music streaming 2016

Music streaming 2016, Part 2: the complex revenue equation

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Our two-part look at music streaming 2016 includes this overview of revenue equations and a look at the current streaming landscape in Part 1.

Read “Music streaming 2016, Part 1: the current streaming landscape.”

In “Music streaming: friend or foe to the independent musician?” we discussed the tiny sums of money that artists and writers receive per stream. But rather than a one-time payment that music creators receive for a download or CD sale, streaming revenues can be perpetual, so long as someone wants to hear your song. And while greater transparency in how royalties are calculated and paid by all the streaming services is a necessity, the simple equation is more streaming spins leads to more revenue for artists.

A big part of the blurriness in regard to how much artists and writers earn from music streaming is due to the fact that many record deals were made before the advent of music streaming in the US, using a model of selling a physical product. It’s time to tackle the job of drafting or revising contracts to take into account the fact that there are no manufacturing costs with either streaming or download sales.

Some industry insiders are suggesting that after the costs of recording, manufacturing, and marketing an album are recouped by a record label, streaming and download revenues should be then be divided equitably – perhaps even split 50-50 – the way writers and publishers currently do. If such discussions come to fruition as a result of streaming’s ascendancy, fewer artists would be as dismissive of the new music distribution paradigm.

One major new development related to the importance of music streaming and it’s economic impact on the music industry came down in December 2015, when the Copyright Royalty Board (CRB), made a change in how future streaming royalties must be paid out.

2016 music streaming rates

As you can see, the new regulations allow each side in the streaming debate to claim a victory. Streaming services will now be paying slightly less for delivering music to their paying subscribers, which continues to grow. But while the paid rate goes down a little, the rate for the bulk of current music streaming listeners that use free versions of Pandora (95% of their users) and Spotify (75% of their users) go up substantially.

Also, the CRB established a rising scale that will be in effect from 2016 through 2020 to boost revenues to musicians, writers, and labels. The raises will be tied to the Consumer Price Index (CPI) and while the gains will likely be modest in the range of 2-3% per year, the pendulum is swinging in favor of better payouts for music creators and their partners.

Streaming services can be a gateway to other revenue

Providing new listeners with access to music they don’t currently know about or own is what makes streaming such an incredible opportunity for musicians. There’s no better example of a superstar artist that “gets” the benefits of having his music available on all the streaming services that Ed Sheeran.

In a November 2015 Billboard profile, the singer songwriter explained why he and his management team are bullish on streaming. Start with the fact that in 2014, Sheeran was the most streamed artist on the planet, with more than 2 billion streams.

From the Billboard article: “Sheeran is one of the first superstars whose career has entirely existed in the streaming era. In 2014 he was the most-streamed act on the planet, and it’s clear that the relationship with Spotify is important to him. ‘If my album is streamed by 2 billion people, which it was, you have maybe a billion that might check it out more online, and like 300,000 people that might buy a ticket. If 300,000 people buy a ticket in one country at 80 dollars a pop, that’s more money than you would ever make off any album or streaming or anything.’ (That said, Sheeran also sells a lot of records. X is on its way to moving 12 million copies globally, which, he proudly notes, is about what U2 sold with The Joshua Tree.)”

Does being the most streamed artist on the planet reduce Ed Sheeran’s income from sales of his CD and downloads? The answer seems clear, it doesn’t.

On a smaller scale, indie artists can look to build the relationship with fans just as Sheeran did, who discover their music via streaming and, in time, move up to purchases of tickets, downloads, CDs, and other products. The pathway is clear and open to anyone with good music available to promote and share with the streaming listening audience.

Reducing Piracy

With much of the debate about streaming services centering on artist’s streaming royalties, little has been publicized about the substantial impact in reducing piracy that music streaming has had in various countries thus far.

In a nutshell: as a country’s music streaming adoption rate rises, piracy declines. Scandinavian countries, the epicenter of the music streaming world, due to their advanced Internet connectivity and high standards of living, provide a textbook example. In Sweden, where a majority of the population now uses Spotify as their main means of consuming music, music piracy has dropped 25% according to Media Vision consultants. In Norway, the International Federation of the Phonographic Industry (IFPI) reports that the majority of the population now gets their music primarily through streaming sources, and as a result, music piracy has nearly vanished, with only 1% of the population reporting file-sharing to be their main means of music consumption.

The effect is not limited to Scandinavian countries. In the United States, where BitTorrent traffic once consumed a whopping 60% of internet bandwidth, Sandvine reports show that now only 5% is used for BitTorrent traffic. Finally, in the United Kingdom, only 14% of music consumers still admit file-sharing, according to OfCom reports.

