Below is part two of a five-part series breaking down music’s value as an asset in the business. Read part one here
In the last article, we left off on a brief history of how music has created value in the markets. The question is, how do popular streaming services provide value? They provide huge libraries of millions of songs that are accessible, downloadable, and affordable. Streaming services are built on freemium models, and they earn revenue through advertisements, paid subscriptions, and acquisitions of related properties. But without the access to these music libraries, there is very little in terms of value that these services provide. With the exception of Spotify’s very recent venture into original podcast production, these streaming services don’t produce any music of their own. Rather, they serve merely as hosts for electronic music distribution.The music is what provides the value for these services, so it stands to reason that streaming platforms would pay accordingly for these assets, right? Let’s take a look.
Spotify pays artists on their platform, on average $0.0032 per stream. To put that into perspective, a solo artist would need 3,770,110 streams on Spotify in order to make the US minimum wage annual salary of $15,080.40 . Apple Music pays $0.0056 per stream, Deezer pays $0.00436 per stream, and Tidal pays $0.0099 cents per stream. You can find the detailed report on these numbers at soundcharts.com for more of a nuanced description. But the main takeaway here is that these numbers focus solely on the payout to the recording owners, and it doesn’t capture the full scope of the expense side of the streaming business.
Indeed, these services will strike a deal with content rights owners and negotiate a payout rate with them (usually between 60 and 70%). These groups include record labels, publishers, and other rights holders. The percentage comes out of the total pool of revenue and is distributed to the rights holders who go on to distribute money to their artists accordingly. When you stream the song “Dreams” on your way to the cranberry juice stand, you aren’t paying Stevie Nicks, Lyndsey Buckingham and the rest, you are throwing a third of a penny into a pool that goes to Warner Music Group who distribute at their discretion based on numbers of streams on the platform, total DSP revenue pool, and the negotiated rate as a percentage of revenue.
Remember when I talked about the sheer volume of data that Spotify has on my listening habits? They use this information to help determine their payout scheme. I pay for the student version of Spotify Premium, which is $5/month. Spotify has 96 million paying users as of December 2018, but 207 million active users on the platform. Spotify also boasts an average revenue per user (ARPU) of $4.81, of which $0.51 is contributed by ad-supported users. This means that, while my streams are considered “more valuable,” ad-supported streams dilute the power and impact of my usage. Additionally, these prices change based off of the markets that streaming services operate within. Spotify knows that I live in Indiana, and thus they price the service accordingly at $5/month. But if I slice off the tag, and live in India, the price of Spotify Premium would fall to $1.70/month. However, if India were still under British rule, the premium price would jump to $13/month. This flexibility in price keeps Spotify competitive in a market where local services set the expectation for users in terms of economic contributions and relative values.
You might notice something that makes no sense whatsoever. When you compare streaming service payout rates, you will see that the highest payout rate belongs to Napster. Before you scurry about and drop $100 for a year’s worth of Napster, let me highlight one more element about the payout rate. In simple terms, the payout rate equation is balanced: if I pay $5 for Spotify and I play 1 song a month, my individual payout rate is $5 to the artist. But if I play 5000 songs a month, my individual artist payout rate is a tenth of a cent. The equation is balanced because there’s no variation in the input, as I am putting in $5 each month without change. As user engagement on the platform goes up and total streams increase, the payout rate per stream decreases to balance it out, making the rate somewhat stable. When you see a higher payout rate from a streaming service, it is more often a sign of low user-engagement than fairness to the artists.
Those of you who are plugged into the music scene will notice that I haven’t mentioned the Chad of all music libraries that is Bandcamp. The reason that I haven’t mentioned them thus far in our discussion of streaming is because Bandcamp really isn’t a streaming service. Honestly speaking, the revenue model of Bandcamp functions more as an online record store. This is because they operate on an artist-centered model rather than a streaming-centered model. You buy music directly from the artist rather than putting your money in a central pool, and the user interface and UX of Bandcamp support this model. Bandcamp serves purely as a middle-man in purchases made on the platform, taking the typical agents cut of 10-15%, while other streaming services are the item you're purchasing to enable access to the songs. While music is still an asset on Bandcamp just as anywhere else, it is the main resource creating value on the site.
In the next installment, we break down ownership and music licensing, and detail how Taylor Swift’s music is one of the most interesting assets on the market.
