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5 Facts About the Economics of Various Streaming Services

You’ve heard the arguments before. “Streaming services are cannibalizing the music industry!” Or maybe, “They’re adding to sales! Obviously they’re the future.” Looking beyond the surface of this issue, how much do you actually know about the economy of streaming services?

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1. Interactive Services vs. Non-Interactive Services

To understand how the economics behind streaming services work, it’s important to make a distinction between interactive services (i.e., Spotify, Deezer, Rdio) and non-interactive services (i.e., Pandora, 8tracks). Services like Spotify and Deezer, which are subscription based, identify as interactive streaming services in that the user has the ability to choose songs with few restrictions. After a certain amount of time, these services begin to limit how much a user may listen to within a month. Pandora and 8tracks, on the other hand, identify as non-interactive personalized radio services. A user may create a station or playlist generated from algorithms based on a preferred artist or song. So how does this distinction factor into the economics of these services? It all comes down to licensing. Whereas non-interactive services like Pandora are privy to compulsory licensing via the US Copyright Royalty Board (CRB), interactive services like Spotify must negotiate directly with labels or third parties for the rights to include their music on the platform.

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2. Big Royalties Mean Smaller Revenue

With a compulsory licensing fee, services like Pandora are required to pay a blanket license fee that has been pre-determined by the CRB. In an interview with Laura Sydell for NPR, Mike Herring, the Chief Financial Officer of Pandora revealed that the company must pay a licensing fee of $20 for every thousand hours of music played. With 70 million active users and counting streaming for roughly 18 hours a month, Pandora is paying fees ranging from $800,000 to $900,000 per day. Unlike terrestrial radio, where royalties are paid to the composers, songwriters and publishers of the music, Pandora must also factor in a performance royalty via performance rights organizations (PRO) like ASCAP, PRS or BMI. In 2012, roughly 64% of Pandora’s annual revenue was spent on royalties, and now the service is in a legal battle with PRO ASCAP to bring the established rates down. According to Mark Williamson, the Director of Artists Services at Spotify, in a separate interview with NPR, the service paid out 70% of its $537 million revenue from 2012 to the rights holders of the music, resulting in a $77.4 million net loss. At the moment, Spotify has 6 million paying subscribers and 24 million active users. Spotify UK’s press information page claims that, since its launch, the company has paid out $500 million in revenue. That number is expected to double after this year.

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3. Artist Revenue: Room To Grow, Miles To Go

In the past year, artists like Thom Yorke and David Byrne have spoken out against streaming services, specifically Spotify, due to what they consider unfair payment for artists. Just two days ago, Spotify responded by launching Spotify Artists and revealing that artist revenue per stream equates to anywhere between $0.006 and $0.0084. Comparatively, an artist may receive $0.637 per download on iTunes. In layman’s terms, total artist revenue is determined by the size of the paying audience, the number of times a song is streamed and payment per stream. The most accurate equation can be found here. Zoe Keating, an independent cellist who puts her music on streaming services like Spotify, has released her total earnings via these services on multiple occasions. In aninterview with The Guardian earlier this year, she revealed that she earned $808 from 201,412 streams of two recordings on Spotify. Similarly, she earned $54.40 for 7,908 streams on Rhapsody, $13.38 for 387 streams on Xbox’s freemium service, and a grand total of $1,617 dollars from SoundExchange for platforms like Pandora and Sirius XM. In total, she earned $3,454.28 from streaming services for these recordings in the first half of 2013. Keating admitted that 97% of her total income as an artist continues to come from digital download services like iTunes, Amazon and Bandcamp, but she remains optimistic about streaming in the future.

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4. Bloom.fm’s Business Model Might Change How We Pay for Streaming

Bloom.fm, which evolved from the late mflow, is still relatively new as a streaming service, but its business model stands out thanks to its ‘borrow, enjoy, return’ nature. Unlike other interactive services that offer free or £9.99 per month subscription options, Bloom.fm offers three different payment tiers. The first tier is Bloom Zero, which included access to a free Internet-based radio application with 150 curated stations plus numerous artist stations. Bloom 20, the second tier, allows users to cache or borrow 20 songs a month for £1. Next is Bloom 200, which gives users access to 200 songs a month for as little as £5. Full Bloom, the final tier, offers unlimited access to the streaming service for £10 per month. As of July 2013, Bloom.fm had accrued 200,000 registered users. While this type of payment model is still new, its middle of the road approach may encourage more listeners to start paying for streaming services as opposed to relying on the ad-filled free approach. More paying subscribers potentially means better profit for streaming services and ultimately better artist revenue.

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5. Streaming Services Aren’t Necessarily Cannibalizing Unit Sales

While many are worried that the rise in streaming will ultimately lead to a plummet in total sales, things aren’t as bad as they seem. In the last year, digital track downloads sold in the US dropped 4% from the year before. Digital album downloads, on the other hand, grew 2%. A 2011 study from the Music Business Association found that digital revenues in countries with Spotify grew 43%. This was especially true in countries like Norway and Sweden, where music revenue actually grew as a result of streaming services. According to an article from BGR.com, sales in Sweden grew from $150 million in 2012 to $170 million in 2013.   While there are many other economic factors related to streaming services, these are just a few that we found to be the most interesting and perhaps the most important. As mentioned earlier, these services are only a few years old. It will likely be some time before streaming becomes entirely profitable and sustainable, or even what artists and consumers want it to be. If you have something to say about this post, let us know! We want to start a conversation. Follow us and Tweet us @quantonemusic.

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