It’s Time For People To Learn How Streaming Really Works

1Despite it being the fastest growing form of music consumption, many people still don't fully grasp how streaming works or, as this article maintains, doesn't work.


Guest post by Faza of The Cynical Musician

Odd as it may seem, people apparently still don’t understand how streaming music works. Spotify has been a thing for years and there’s a fair number of competitors these days, as well. Despite the vast trove of experience available to anyone with a stake in the music biz (or an internet connection), everyone seems dead set on getting it wrong. Again.

With Spotify poised to finally go public (which is a story in itself), it seems like it’s a good time for me to pick up the Cynical Musician’s Burden.

This specific post was inspired by the anti-Spotify diatribe of Gareth Emery – “a UK-based DJ with more than 1.1 million Spotify followers” – recently posted on Digital Music News. Emery is also “the founder of an Ethereum-based streaming music platform called Choon” – which may, or may not, colour his views on Spotify. Regardless, the amount of confusion present in his post makes me question the wisdom of getting involved in any business venture he’s fronting.

Emery writes:

Spotify has always been run for the benefit of the major record labels – all of which are shareholders – whilst artists get crumbs from the table.

The whole system is cloaked in secrecy, nobody knows how much they’re going to get paid or when. It can take over a year to get paid for a stream, and up to two years. Even with over a million listeners, and tens of millions of streams, I couldn’t rely on Spotify for an income — so it blows my mind how smaller artists are supposed to manage?

Apart from the last sentence, the whole thing is pure, unadulterated bollocks.

Spotify has always been run for the sole benefit of Spotify – or rather: the benefit of Spotify insiders. The details of their upcoming public debut only serve to reinforce this. The major labels have managed to grab a slice of that pie – in terms of equity – which was a smart move, but it’s wrong-headed to think that artists’ issues with Spotify are due to major label meddling.

There’s also very little that’s secret about the system. Not anymore.

A further excerpt:

[…] the amount paid is tiny – and nobody can tell me how much one stream of one of my tracks is worth. Very little is the answer. I have a million monthly listeners on Spotify and I couldn’t rely on it for an income, it probably makes up less than one percent of my income. Touring is the only reliable way an artist can make money these days.

This is a feature. You literally can’t have streaming-as-we-know-it without this problem.

And one more:

But there’s no lack of money in the system. Spotify yesterday said it enjoyed €4.09 billion in revenues last year. It even boasted that gross margins increased by 14% to 21% thanks to “new licensing deals with music rights holders” – i.e. paying the artists even less than before. The real people benefiting are the shareholders, and these shareholders include all the major record labels.

Again with the major labels. Whatever goes wrong – it’s the major labels’ fault. Just stop, please. You’re making a fool of yourself.

The major labels make a convenient scapegoat (together with “antiquated” models dating back to “the days of jukeboxes and sheet music”) that always comes up when people realize that the music business in the internet age sucks. It is also the tell-tale mark of a huckster that’s selling their patent brand of “what’s-the-new-secret-sauce-these-days?-blockchain?” snake oil.

Just say no.

There’s really no deep, dark secret here. The business model behind Spotify was always going to work the way we see it doing. I’ve already outlined the fundamental problems nearly ten years ago, and showed you some nice formulas to illustrate the matter six years ago. People simply aren’t paying attention.

Here’s a TL;DR breakdown of why things are the way they are:

  • Nobody knows how much a play is worth because listeners aren’t paying to listen – this can be taken in the strong sense (where listening is free and ad-supported) or in the weak sense (where a user pays a fixed amount for access over a period of time, regardless of the number of songs actually listened to),
  • There’s a fixed amount of money going into the system, being the number of users times revenue-per-user (this being capped at the maximum price of subscription), but the number of available tracks keeps growing. Artists are literally fighting for a sliver of the pie. There’s a lot of tracks and artists in the system, so the size of the individual slices is bound to be small,
  • Major labels and distributors do fare somewhat better than individual artists, but that’s only because they get a share from a large number of artists/tracks,
  • There’s little to differentiate the various streaming services, because everyone is trying to serve exactly the same music (everything available) and the experience of listening to your favourite tracks on one or the other isn’t that different. For this reason, the main competition between the services will ultimately be on price, driving the already miniscule payouts even lower,
  • Streaming uptake won’t save you, because the number of artists/tracks is guaranteed to grow faster than the number of users,
  • The actual number of streams you’re getting don’t mean jack. The only thing that matters is how many streams you’re getting relative to everyone else.

It’s the pricing, stupid!

Piracy certainly had its negative effects on our industry. Still does. However, the industry’s reaction to piracy was just as bad. Seriously, it’s time to stop digging.

We’ve already been over this, but let’s recap:

4The first thing the industry did was to unbundle the album and put it in a rigid 10-to-1 price structure, courtesy of the iTunes Music Store and imitators. It went just about as well as we’d expect.

Here’s a simple way of looking at it: you want people to spend as much money as you can get them to part with, not as little as possible. This means that your pricing structure should give a better per-unit price on bulk purchases than it does on single items.

Digital downloads were not, in themselves, a bad idea. Neither was unbundling the album (albeit, not for all albums – Dark Side of the Moon should really be listened to in its entirety). A $10 price-point for the whole album was mostly okay. A corresponding $1 price-point for single songs was madness!

When you structure economic incentives like that, it’s a wonder that anyone would choose to buy the whole album. What if there are only eight tracks on the thing and you can buy them separately at a tenth of the price? Hmmm… should I spend $10 or $8? Decisions, decisions.

The iTunes flavour of digital downloads did a great job of accelerating the decline of physical sales, whilst further depressing industry revenues. Gee, we’re losing money on this strategy. What should we do? I know! A sale!

All-you-can-eat, pay-for-access (best case) streaming was the response the brainiacs of the industry settled on. Digital downloads too expensive? How about you pay $10 a month (worst case) or even nothing at all (best case) to listen to all music ever recorded!

That’s bound to be an excellent way for the industry to recover.

In all fairness, we have been seeing some actual growth in recent years. This sounds good until you realize that once you’ve hit the bottom, the only way is up. Since the beginning of the century, the recorded music industry has shrunk by about 70% – let that sink in for a moment – it doesn’t take much to show growth if you’re earning peanuts as it is.

The “antiquated” model of “jukeboxes and sheet music” worked. A songwriter wrote a song; a recording artist recorded a performance of that song; if a music fan wanted to listen to that song they paid some small (compared to the cost of production) amount in order to be able to do so. This could’ve been a “dime in the jukebox”, it might have been a couple of bucks for the single or it may have been $10-20 for the whole album. If your song/recording was popular, you’d have a lot of people chipping in small amounts that would nevertheless add up to a substantial payout. If not? Well, you should do better next time.

The whole point of this was that people paid actual money and they paid for the actual song or recording. All amounts spent were votes of confidence in a given songwriter or artist. Sure, there were plenty of middlemen taking a cut (deservedly or no), but a share of that money wound up in the songwriter’s or artist’s pocket. More importantly, the music fan had to pay extra for each additional artist or song they wanted to listen to. There was new money flowing into the system on the backs of new, hot releases. The music business thrived.

We’re simply not going to get that back if we give people the option to perhaps, maybe pay some small amount to listen to all music ever recorded by anyone, anywhere, anywhen. Such a system may be good for whomever taking a cut off the top (such as Spotify), but it’s going to suck for anyone actually contributing products into the system.

Streaming doesn’t work for Taylor Swift, it don’t work for Adele, it apparently doesn’t work for Gareth Emery, and it sure as hell ain’t gonna work for you.

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