D.I.Y.

Why Musicians Make Little While Music Services and Distributors Make Billions [JEFF PRICE]

image from lygsbtd.files.wordpress.comBy Jeff Price, the founder of TuneCore and now founder/CEO of Audiam.

In today's new music industry of peer-to-peer file sharing, download stores, and on-demand streams, it's hard enough for an artist to make money by selling their music. So what happens when the world's largest music distributors and stores carry all the songs in world but don't need to sell any of them in order to make money?

The answer: Revenue from the sale of music goes down for the artist, while simultaneously there is no negative financial impact on the new stores and distributors.

Interests are clearly misaligned. Artists have been reduced to replaceable cogs in a teeming mass of other undifferentiated music creators used purely as a commodity to represent breadth of choice for the consumer. In short, artists are used to financially fuel these new companies, but they are not reaping the same financial reward in return.

The old music industry may have had a lot wrong with it, but at least it was clear how everyone in the food chain — the artist, record label, music distributor and physical retail stores — could stay in business. The music had to be created, recorded, manufactured, distributed into stores and… SOLD.

Not so in the new music industry. Now it is only the artist who must sell their music in order to "stay in business." And artists are fending for themselves against a tidal wave in a sea of technology companies and venture capitalists. All sectors of the music industry are no longer being run by people from the music industry. This glaring misalignment does not bode well for the future of music.

Let's start with the music stores.

MUSIC STORES/SERVICES

Unlike the physical music store of yesteryear that needed to sell the CDs and vinyl sitting on their shelves to make money, the digital music stores and services of today (Pandora, iTunes, Amazon, Spotify, and others) can make money without ever selling — or even streaming – all the music they "stock." In this digital age, amongst the new ways music is being utilized for profit, the sale or streaming of music is almost an afterthought.

Take iTunes, currently the obvious substitute for the traditional record store. If Apple happens to make money from the sale of the music (which, some suggest they didn't for many years), all the better — but, the main purpose of iTunes is to make money for Apple by selling Apple products and gaining market share for its operating system.

Amazon is more or less in the same boat, using music as an enticement to motivate people to create Amazon accounts, buy other products that are not music (including their own Amazon Prime service), sell more Kindles, and gain market share. This explains why it sells music for less than it pays for it. Music acquires those customers for their other products and services.

And it's not just Apple and Amazon. Take a look at Spotify and other interactive streaming services.

How is it possible that a company like Spotify, whose sole business model is to make money from the streaming of music, is not prioritizing making money from the streaming of music? The answer: Spotify doesn't need to stream the music it carries, nor be profitable from those songs it does stream, in order for its investors and owners to reach their financial finish line of selling the company or taking it public to make billions.

To reach their goal Spotify believes they must have: a huge number of subscribers, a vast catalog of artists, a user experience that customers find pleasing, and ubiquity. Making money off the music, or having the music it carries being streamed is, at this time, an afterthought. And when the inevitable financial exit for Spotify does come, the artists will make no money from it despite being at least half of the equation. This may explain why the major labels, all of whom own a piece of Spotify, do not appear worried about Spotify's royalty rates. Their eye is focused on the true financial prize: owning a percentage of a company that gets bought for billions.

Just look at Pandora: its shareholders made a fortune when the company went public, despite it making little to no profit. It was able to IPO off the artists' music despite the music not ever needing to be played, nor paying the music creators a royalty they deem reasonable.

At the "music store," the point of economic intersection where art truly does meet commerce, the entity selling the music generates revenue without selling music or can lose money on the sale or stream of a song and still reap a profit while the artist makes little or nothing at all.

The interests of the artists and the music stores are no longer aligned. Technology has provided a way for there to be little-to-no cost or risk to have music stored on hard drives always available to buy or stream. The incentive for a store to sell music and make money from that sale is gone. Instead, music is used to sell smart phones, tablets, computers, recurring monthly subscription fees, operating systems and to generate market share. Or it's being used as a loss-leader in order to attract a buyer; making all the investors and shareholders rich while the songwriters, publishers, artists and music creators get little to nothing. The artist is a commodity being aggregated to provide the impression of breadth in a music catalog.

