WHY DO MUSICIANS MAKE MUSIC?
A case for updating the business model in the music industry
Let’s answer that question right away: because they love it. They need to do it. They deeply believe that music moves people, delights the ears, conveys the deepest emotions, ideas, and complexities of life, and frames the human experience in a way that no other form of expression can. Musicians are driven to make music because they can and must.
Given that this is their life’s work and that people derive pleasure from that work, it’s not a stretch to think that the creator might want to derive material goods, to “make a living” from this work.
But if an alien landed on earth today and observed the music industry, they would see thousands of incredibly passionate hard working people creating amazing sounds that are enjoyed by billions of other people. And they’d see a handful of other groups of people, corporations that is, who derive the primary financial benefit from this massive exchange of sound and enjoyment. It would look much like a natural resource being plundered from the land, only in this case the land and resource is actual people and their life vocations.
The purpose of this article is to zero in on the problem facing musicians, look at it from various perspectives, and clarify some common misunderstandings. Once a problem is clearly understood, then solutions can be considered. Too many billions of dollars of venture capital have gone up in flames due to brilliant founders enamored with their solution, who have bypassed some of the hard work of relentlessly defining and understanding a problem.
Nobody pays for music anymore
That’s right, nobody actually pays for this natural resource called music. No, subscribing to Spotify does not qualify as “paying for music” More on that later…
Sure, we know that we don’t buy CDs or downloads anymore, but what does that really mean? Considering the the old model, roughly before the year 2000, may illuminate the profundity of this:
In the old model, we spent money and received an album, single, or download in exchange. Currency was exchanged for a specific product. Artists benefited, with exceptions of course. The businesses of the industry greatly benefited. There was commerce happening — money was paid for recorded music.
We also had to purchase hardware on which to play that music — a turntable and stereo, a cassette player, a CD player, an iPod…
Once digital recorded music was unleashed on the internet, music business revenue spiraled downward and reached a 40 year low point in 2014. Piracy and file-sharing have a unique history and occupy many books and papers, so we’ll not go into that here.
But even with piracy largely mitigated by legitimate streaming platforms, the repercussions of digital piracy remain.
Because of the massive growth in volume of music consumed on streaming platforms like Spotify and YouTube, the music business is actually growing again. And that growth is quite robust and is expected to continue. Indeed, Goldman Sachs projects that the global music industry will almost double in size from 2017 to 2030 — from $62 billion to $113 billion! The majority of this growth comes from streaming.
Still, nobody pays for music.
But even with piracy largely mitigated by legitimate streaming platforms, the repercussions of digital piracy remain.
Wait, what about all this growth?
But if nobody pays for music, where does this revenue growth come from?
It’s important to make this distinction: the value exchange isn’t currency for music. It’s payment for a service — a user experience and convenience, Music is now essentially a public good commodity that underlies the experience. Despite being a public good and having beneficial properties, music has no intrinsic value.
The staggering volume of music being consumed appears to be a beautiful thing. Exponentially more people are listening to more music than any time in history.
Streaming services like Spotify have given the world an endless buffet — almost all the recorded music in history is available on demand, at any time, for no cost.
David Bowie said in 2002 ”Music itself is going to become like running water or electricity…” and that is exactly what has happened. Spotify is the utility company, and they don’t own the natural resource that they disseminate.
It’s like paying a flat rate for city water with no consumption limits. Well heck, I think I’ll make a river then. Yes, water’s a limited resource and my river-making would be considered unethical at best. The point is, while digital music is infinitely playable and consumable, the act of creating it is not.
The point is, while digital music is infinitely playable and consumable, the act of creating it is not.
The major record labels are doing quite well
The beneficiaries of the new growth in the music industry are primarily the major record labels. There are essentially three such labels. A fraction of a percent of artists who are associated with those labels and whose music is listened to in massive volume also are benefiting.
The oligopoly of the music industry, controlled by these labels and entrenched practices that date back to the 1920s cannot be underestimated. It’s a poisoned ecosystem, a broken economy. And it’s fundamentally misunderstood by many in the music industry, including musicians, who mistakenly point fingers at the streaming platforms as the powers-that-be that are taking advantage of artists. The labels are happy to let (and even help) this myth perpetuate itself.