Interestingly, few of the naysayers railing about royalty rates have pointed out that streaming offers a safer, simpler, and legal alternative to illegal file-sharing, and that it is shaping up to be the best way to compete in an industry where, for a whole generation of listeners in the post-Napster era, free music regrettably became the new normal. As streaming grows in popularity, the record industry can expect to see piracy continue to decline, as the slump in recorded music sales over the past decade starts slowly starts to reverse.

One more sign that streaming services are gaining the respect of the industry is the addition of the Beatles iconic catalog of songs to nine of the major streaming services last December. Their music’s availability will make the $10 per month subscription more attractive to baby boomers who are just now starting to embrace this model of music distribution.

Strategies for success in 2016 and beyond

Adele withheld her recent smash, 25, from all streaming services, with the exception of the lead single, “Hello.” This decision undoubtedly boosted the album’s CD and download sales to the record-breaking levels it attained its first week on the market (3.38 million albums). But let’s be real, while that’s a strategic move an artist of Adele’s stature can leverage to boost earnings via album sales, independent artists – and even most major- and indie-label artists – could not have the same results.

Streaming media is the future of content delivery. No one who is actually looking at consumer trends can deny its steady and consistent growth. Just look at how the phenomenon of “cord cutting” expands as consumers replace expensive cable TV contracts with an a la carte menu of video streaming services such as Netflix, Hulu, and Amazon Prime.

Music is following a similar trajectory with the leading subscription streaming services all showing steady growth numbers. For artists without the clout of a Taylor Swift or Adele, music streaming must play a part in their marketing and sales’ strategies. And if the “windowing” strategies discussed in Part 1 of this post come into play, then paying subscribers may soon be hearing all the latest releases even from top artists, whereas the “freemium” subscribers will have to wait a few months before they get access to the latest tracks.

That future may be just around the corner, as “sources close to the negotiations” report in this story in The Wall Street Journal, as Spotify readies potential 2016 testing of a few windowed releases to gauge the market’s response.

For emerging artists, there is no sense in withholding any of your music from the full range of streaming services. The most important play your music will ever receive is the one it may get by a streaming music user who has never heard you before. At the same time, review the rights you retain in your songs and your master recordings and for all future deals, look to retain the greatest share possible to maximize your earnings from the many sources of digital distribution that exist. If you do so, you’ll be much more likely to see the growth in streaming users correlate to a growth in your own digital music revenues.

Image via ShutterStock.com.

Keith Hatschek is a regular contributor to Disc Makers Echoes blog and directs the Music Management Program at University of the Pacific. He has also written two music industry books, How to Get a Job in the Music Industry, which just came out in its third edition, and The Golden Moment: Recording Secrets from the Pros.

Robert Bassett is a freelance engineer, producer and bassist living in Northern California. He teaches music while completing his degree in Music Management this spring.

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Read More
Music streaming 2016, Part 1: the current streaming landscape
Music streaming: friend or foe to the independent musician?
Thom Yorke’s Music Streaming Rebellion
How to find, land, and work a music publishing deal
Predictions for the music industry: Part 1
A guide to Apple Music for the independent musician

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2 thoughts on “Music streaming 2016, Part 2: the complex revenue equation

  1. Hey, nice write up on streaming!

    I see one problem with your analysis however, when you reference the CRB’s ruling that increases rates per stream, you make a distinction between “interactive” and “non-interactive” that is inaccurate. The “official decision” from the CRB, cited through the link you posted here, states that:

    “The Copyright Royalty Judges today issued their written determination of royalty rates and terms to apply from January 1, 2016, through December 31, 2020, to digital performance of sound recordings over the Internet by nonexempt, noninteractive transmission services (webcasters) and to the making of ephemeral recordings to facilitate those performances.”

    This “per-stream rate” only applies to webcasters and other non-interactive services. The distinction does not lie in “interactive” vs “non-interactive”, but between paid and free tiers of Pandora users. Spotify is not included in these decisions, as they are an “interactive” streaming service with an entirely different equation used to calculate money paid out to artists, publishers, and labels which can be found here: http://www.spotifyartists.com/spotify-explained/

    This is concerning because the conclusions you arrive at as a result of this increased streaming rate are misleading and suggest that millions of dollars are going where they really aren’t. In reality, the CRB has zero control over what Spotify pays out for the use of sound recordings; the private deals between Spotify and record labels determine this. Hope this helps!

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