Why Music Streaming Is More Lucrative For Labels [JAY FRANK]

Future-hit-streamingBy Jay Frank of FutureHit.DNA.

In the great streaming royalty debate, the focus has been on tiny royalty rates per stream. Artists are up in arms, many are opting out of streaming services, and the noise and debate has been growing louder. Lost in that noise is a voice that is seldom heard: that of the record companies. There’s good reason for that: they’re making more money from streaming and the future looks extremely bright for them.

Buried in the Christmas Eve edition of the Wall Street Journal (which is itself a day to bury news) is a short column by esteemed writer Ethan Smith. And buried in HIS column (not the lead paragraph, but 8th paragraph) is the vital important nugget that shapes the future music business:

Data reviewed by The Wall Street Journal showed that one major record company makes more per year, on average, from paying customers of streaming services like Spotify or Rdio than it does from the average customer who buys downloads, CDs or both.

OK…let’s quickly digest this. On a per-consumer basis, a major record label makes more money from streaming services than any other format. This might be a figure to look at skeptically if these services barely reached a million people, but worldwide streaming services generated $1.25 billion dollars this year and Spotify alone has over 24 million active users (which jumped massively in the last week with app installs up 4x over the previous week). But how much more is being earned?

The average “premium” subscription customer in the U.S. was worth about $16 a year to this company, while the average buyer of digital downloads or physical music was worth about $14.

Let’s take a look at that. Year over year, the premium subscriber was worth nearly 15% more than the person who bought music either digitally or physically. So, if there’s more money to be made in the streaming hills, why are so many artists unhappy? Because the artist has to rethink the business on multiple levels.

image from www.feliciastreeter.comIT TAKES LONGER TO MAKE MORE MONEY
As Ethan points out, it took an “indie pop/rock group” 34 months to make more money from streaming than they did from sales. Some artists will do it in less time, and others in more time. Either way, the artist has to take the long view. It’s certainly easier and much better to run a music business with the money coming in quickly with an up-front sale. However, if you believe in your music and have patience, the long run pays off. In this way, the recorded music business will quickly resemble its partners in publishing. In another way, with many artists being financially irresponsible, is it so bad for them to get their money slowly over a prolonged period?

A person buying $14 worth of CDs a year has the money going to 3 artists at the most (3 CDs x under $5). A person buying $14 worth of downloads a year has the money going to maybe 18 artists at the most (18 downloads x $.79). However, $16 worth of streaming revenue conceivably goes to as many as 3,200 tracks (3,200 streams x $.005). Even if you take an assumption that a person does 100 listens of one artist in a year, that’s still spread out over 32 artists in a year, or nearly double the max average for download sales. As I’ve reiterated before, the real issue facing artists with streaming is that the very access that allows them to make money means the pie gets sliced thinner. There’s more money, but it just goes to more artists.

Disposability of a song only works if you work it extra hard while it’s hot. If an artist/song takes 34 months to make more money, then the song needs to be relevant for those 34 months. No longer can you stiff a consumer who buys something and only listens to it a couple of times. Now, those listens need to reoccur and do so over a prolonged period. This also means continually marketing content to ensure it stays relevant.

Longtime readers of my book Futurehit.DNA have already been making music that plays into these trends. I’ve been predicting for years that music revenues will be based more on repeatability, and that is now taking firm root. Those who embrace these new realities are more likely than others to rise above the mass volume of music released and are poised to thrive in this new age of the music business.

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  1. I’d like to see those stats. I don’t know any artists making more money from streaming than music sales.

  2. Labels making more via streaming than sales, combined with artists having to wait longer to see their earnings, should be a justification for larger up-front advances from labels to artists, correct?
    Of course, the weasels at the labels don’t want you to think that way…

  3. Not really. Who is to say that any artist is going
    be successful. Labels have to dish an extreme
    Amount of capital to make artist successful
    so that advance is worthless for new artist. And
    when those albums flop artist NEVER pay those
    advanceback. artist take advances, use up marketing
    money and PR employees, consultants, radio
    campaigns that start at 40k. Then ungrateful artist
    say their weasels when it’s time to pay back their loan
    but their touring and collecting awards cause that label
    backed you when no one else would.