But if we believe that efforts to create and record music have value and should be compensated, just like the creation or manufacturing of any other product, the current model is at odds with that belief.
Artists are left out of the growth.
For the love of music
The creators and performers of music have not and will not benefit from the growth of the industry unless and until the model is changed and they are empowered to share more fully in the revenue.
The majority of artists who in the old model made a decent living from their recorded music, now earn absolutely nothing from their recordings.
For a few years during the rise of streaming and plummeting recording revenue for artists, the following was peddled by well-meaning pundits in the industry: “well, you now have to earn a living from live performance and merchandise, recordings are just marketing tools…” The shallowness of this concept was always evident, but certainly became abundantly clear in the year 2020 when live performance ground to a halt.
A few well established artists have recently been making the news when they cash out by selling their catalogues to speculative investors, who are paying huge multiples of the actual revenue generated by those catalogues. While those artists benefit (often noting that they are paid dozens of times more than they would have made from the music royalties of the catalog for the remainder of their lives and that of their heirs), this speculative part of the industry still only touches a small number of artists and has little implication on the overall business model of the music industry. Though there’s an important concept at work here that we’ll come back to later.
“Well, you now have to earn a living from live performance and merchandise, recordings are just marketing tools…” The shallowness of this concept was always evident, but certainly became abundantly clear in the year 2020 when live performance ground to a halt.
The new world is wonderful and efficient for consumers
Let’s repeat it: nobody pays for music anymore. No, paying for a Spotify subscription is not “paying for music.” Subscribing to Spotify or YouTube Premium simply leases a seat at the buffet, and a wonderfully efficient delivery tool. We pay for a service.
We’re not exchanging our monthly fee for music recordings — we’re renting a convenient and well-designed delivery experience (the app) that’s filled with all the music in the world, and we have the ability to seek, discover and hear whatever we want.
It’s as if, in the old model, we bought a stereo on an installment plan of ten bucks per month, and along with that monthly payment came our own personal library and hard drive filled with every recording ever made. For free. Millions upon millions of dollars of CDs, LPs, and digital files, in our own warehouses and hard drives, freely accessible whenever we wanted. For $10 a month.
It’s a goofy unrealistic notion, and would never work out for compensating the artists.. And assuming we were listening at the rate we listen to streamed music today, it would be impossible to manage that warehouse and find what we wanted with anything close to today’s efficiency.
We now have unbelievable value at our fingertips. The streaming world is a music lover’s utopia. And we don’t pay for the music anymore. We pay for a wonderful delivery service.
It’s not so wonderful and efficient for artists
So streaming platforms create massive efficiencies. But in business terms, both for artists and the platforms themselves, there’s just not enough revenue generated to build a complete and equitable music economy. No matter how much the overall industry revenue grows.
Consider: every user who signs up as a free Spotify user decreases the value of all streams further. It’s a race to the bottom, and subscriptions can’t make up for it. The unit volume increases (more people listen to more tracks,) but the incoming revenue from subscriptions and advertising grows at a much slower rate. So even though the revenue of the industry as a whole grows, the unit value of a stream decreases. And that unit value is what determines what an artist earns when their music is streamed.
The mandate that payments be made to rights owners of music and recordings is law, but the rates paid per stream are at the discretion of the streaming platforms and are complex and opaque.
Nonetheless, the current rates paid per stream aren’t sustainable for the streaming platforms themselves. For every dollar in revenue they generate from subscriptions and advertising, the platforms pay roughly 70 cents to the owners of the music and recordings. Then they have all the operational costs of a corporation. Sounds like an awful business to be in.
And no matter how much overall music industry revenue grows, only the primary stakeholders (major record labels and publishers) will benefit. They will do so exponentially. Their promotional power, their ownership of shares and control of Spotify itself…all this drives more revenue, and a greater percentage of overall revenue, into their coffers.
There’s been a massive shift in the value exchange in the music industry, but the model hasn’t changed to adapt. For the most part, deal structures of 40 years ago still are in place today.