Certainly, no one is disputing the fact that artists have always been commoditized to a degree; that is, their music was a "product" to be peddled, sold or used by others to make money. From recording studios, to labels, to distributors, to press to radio, to retail — the artist was the necessary means to a variety of parties' monetary ends. However, in today's industry there is a profound lack of transparency of how and why the artist is being used to make money.

DISTRIBUTORS

Although life was not a bed of roses between the traditional labels, artists and distributors, they all had the same goal: get CDs onto the shelf of the physical retail store, get them sold and collect the money from the sale. Arguments were over how this money was split, not whether the music should be sold to make the money.

Not so for today's digital music distributors — think CD Baby, IODA, InGrooves, TuneCore, ReverbNation etc. There is little to no cost of failure if the music doesn't sell. These companies do not have 500,000 square foot warehouses with 20-foot high ceilings loaded with shelves piled high with CDs waiting to be picked, packed and shipped out to retail stores. They don't have regional staff located around the country walking into stores to promote the bands, releases and checking for inventory around tour dates. They front no money for in-store marketing programs or manufacturing. They suffer little to nothing if the music does not sell beyond the one time cost of placing a digital file onto the hard drive of Apple, Amazon or Spotify.

This paradigm in and of itself is not the problem. But add to it that many of the board members and management of these new companies are not from the world of the music industry; they are from the world of technology, banks, software, hedge funds, private equity or technology firms that have no background in the music industry.

Their goal is to get as high a financial return as quickly as possible by taking the company public or getting bought – both of which can be done without selling the "product" they carry. There is no reason or incentive to build an artist's career or sell the music. Why invest in an artist like Bruce Springsteen for almost three years before he hits if it doesn't help make money now.

Even more disturbing, as stores don't need to sell music to make money, the distributor should be the last line of defense. But for the most part, the new music distributors are also being run by the same banks, software, hedge funds, private equity or technology firms that have no background in the music industry. The artist is stuck in the middle between two sides– the stores and the distributors– both of which make money without incentive or need to sell the artist's music and neither has leadership with industry expertise or institutional memory. The artist is now, essentially, dealing with a two-front war.

Perhaps this explains the bizarre behavior of distributors taking distribution fees from artists without providing real value . As an example, they claim to control synchronization rights to recordings and compositions for licensing into TV shows, film, videos games, YouTube, Vevo, and Vimeo, and then charge artists a fee to use their own music in their own YouTube videos.

The smart investors understand the dilemma of short term return at the expense of long term growth. They make certain to bring the right management into the company to assure they are not short sighted and destroy a valuable sector, however, many do not.

Where exactly does this leave the artist? As an interchangeable cog that has little-to-no long term value.

Companies generating revenue from music, while no longer needing to sell it to make money, combined with management of many of these companies being from outside the music industry is a lethal mix for artists. One they may just not survive.

By the time the owners of these new companies "exit" reaping billions of dollars, a sea of decimated artists may be left in their wake wondering what the hell happened.

And the inheritors and owners of this new industry might just find themselves wishing someone actually cared about the artist as without them, there is no long term growth or industry to "monetize" for anyone.

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25 Comments

  1. I totally agree, however, with the over saturation of “music” or “artists” increasing on a daily basis, the value has also decreased tremendously. Where is the quality? The old model at least had a control.

  2. Find the bands you love and buy their album on their website or directly from the band at shows. Support them by going to their shows and buying their merchandise. If you really loved them you would buy the album and not one song at a time on some stupid streaming service. Collect art people.

  3. Streaming already won people, get over it and accept the future. I’m sick of artists trying to guilt trip consumers about streaming their music instead of buying it. Now everyone’s getting into the whole “moral” argument about it which has become pretty funny actually (I’m referring to that NPR blog). Streaming is perfectly legal now and will begin to start scaling really soon. Many teens nowadays have never bought music in their lives and never will, they either have spotify on their phones or use youtube. The debate is over really and the reason it’s still going on is people’s refusal to accept change. If you can’t beat em, join em.

  4. Robert said “If you can’t beat em, join em.”
    So you’re saying artists should join the Wall Street folks that are only interested in a huge return on their money? These are the same guys that screwing over the artists, so I’m not sure how that helps anything, especially since the artists would never see the kinds of returns the Wall Street guys will see.
    “Streaming is perfectly legal now and will begin to start scaling really soon.”
    Not in all cases, by any means, and it has already scaled up.
    “The debate is over really and the reason it’s still going on is people’s refusal to accept change.”
    The debate is far from over. The reason it’s still going on is people’s refusal to let themselves be screwed over by media giants.

