotify have a specific problem, which is that they can’t achieve economies of scale. The weird anomaly in streaming music services like Spotify is that the more popular they get, i.e. the more people who stream music, the more royalties it has to pay out to the content owners. Spotify and its ilk generate the overwhelming bulk of their revenue from subscriptions, and seems committed to building its business on convincing people to pay for music. This doesn’t seem to be an ultimately winning strategy. Unlike Apple or Google, Spotify doesn’t have massive deep pockets that they are able to dip into, nor does it have another product subsidizing its existence, like a headphone or hardware company or even a search engine that would buoy it up when times are tough and while its building. In other words, from the gitgo, it is forced to stand on its own two feet, and quickly.
Spotify has signaled in the last year or so that it is heading for an IPO; its last valuation was around $4 billion. It’s dubious as to whether it’ll be able to achieve a major buyout enough to satisfy its investors.
Maybe Google or Facebook will purchase it, who knows?
In light of all of this, on the other hand, streaming music is about to become a lowly gladiator in a high-stakes death match put on by the kings of the tech world, Apple, Google and Amazon. For these giants of industry, the music business isn’t an end in itself, but just one piece in their battle to control the future of the Internet. And the odds are most definitely stacked in their favor.
Consider this:
Apple expended $3 billion in 2014 on Beats Electronics, at least in part for its streaming music platform (which is mainly on-demand, but has also been described as a Spotify-Pandora hybrid).
Google recently bought Songza, a human curation service for music that some believe could threaten Pandora. And Google’s YouTube is the clear winner for on-demand streaming of music videos; it’s also launching a new subscription-based streaming service.
Finally, Amazon also recently launched its own streaming music service, Amazon Prime Music. Like its streaming video service, Amazon Prime Music is free to anyone who subscribes to Amazon’s premium home delivery service, a bonus for many. We’ll see how that goes.
But all of these mega-titans have tremendous advantages over Pandora, Spotify and all of the stand-alone services who are not backed by larger tech companies with more lucrative product lines: namely, the titans have very deep pockets and very little pressure from investors to reap money from music.
So, the winner here may be the company who does have to depend on music streaming or music subscriptions as their primary income source.
MUSIC CONSUMER – WINNER OR LOSER?
No Pay, Lots of Play
The Rise of Prosumerism
ON THE WINNING SIDE: CONSUMERS ARE THE CLEAR WINNERS!!!!!!
Most consumers, especially in the upcoming generation, don’t attribute much value to owning an actual recording, and most consumption happens at little-to-zero cost to the listener. An enormous, decades-long shift towards free (or near-free) music means that entire generations have never paid anything for recordings. These consumers will most certainly be resistant to any hard and fast requirements to pay for listening to music, on-demand.
So, for music to have a true market value once again, it may be a case that this generation has to simply die out and a new one, used to paying for music, has to inhabit the music-buying space. Will that happen? Probably not.
With the influx of more pay-to-play music services, like Tidal, where there is no freemium tier, there are two “maybe” outcomes:
- Drive more people back to piracy if they have to pay for music; and/or
- Raise a new generation whose members are used to paying subscription service fees for ad-less listening, or offering some other value add benefit.
Maybe not.
ON THE WINNING SIDE: Prosumerism!
Prosumers are “producer/consumers”. This deals with the concept of UGC – user-generated content.
Social media and sites like Youtube have given rise to a whole new brand of artist, one that remixes, mashes up music and videos, and they make money doing it! It’s like a musical conversation is had between the actual artists and their fans. And then, the fans take it to a whole new level. The availability of easy and cheap music-making hardware and software have allowed the market to be flooded with (sometimes unworthy) UGC, and it’s hard for a consumer to distinguish between a “real artist’s” music and a hobbyists.
This is not a winner for artists, but a clear winner for anyone with a decent computer who wants to generate their own music, put it online, and start making some pin money (or sometimes, more than that).
Piracy Sites – Winners or Losers?
These are the real losers. But…they may have a comeback if all subscription services change to only “for-fee” subscriptions
OTHER LURKING THREATS
DON’T KILL THE INTERNET! We need it to innovate and grow our businesses!
The FCC recently stated that it is going to implement net neutrality principles and re-classify the telecommunications companies to bring them under FCC rules and regulations. This is great news for the music industry community. The mega-telecoms want a two-tiered internet, one with ‘fast lanes’ and one with ‘slow lanes’. And the ones in the fast lanes will be the ones that can pay the mega-telecoms the toll. However, the fight isn’t over; the mega-telecoms are lobbying hard to bring down the FCC’s recent ruling.
The issue of Net Neutrality – in all of its iterations – is one of the defining issues of our time. The Internet controls how we consume information, media, art; it’s a necessity for our businesses and how we use our websites and broadband; it’s critical to how we innovate, communicate and essential to how we learn and educate.
Control of the Internet is, indeed, control of our world and our minds. It’s important that the oligopolistic telecommunications companies, whose only desire is for profit, to be regulated like a utility company so none are left off of the information highway.
The Internet is THE portal for musicians, not to mention other music industry professionals and entrepreneurs. Both B2B sites’ and direct-to-fan sites’ viability are dependent on their ability to offer, display and deliver various types of content to users via the sites.
It would be disastrous for musicians and the music industry entrepreneurs, innovators and other creators if telecoms are given the green light to create a fee structure based on broadband usage, thereby essentially re-creating the Internet into Cable TV.
And innovation would grind to a halt. For example, if we had no net neutrality at the beginnings of the tech media revolution, we would have no youtube. Or Netflix. No online company would have the opportunity to develop without onerous fees.
And..net neutrality affects streaming services. The standalone services, such as Spotify, are particularly vulnerable to broadband caps; if only so many users can use the service, it wouldn’t make sense for a streaming service to stay in business. Regardless of the number of users, the streaming service would still have to pay licensing fees and guarantees. And the streaming service business would be stunted in its growth before it even began.
CONCLUSION:
In conclusion, the music industry combatants are armed, ready and some are dangerous. Some are more ready than others. Major obstacles will continue to be put in their way. And the law here is still being finely honed as a weapon; the danger is that, without a solid, legal framework, all of the participants in the music industry hunger games are shooting each other in a circular firing squad.
So…who will win and who will lose the Music Industry Hunger Games?
Here’s hoping they’re all winners.