The split of the revenue
Spotify pays 70 cents of every dollar they earn in revenue to owners of the music and recordings. So it should be re-emphasized that streaming platforms like Spotify have a terrible business model (a baseline COGS of 70% is unsustainable, as Pandora’s Tim Westergren argued for years). They just can’t make a profit. Thus the current scramble to find growth revenue in podcasts and other products.
So while the industry may grow as more people stream more music, the split of the pie is what impacts the creators of the music:
- Of that 70 cents in royalties paid from every dollar that comes into Spotify, 58–64 cents goes to the record labels who own the sound recordings and typically a portion of the publishing. About 9 cents of this may be paid back to the artist in sound recording royalties
- The label’s primary expense relative to a recording is the marketing — they no longer have the costs they had in the old model like manufacturing, distribution and music production (the cost of which has fallen exponentially).
- So labels are not only bloating the overall pie in their favor by ensuring their top artists are leading the growth curve, their profit margin is now significantly greater than it was in the old model
- The average major label artist, assuming they share in some publishing as the creator of the music, and assuming they are paid a royalty by the record company, earns about 18 cents of the 70 cents of streaming revenue.
- The remainder of the 70 cents goes to publishers, administrators and some other minor collectors like SoundExchange to distribute to recording master owners (again the labels) and performers.
- The problem is always that the recording, owned by the record labels, gets the lion’s share of the royalties. The artist has no advocate, and the Performing Rights Organizations (ASCAP, BMI) that should be advocating for them, have their own decrepit model and corrupt set of practices that don’t truly put the artist first.
The value of a stream
The number of streams that generate 1 dollar of revenue fluctuates, but it’s estimated that the average on Spotify is 230 streams = 1 dollar.
- So for the lucky artist who makes 18 cents for every dollar, earning 10 dollars would require about 12,777 streams. To earn $10,000 would require 12,777,000 streams. To earn a living… you get the picture.
- On YouTube, where 3 times as much music is consumed as on Spotify, about 1500 streams generate 1 dollar in music revenue. This puts the artist requirement for earning 10 dollars at 125,000 streams. To earn $10,000? 125,000,000 streams.
What about independent artists?
Ironically, lesser known independent artists have a great deal when it comes to the split of the pie. This sounds crazy given the struggles of independent musicians, but the math is theoretically in their favor.
An independent, self-released artist can earn the majority of the 70 cents generated in streaming because the 58 cents that would go to a label is paid to the independent artist who owns their recordings and a majority of their publishing.
There are wonderful distribution and collection services for the independent artist that can efficiently get their music on every platform imaginable and collect all the revenues for very low fees.
But alas, 70% of nothing is nothing. Without the promotional and marketing powerhouse of a label, independent artists are a mere grain of sand in a universe of content and the total revenue generated by their streaming counts is paltry. Occasional anecdotes surface of an independent artist who applies massive and creative DIY efforts and earns some noteworthy streaming revenue — these are rare, random, and never enough to sustain a living or career.
What can be done for the artist?
First of all let’s acknowledge something at a very high-level: there is a finite number of people in the world, and they have a finite number of hours in their life to listen to music. So while the percentages may move, there’s a limit.
It’s a perspective that helps us recognize, among other things, the folly of the investment funds that are paying huge multiples for catalogues. These catalogues by their very nature will only have declining revenue returns as they recede into the long tail and new music continues to enter the world. It’s so stupid and vanity-driven. Over time a lot of investors will lose a lot of money.
But what can be done for the artist? What would an equitable model look like, that would give artists a just percentage of the pie, give them a direct connection to their fans who support them, and empower them to have some control over who gets how much of each segment of the pie?
One important note: demonizing the record labels, publishers, streaming platforms, PROs or any other party in the equation is a losing proposition and foolish notion. In advocating for empowerment of the artist, we have to take a partner perspective, and recognize the value that each partner brings to the table. As we’ve noted, currently the weight placed on the value is unjustly skewed toward the record labels and rooted in the model they’ve been protecting since the 1920s, but taking an adversarial approach toward labels won’t work. Artists need the labels. And they need the PROs, because despite how corrupt their practices are, PROs have legal authority to receive and distribute their assigned publishing royalties.