  5. The “Silver Conductor” here, I totally agree with where Jeff is coming from,he knows this game in and out.His behind the scenes knowledge is impeccable. I was waiting for AUDIAM to come along after the the TC departure. We are in a whole new space as far as the record industry goes, we as musicians and Indie Artists just need to stay up to speed on ALL the changes that are taking place at the speed of Tweets.
    MusicLuv, The SC.
    (www.thesilverconductor.com)

  6. Poor article. If you’re an artist simply trying to gain a living off of record sales then you clearly have no idea of how the music industry works nowadays. OK, maybe physical stores were more obliged to sell music in order to survive, but do you really think that they promoted music instead of themselves? I don’t ever recall Tower Records or Virgin ever having to advertise the shit out of certain music because they needed to keep their business alive and not because they were paid by a label to do so… Your article doesn’t at all explain how physical stores would actually help artists. Physical stores just promote themselves to get people to come (same concept as a digital store), they just reunite content. Any in-store promotion is simply a bidding war.
    I’d rather have my music on a digital service even if it pays less. At least people can find out about me with recommendation. Something digital stores provided and physical ones didn’t.

  7. So hold back your Gems, Get a straight job n wait until some how, some way, music has value again. Better than your masterpiece being downloaded for free by most people off of a Ford or American Airline Ad on Line.

  8. I think the biggest issue is that musicians have always been a desperate bunch for money and attention. There’s only ever been so much room at the top and it doesn’t help that that 1-5% have gotten 95-99% of all the publicity and marketing. It’s led so many to think that they can make it, too, but in reality being good isn’t always enough. Even the most famous musicians had help being in that 1-5% by legal to non-legal means from their labels. There is only one way musicians aren’t going to ever be completely screwed over and that’s by not signing to major labels and to not sign up with major streaming services, but that’s not likely to ever happen. We still live in the best time in the history of music because at least now musicians can record affordable on their own and market themselves worldwide. If your music is good you should be moderately okay which wasn’t even the case ten years ago.
    http://www.chancius.com

  9. I still fail to see the correlation between declining record sales and the negative impact that has/will have on music. There are so many revenue streams outside of just album sales (touring, selling merchandise, licensing and creating content), and now that record labels are being phased out, isn’t that ultimately better for artists? True, they may struggle much more earlier on in their career than they might have under a contract with a label. But as you said in your post last year, it’s easier and cheaper to create, distribute and market your music than ever before. Personally, I think this is going to dramatically raise the music industry’s profile and ultimately reinvigorate people’s love of music. I may not have paid for all the music I listened to on Spotify this year, but I’ve probably been to about 10x more live shows, bought more full length albums and become more interested in bands that I’ve found on Spotify than I ever would have before music streaming existed. Businesses using artists and their music like commodities is nothing new; but the difference is that now artists don’t have to rely solely on those businesses to do everything for them. Maybe that will discourage people from pursuing careers in music but honestly, if you’re not willing to accept the financial risks associated with doing what your passionate about, I’d say music is the wrong industry for you.

  10. Just a couple of comments on a couple of comments …
    Record stores promoted the hell out of artists – newspaper adds, posters, window displays, end caps, counter displays and usually sales people who knew about music … Some of this was paid for by the labels but the promotion was heavy … remember record stores were the place to be before Starbucks.
    And, record companies aren’t going away – they are becoming more important than ever. Smaller rosters for sure, but, it’s all about cutting through the endless amounts of crap on the Net and building and sustaining careers. They really do have this digital thing figured out and still maintain their power and skills in the real world where it counts more than ever.

  11. Yep I wish one day all musicians would take their music off every platform available. Just for a month…. Let’s see how the World would cope with…. silence!

