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

Laura Shin

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?