Let’s now consider whether the product of musical creation and recording could be considered something of value. A painting or sculpture has a value based on what the market will pay for it. One could say that it can’t be repeatedly and widely experienced like a recording, so scarcity is a primary driver of value, but let’s just say that a photograph is the equivalent of such proliferation. The value remains in the original. And people will pay to own it. Visual art is a manipulation of light to elicit a response in its viewer, music is a manipulation of sound to do the same. So the value argument quickly takes shape.
So what if an artist could make 40 or 50 cents on a streaming dollar, and still have strong corporate promotional backing and marketing to reach a significant number of streams?
How might this happen — that more artists with great music could get more exposure and also earn more from streaming?
If the labels’ profit margin returned to what it was in the “old model” when they bore the costs of manufacturing, distribution and promotion, this could be feasible. There was nothing wrong with that profit margin then, and today without those costs, achieving the same profit margin requires a significantly smaller percentage of the pie. The numbers changed, but the model never did.
Since the dawn of the recording industry, and since it was clear there was money to be made, artists have been subservient to the record labels. They grovel for the coveted “deal” and when they finally attain this holy grail, enter a complex world of recoupable advances, slim royalty percentages, and loss of control.
But what if the artist were empowered to be able to sell the revenue streams to the labels. If I want to make a profit from a book or widget I sell in my store, I need to buy it at wholesale, then mark it up to sell it for a profit. What if labels invested in the artist outright in exchange for the right to market the artist’s music and the right to participate in the revenues?
The artist in control
The artist can be in control from the beginning of a creation of their work. They should be able to decide how much of the various rights they want to assign to other value-creating entities, and be able to put a price on those rights. The current complexities of record deals and associated legal wrangling can be largely mitigated.
If music is a commodity that has no intrinsic value, then the value is what is defined in the set of rules that outlines who gets what from the streaming revenue.
Think of it like selling a house: I grant the realtor of my choice the right to market my house in exchange for a percentage of the sale price.
An example might look like this — before releasing a recorded piece of music, or a collection (“album”) of music:
- The artist sells or grants a percentage of the master ownership to a label or marketing agency in exchange for the rights to market the music and grow its streaming revenue. Artists can take bids and review various offers just as in the current model, but the artist dictates the terms. What would in the old model have been an “advance,” becomes a purchase of rights to a percentage of streaming revenue.
- The artist makes available a percentage of the publishers share of publishing for sale to publishers, or any other interested party. The artist can decide how many entities may enter this category, and even have prerogative to approve or deny purchasers. This flips the current practice of speculative publishing catalog purchases, and gives interested parties the opportunity to participate from the beginning of the life of a composition
- The new model can allow for fan participation — analogous to Kickstarter or Patreon, artists can sell bonus material and offer incentives for various levels of support and participation. And is it even possible — could artists actually be paid again by fans for their music? There’s plenty of evidence that fans are actually willing to pay for access to an artist and their music.
- Conceivably the artist could split up the pie into as many parts as they would like to compensate for everything from artist development services to producers to publicists.
The deals and roles aren’t essentially different from the current model, but with the artist putting a stake in the ground and controlling the deals, the model can change drastically.
To some extent this has never been changed simply because “we’ve always done it this way” — the century old model is preserved by those who stand to lose from it. But they don’t have to.
Labels, for example, with this model could support far larger rosters of artists than they do, and conceivably earn even more — not by dominating the pie, but by having a piece of more pies.
Artists don’t really need ongoing contracts with labels and publishers that automatically assign rights and revenues for anything they create until the termination of the contract. Relationships are important and can still develop with partners, but in a new model the foundation of these relationships can be built on a basis of equitable exchange.
An important piece of the puzzle in this solution is technology. Great efficiencies can be gained by making all the above transactions and assignments happen in a secure, instantaneous, and independent technology platform and environment.
We’ve not assumed any details of the technological solution here, but rather laid out the problem, illuminating how the model might generally be re-conceived.
The global problem with the music industry needs to be deeply considered and clearly understood when creating the technology that best serves any new model.