  12. Many people are quick to blame streaming sites and digital stores as the reason for artists not making as much as they deserve to. Even though they have contributed to it it’s not entirely their fault. Most people don’t want to buy music because they don’t think that it’s even worth it. They don’t see that the “higher authorities” are the ones that are claiming most of what the artists deserve. It’s important for the artists to speak to their audience in way that makes them want to support them through merchandise and concert tickets. Of course, if they have money for tickets and merch why not just buy the music? Some people just don’t see that it’s worth it. It’s the artists job to convince their audience why they should buy the music. Many are content with people not making a dime as long as others are listening, but realistically they need to survive on this because it’s their job. Once the individuals find a reason that convinces them that purchasing the music is worth something valid, more and more people will. I’m a teenager in this modern age and I still buy CDs. I love being able to collect what speaks to me in a physical version. I enjoy feeling as if I’m supporting the artform that means the most to me. At the end of the day if everyone stopped focusing on sales as a measure of success then we would find that there is something more important than making money.

  13. Jeff does a good job comparing the “old” music industry with the “new” music industry. In the old music industry, the artist, record label, distributor, store, etc. had to sell music to stay in business. Today, music stores/distributors do not even have to sell music to make money. Money is made by gaining market share and by selling other products. This negatively affects the musician in two ways. First, the musician is making less money and is no longer being fairly compensated for their work. Streaming sites like Pandora and Spotify pay the artist less than a penny per stream. Second, the musician is no longer a long term investment. This is because the goal is to get a high financial return as quickly as possible. As Jeff stated, “There is no reason or incentive to build an artist’s career or sell the music.”

  14. Oh, yes there is a reason and I can think of plenty of incentive. How about having really great music for a change? Let’s do some thinking outside this box they all seem to want to put everything in. We could really use a modern Motown.

  15. Why is it the responsibility of the distributor to further an artist’s career? They are simply the medium of distribution; they are not responsible for an artist’s success beyond making sure that consumers have an easier way to access the artist’s music. Stop blaming music streaming services for adapting to consumer demand. The evolution of the music industry in the digital age has made one thing crystal clear: the average consumer does not want to pay for music a la carte. Nothing you, Jeff Price, Thom Yorke or whoever say will ever change that. Artists themselves must stop relying on the sales of their music as the primary means of income and instead see this evolution as an opportunity to take control of the marketing and distribution of their music independent of record labels. In the short-term, they will absolutely struggle but if they’re truly as good as they think they are, they have a greater opportunity for long-term success than they ever did under the old music regime.
    Will this lead to the eventual death of music? You tell me: one on end of the spectrum, you have an industry rigged to give control to record label executives, whom are incentivized to treat artists like commodities and lock them into contracts that take away the creative control of their own music. On the other end, you have a system that lets anyone upload music immediately to a platform (no middleman) that has a growing audience of 11 million paid subscribers, while giving artist’s the lion’s share of its revenue.
    Perhaps one day Thom Yorke will come out with a whimsical streaming platform that pays artists 100% of the profits and runs on magic and the steady capital of generous benefactors. Until then, streaming services can continue to grow their catalogue of music without the quality of music produced by artists suffering. I think there are just as many good artists out there now as there were 30 years ago. The difference is I don’t have to wait for the radio or a record store to tell me who I should like, I can find the music I like myself.

  16. The facts are correct. I question the sentiment and cannot find the conclusions.
    First, this is not music industry vs. the invaders or old world vs. new world. iTunes, Spotify, Amazon are legitimate members of the music industry, albeit newer. Things evolve. New players come. Old ones go. Setting this up as us vs. they helps no one.
    What most bugs me about this article is it ignores the artists’ responsibilities. Yes, disgusting practices take advantage of artists. They always have; probably always will. But artists need to understand their industry, it’s regulations and laws. The need to educate themselves about licensing and agency. If they license away rights they should not, the company taking advantage is being evil, but that’s the artist’s responsibility too.
    BTW, the artists getting screwed by Spotify and Pandora are the major label artists, not the smaller ones. It’s not like droves of people would be buying those smaller artists’ songs if the streaming services did not exist. Yes, they deserve fair compensation, however, if it were not for Internet services, a lot of these artists wouldn’t be on the map and wouldn’t be making money.
    As for the labels becoming owners in streaming companies like Spotify, that made sense. They recognized how the industry is changing and adapted. That’s pretty shrewd considering how badly the labels dragged their heels and mucked things up for years and years post-Napster. The labels are figuring it out. Now the artists need to do it too.
    I do not understand why musicians hold onto pre-Internet beliefs and business models. There is more do it yourself opportunity than ever, provided you work for it. There is less major label opportunity than ever. I’m not even sure what the independent labels do beside print and distribute a few CDs and add artists songs to Amazon, iTunes, Pandora and Spotify (Please enlighten me). A non-label artist can do all of that independently (okay, international distribution is problematic). Heck, anyone can sell on Bandcamp. The tools are there for musicians to access.
    The real question isn’t what’s wrong with the music industry. When I was a kid it was all secret and mysterious. Today anyone can participate on a national and global scale. The real question is, how will you take advantage of it?