  4. Future success stories can’t be predicted with 100% accuracy, no, but if a label or Head of A&R can’t do its due diligence in assuming potential P&L, they should be working in a different business.
    If a label is earning more across the board due to streaming revenue from its catalog, that should absolutely be reason enough to loosen the purse strings regarding an advance component.
    And don’t get me started on record label executive salaries & benefits as compared to the paltry up-front advances offered to new signings. Please.

  5. I`ll stand by this article. Not sure about all the stats, but I can say that as a 100% DIY label/artist, my monthly payouts have increased 200-300% because of streaming. It`s a long game for sure, been pushing this boulder for 6+ years.

  6. what does that mean in “real” terms though.
    If you’ve been making $ 1000 a month before and are now making 2-3000k that’s significant, but if you have been making 20-30-50 dollars up to now – as most artists have from streaming income – it still doesn’t even move you close to the poverty line. As a hobby musician that’s fine probably, but if you’re doing this professionally it’s a failed model. All of this talk about 34 months and more doesn’t consider at all the notoriously short attention span of the consumer who is barraged with new music on an unprecedented level and pace these days. It would take an extraordinary amount of effort from the artist to still be active after that time plus of course other resources to survive.
    If you don’t have funds to stoke the fire all that time the streaming system will put you under.

  7. Wait EVERYONE one Major record label made more money streaming then everything else. PROVE IT. Until then, please can we just stop this nonsense. Streaming has only made the various streaming companies founder rich in stock since the stockholders don’t have earnings and the artist make pennies and dollars who does this even help the eco system of the entertainment economy.
    BTW I love posting the end of years sales number on the Digital only people parades since Digital when down this year and CD while going down are still 57.3% of Sales and proudly sold at every Starbucks and Wholefoods, truckstop, Mall and Mom & Pop record shops. Plus Amazon…….

  8. It doesn’t say that. It states that the label, not the artist, is making more ARPU from streaming users then a la carte users.

  9. If I spend $14 a year on CDs, I’m probably buying 1 CD. Hotel California, for example, still costs (retail) anywhere from $12 to $16. Beyonce’s new CD carries a retail of more than $14. What kind of CDs can I buy at less than $5 retail per disc?
    And downloads are $1.29 at iTunes and Amazon (sometimes $0.99), where most people go. Where’d the $0.79 come from?
    Meanwhile, the labels are shareholders in Spotify. They’ve made money from advances PLUS Spotify is an investment for them. If/when it goes public, the labels stand to reap additional rewards.
    Jay is right about streaming working over the long haul. If you’re Pink Floyd or ELO or (name catalog band here), you’re going to do well with streaming because people know your music and will continue to listen to it until they die. That music was a part of listeners’ lives. Since it’s so much easier in 2014 than 1980 to listen to EVERYTHING we want whenever we want, it’s that much harder for the next Who or U2 to break through.
    The world for the music listener is just different now. As soon as musicians and writers and managers understand that, they’ll hopefully come up with strategies to make up the short term revenues they need that leads to greater incremental revenues from streaming down the line.

  10. All the above is true. But the real reason why labels make more money out of streaming is because their negociation power allows them to ask huge advance fees (Minimum Guarenteed) on further revenues. Those advances often surpass the total of progressive revenues, and then the un-redistributed money stays in the label’s pocket. we’re talking about millions of un-redisributed dollars a year.

  11. Nice peice Jay, as usual. Here’s one more fact for your stew:
    Lables LOVE streaming b/c they do not have to account to aritsts for much of the initial “advance” revenue. The start up fee paid by streaming services as a licnce is often deemed an “unallocated receipt” and gets parsed out to thier favorite artists. For more on this see the end section of a peice I wrote last year along with some sobering numbers on actual lable revenue and how streaming will ensure the talent bottle-nck that the internet helped loosen up.

  12. Corey, these guys are out to lunch. I’ve been in top level muisc meetings on Muisc Row in Nashville and can tell you they have admiited to devaluating our royalty rate to mere pennies, practically nothing for streams. And then alone comes “Jones” to put out BS needed to hopefully keep us all happy. It is a fact that no label can sustain its self on single sales alone, and for sure can’t do it on streams, this is total insanity. So you ask, how does a label stay in business. My friend, they got in bed with the owners of the tech world and streamers to get a percentage of every song that is played or used, while the writer and artist struggles to collect his pentance owed him on his one song. The creator is nothing more to these fast talking Kings of control than a slave in the fields earning his daily bread crumbs.

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