Get Off of That Cloud: Is Streaming Destroying the Music Business?

Get Off of That Cloud: Is Streaming Destroying the Music Business?

Many music lovers welcomed the arrival of the Swedish music streaming service Spotify to American shores in 2011.

Suddenly, people who downloaded the app had millions of songs at their fingertips—tunes that were free to those willing to listen to some ads. Open to paying a $4.99 monthly fee? You'd get those songs ad-free.

Spotify represents a big departure from internet radio stations like Pandora, which allow users to create their own channels based on bands, songs and albums that they like. The beauty of Spotify is that it lets you play songs "on demand," unlike internet radio stations.

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So imagine the horror that many of these music lovers—converts to services like Pandora and Spotify—likely felt when musicians began to detail the paltry earnings that they'd received from such streaming services: fractions of a cent for every play.

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One particularly striking example was published by Damon Krukowski of Galaxie 500 on Pitchfork: "Galaxie 500's "Tugboat," for example, was played 7,800 times on Pandora [in the first quarter of 2012], for which its three songwriters were paid a collective total of 21 cents, or seven cents each. Spotify pays better: For the 5,960 times "Tugboat" was played there, Galaxie 500's songwriters went collectively into triple digits: $1.05 (35 cents each)."

Krukowski, who released his first album on LP in 1988, calculated that in order to make the profit he earned from selling one LP back in 1988, his songs would need to be played 312,000 times on Pandora or 47,680 times on Spotify.

It begs the question: Are streaming services on track to tank the music industry?

Sounding the Alarm Bells

It would be easy to point the finger at Spotify or Pandora and claim that they are bankrupting the very musicians they purport to promote—except for the fact that both businesses are (well, mostly) in the red.

In December, Pandora, which is a public company, reported earnings of $2.1 million (or one cent a share) on revenue of $120 million. But the company warned that it would report a loss of six to nine cents a share for the coming quarter—plus it has never had a profitable year.

So where is all the money going?

To music royalties, for one. The New York Times reports that Pandora paid $66 million in costs that include royalties. And Pandora's challenge is only going to get greater: Apple plans to launch a rival radio service.

Given the lay of the land, it turns out that while musicians are decrying how little they receive in money from streaming services, Pandora is actually lobbying to reduce those payments even further via a campaign to pass the Internet Radio Fairness Act. The company's plea explains where the unfairness lies: "In 2011, Pandora paid over 50% of revenues in performance royalties, while SiriusXM paid less than 10%."

While it may seem unfair to Pandora that another radio service pays lower rates in royalties, Pandora's campaign seemed unfair to musicians—many of whom, like Rihanna and Billy Joel, have publicly opposed the bill.

Spotify, which isn't public, doesn't appear to be raking in the big bucks, either. According to private data obtained by research firm Privco, the company had losses of $59 million in 2011. According to the report, "virtually every new dollar of revenue went directly to music companies as royalty payments ..."

Spotify has never publicly declared its rates, but The New York Times reports that a number of music executives who've negotiated with the company claim it pays about $0.005 to $0.007 a stream by users who subscribe (the equivalent of $5,000 to $7,000 per million plays), and as much as 90% less for streams by non-paying users.

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However, even though it's losing money on royalties, Spotify has been increasing its payments to artists. A confidential report by Merlin, which represents more than 10,000 independent labels, showed strong revenue growth from Spotify in the first quarter of 2012, noting that the increases were consistent, which indicates that Spotify's subscriber base and usage are growing. Merlin CEO Charles Caldas said, "Spotify’s payouts to Merlin’s 10,000-plus indie labels rose 250% from the year ending March 2011 to the year ending March 2012."

So Who's Making Money Off Music?

If the artists aren't making much off streaming, and the streaming services aren't making any money off streaming ... who exactly is making out here?

Caldas has some insight, as he told Evolver.fm: “Spotify doesn’t pay artists. They pay labels.” Not only do labels vary in the amount that they pay artists, but artists have also claimed that labels haven't paid them what they're due.

Another thing to keep in mind is the significant lag time beween the plays and the payments. Caldas says that payments, which first go to the labels and then to the artists, could be for streams from a year ago, when Spotify had a much smaller subscriber base.

Caldas also speculates that the amount an artist makes from one ardent fan playing a song over the course of his or her lifetime could end up exceeding the amount that he or she makes from selling one CD. While a CD is a one-time transaction, every time that a song gets played via a streaming service, the artist will be paid—even if it's just half a penny.

Streaming: Here to Stay?

Despite the controversy over streaming services, many musicians (even those who have been vocal in this debate), subscribe to Spotify. Since even musicians admit that streaming services have a place in their music-listening universe, streaming is likely to only get bigger.

And, as the services grow, payments to artists should also increase: As Donald S. Passman, a top music lawyer and author of “All You Need to Know About the Music Business,” told The New York Times, “Artists didn’t make big money from CDs when they were introduced, either. They were a specialty thing, and had a lower royalty rate. As it became mainstream, the royalties went up. That’s what will happen here.”

So far, the future is looking good for streaming. In Apple's recent earnings report, some investors noticed that iTunes growth in the last year was a lot lower than analysts expected. As Forbes' Zack O'Malley Greenburg said, "There’s no denying the trend towards streaming. Though it’s difficult to quantify, some industry sources believe that services like Pandora, Spotify and Rdio already account for the majority of total music consumption. As that continues to become the norm for more music fans, the idea of having a collection may soon be as outdated as the cassette."

This may be why Apple plans to launch its own streaming radio service—and if that happens, such income "streams" will become a much bigger slice of many musicians' earnings.

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