  17. The issue is that selling music to stores is hard so most of the companies today are made up of kids clicking on keyboards and there is little to no talk to owners or the buyers in stores. Plus more then a few of the modern label managers don’t know a whole bunch about making a physical CD let alone a Vinyl record. Moreover the ability to focus Artists and Labels on the need to communicate to fans that stores are open and waiting from them to come get a piece of music is just not happening. Most of the bands we see only push their itunes. BTW I know of one distributor that treat selling music as priority since it built it’s whole model on doing just that SELLING. Feel free to contact me if your label/bands wants such a relationship.

  18. Hear that songwriters? Need to stop writing music and start making albums and touring and merchandising. No more hiding behind your music…time to become artists and get some Tshirts made.
    Personally I think the debate is just starting.

  19. Have you ever heard of a songwriter? Engineer? Producer? None of these people sell merchandise. They don’t tour. They don’t sell albums. You think the Beatles would have been “The Beatles” without George Martin? What were they going to pay him with? Proceeds from last nights gig in the pub? Who will discover and nurture new artists? Who is going to help them write better music, learn how to perform better, etc? You have such a short sighted view of how all of this works.
    You can’t invigorate people’s love of music if they don’t have any value for it. If you get something for free ($10 a month or a bundled package is basically free), you have no investment in it. In case you haven’t noticed, the idea of “free” and cheap basically destroyed the print and news industry. We have fewer choices, terrible writing, and it’s all based on how many clicks they can get out of you. Over 1/5 of the people who use to work in news have lost their jobs in the past 10 years…we destroyed that industry when we need solid reporting the most.
    What you are going to get is a reduction in the quality of the art form.

  20. Oh I also failed to mention…without the money that has traditionally been from record sales…how will artists pay for studio time? New instruments? Funding a tour to get exposure? What about all the people who work at making instruments, running studios, all the electronic gear? It ain’t all basements and Garage Band.
    At least with crowdfunding you get people to invest in something up front…they become a partner and a patron, but with streaming, there’s no upfront money. There’s only hope…and you’ll have to push an awful lot of streams to get paid something significant when you consider it’s around 16,000 streams to one $.99 sale.

  21. Actually, physical record stores have refund privileges, meaning they can refund unsold records back to the record label. The monetary loss usually hits the artist just as much or more than it does the record label, so the incentives for physical record stores and music services to sell music are actually very similar.
    What record labels fail to mention is that they are the ones responsible for paying artists in this digital age. For example, Spotify pays Universal Music Group who in turn pays its artists. The truth is that artists never made much money from album sales- they got approximately 10% of the record label’s profit during the physical CD age and they’re getting about 10& of the profit now. Record labels, after merging with other music subindustries in this digital age, are also garnering the same percentage of profit from digital stores/services as they used to from physical CD sales.
    The problems don’t lie with the digital music stores/services; they lie with the record labels.
    Problem #1: Record labels seem to be stuck in this rut where they’re rejecting change because they want more sales. It’s true that record labels aren’t selling as many songs as they used to. However, that would happen with or without digital music stores’s single song downloads/services. Before iTunes, the mp3 was all the rage and people didn’t have a valid digital music source to buy from so they pirated instead. Before Spotify, people were buying from iTunes but even more people were downloading illegally to avoid paying. Digital music stores/services aren’t hurting record labels; they’re bridging gaps that record labels don’t seem to want to acknowledge.
    Problem #2: The record labels aren’t and for a long time haven’t been paying artists nearly enough. It’s just that they now have something to point fingers at. Before the digital age, artists could only blame their record labels, and which artist would ever be suicidal enough to do that? Now that digital music stores/music services have entered the industry as revenue makers, artists can blame them without the negative repercussions of losing their record contracts.

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