Taylor Swift took a shot across the bow of streaming music this week by pulling her entire catalogue.
In doing so fans had no choice but to buy her album which in-turn made it go platinum and made her responsible for 22% of all album sales last week.
Suddenly everyone has woken up!
It is no secret that most musicians, including Taylor, make a fraction with streaming when compared to ‘the old days’ of purchase.
In fact, it is killing the music industry. Ask any senior exec at any major record label and they will tell you that they are a hair’s breath away from going out of business.
How did this happen? The short history helps us to understand the future and goes something like this:
Digital: Digital technology revolutionizes the making, quality and distribution of music.
Piracy: Digital also enabled the amplification of free piracy downloads. Remember Napster? The record labels should have just bought them.
Online Retail: (iTunes) started to ‘save’ music from piracy because it started to become more convenient to click ‘Buy’ vs. having to find what it is you were looking for on illegal sites that were not well organized or catalogued. But purchasing albums was still expensive and so iTunes convinced the music industry to sell tracks individually. This killed full album sales. Why buy what you don’t want?
Streaming: At this point, beaten up by piracy and online retail, streaming comes along and the music industry begrudgingly jumps at the opportunity to try another revenue stream. It makes sense to them because the model resembles radio and ‘pay-for-play’.
For streaming to work you need scale and we don’t have that yet.
As a consumer, streaming is a no brainer. It’s affordable and I get to listen to anything I want whenever I want. The world’s music library is at my fingertips for $10 a month. Heck, I used to spend at least $20-$30 a month buying music before that. Since streaming, I have not bought a single album! No wonder the labels and the artists are suffering. So why did the the labels and artists do it?
Beaten down by piracy and online retail, the hope was that supplemental streaming would help make up the difference, or increase discovery towards purchase, but there are two big problems.
– Streaming replaced album purchases
– Streaming takes scale. If the whole world was on streaming we would have the scale we need to amplify every micropayment into something significant for artists. Spotify has about 40MM users but only 10MM of them pay. From a business perspective that is a fantastic conversion number, but it is too small to pay out anything significant enough to major artists to replace prior sales numbers.
Without scale, how bad is streaming for artists?
At Spotify an artist’s royalty payments depend on the following variables, among others:
• In which country people are streaming an artist’s music
• Spotify’s # of paid users as a % of total users; higher % paid, higher “per stream” rate
• Relative premium pricing and currency value in different countries
• An artist’s royalty rate
These variables have lead to an average “per stream” payout to rights holders of between $0.006 and $0.0084. The effective average “per stream” payout generated by Spotify’s subscribers is considerably higher.
So, in plain math, 1 million streams will earn something like $6-8,000 for an artist. Compare that to individual song or album purchase and the numbers don’t pay.
Given the music business is in such dire straights, things need to happen quickly. So what are the options?
1. Streaming has to scale…and fast.
All streaming services need to scale quickly, if they don’t, the large artists and labels that we care about could pull out.
Without the top talent, streaming collapses. If I were Spotify, I would start an education campaign to every user to let everyone know what is at stake. Rally their membership. Maybe folks would be willing to pay more…or possibly we could have a tiered system or even combined streaming subscription with purchase somehow.
2. Combine subscription streaming with discounted purchase.
We could get the best of both worlds. Imagine a tiered membership where we get to listen to every song, in-full, a few times. After that, it requires a purchase. Or possibly only key songs are available to stream, while others then have to be bought. As a member, purchase could be a lot cheaper than we had to pay in the past – but more expensive than streaming. Apple & Beats are actually in a perfect position to offer something like this if artists start to pull out of streaming. This may be the best compromise for everyone. Spotify better watch out. Remember, Apple is never first…they sit back and watch first-movers flounder and then they improve what exists.
3. Labels turn into cable-like streaming music services.
When things become desperate…crazy things happen. If the labels wanted to, they could pull all rights from all streaming services and start their own. This would be fantastic for them, but terrible for the consumer as we would have to subscribe to multiple labels, much like we had to for cableTV in order to get everything we want. No one wants this. An outside shot is that the labels get together and form something together, but that is unlikely.
4. Advertising & Brand Sponsorship support the streaming model
For this you need scale and it may not be possible to ever reach the kind of scale where advertising can fully support the business. Revenue is supplemental. What is possible is for Brands to see the opportunity at a point in time where the industry is flailing and support music in a way that they have not before. Apple buying U2’s album was one version of that. As controversial as it was, it worked.
5. The new world is for new talent & Big Bands/Artists are over.
The only artists benefiting with streaming are mid-tier and those just starting out. The ones who would never have a shot with a label. If you like discovery like I do, there are plenty of amazing new artists that I listen to on Spotify. It’s possible that these streaming services could turn into simple discovery engines for new talent. Maybe well known artists keep current hit singles on there but keep most of their catalogues for purchase only. If this happens, the Spotify business model as a scaleable business could collapse as memberships would level off as mayor artists and catalogues leave the platform.
If I were going to take a bet, I think we end up with option 2 – the hybrid. If Spotify cannot scale fast enough, artists will pull out and Apple & Beats-like service could end up in the lead. The only thing helping Spotify, believe it or not, are the labels as they really need a competitor to Apple in the market.
Maybe Taylor Swift did do this for the money, but I don’t think so.
Taylor decided to take a stand for the future of her business and everyone elses.
If this catches on with others, big changes are coming sooner than we think.