Music Business

Could Half of Music Royalties Pay for Music We Would Rather Skip Over Than Listen To?

Images-1By David Touve of Rockonomic

In this post I am going to highlight what may be one of the great ironies of how we pay for music in the “music as a service” era: Upwards of half the money paid out in royalties by music services may be used to pay for music we would rather skip over than for that music we would rather listen to.What we’ll discuss below is if nearly 15 songs are skipped during any hour (according to data released by Paul Lamere from Echonest), then upwards of half the royalties paid by music services could be accounted for by these skipped tracks.

If, however, skips only count as plays—from a royalty perspective—after a certain number of seconds of playback (e.g., after 30 seconds, as suggested by Mr. Jonze at the Guardian and Stuart Dredge, at MusicAlly), then the proportion of royalties paid due to skipped tracks falls to between 20.86%, or just over one-fifth of royalties paid, and 23.5%, or nearly a quarter of total royalties paid.

Regardless, the matter of counting skipped tracks as royalty-bearing performances needs to be taken into account amidst the broader discussion of payouts from these music services. A reasonable person would conclude that skipped tracks are evidence of music transactions that might not otherwise have occurred in a world of Track and Album sales—few people purchase a track just to skip over it!

As a result, browsing is now a crucial piece of the business model for music; As a revenue stream for music stakeholders.

How did I come to this ironic, if not ultimately ridiculous conclusion? Here goes…

* With apologies to the grammar police for ending a sentence with a proposition.

A Song Skipped is a royalty paid

We all skip tracks while listening to music—whether on CD, via Pandora, or via our favorite music service like Spotify, Beats, Rdio, Google Play, Deezer, etc.

Money_bagsWhat most of listeners don’t realize, however, is that royalties are paid for music that we skip. In fact, in some cases, a full royalty is paid for music that we skip even if we skip a track in less than a few seconds. Whether you think this approach to royalties is fair or not, in order to get the license, services pay for music even when a track is skipped.

For example, webcasters such as Pandora owe a full performance royalty for any portion of a track streamed to a listener, if they choose to operate under the variety of licenses offered via the statutory process in the US. As a result, a track skipped after 1 second is worth as much in royalties as a track listened to for its full duration.

In other words, webcasters — and in turn listeners — pay as much for a skipped track as they do for a track heard in its entirety. This little factoid is why the nuances of no royalties owed for skipped and promotional “Heat Seeker” tracks played into the economics of the supposed agreement between Apple/iTunes and record labels.

While the law—or, more clearly, the cost of abiding by the law—leads some webcasters such as Pandora to limit the number of skips in any hour and other webcasters to not permit skipping at all, that law does not limit interactive, or on-demand music streams from services such a Spotify, Beats, Play, Rdio, etc.  who license directly.

Roughly speaking, a service such as Spotify pays royalties based upon any song’s share of total listens over any period. And so, if song X is 10% of all listens, the stakeholders in song X (i.e., record label(s), performing artist(s), musicians, publisher(s), songwriter(s)) will receive—roughly speaking—10% of the royalty pool. Other services, such as Rhapsody, might pay for music on a per performance basis, or at least face a minimum per track payment alongside a percentage of performances rubric for royalty payouts.

The above-described difference in payouts methods is why artists might have seen metronome-like consistency in the dollar value of payouts from services such as Rhapsody, while seeing variation in payments from a service like Spotify. Slight changes to listening hours leads to different payouts (on a per stream basis) from Spotify, while similar changes in listening hours lead to different total payouts but the same per stream payout from Rhapsody.

Nearly 15 Songs are Skipped Per Hour

What if a large proportion of the song plays from any service are accounted for by tracks that users choose to skip? Well, given a skipped track is a played track, the stakeholders in skipped tracks get their full share of the total play pool — a situation that leads to rather ironic outcomes: a skipped track can be worth as much as a track we listen to in full.

Paul Lamere, Director of Developer Platform for EchoNest (owned by Spotify), was kind enough to share, way back in May of 2014, an in-depth look at song skipping behavior within Spotify. This piece was picked up by the Guardian and other sources.

Mr. Lamere found, through an analysis of billions of song plays on Spotify, that we skip, on average, 14.65 tracks per hour.

BN-DF456_STREAM_G_20140612162817This number may seem incidental if it were not that case that we can likely only listen to around 15 full tracks in any hour, given the average song is around four minutes in length. At four minutes per song, on average, the best we could do without any skipped tracks is listen to 15 songs per hour. But if some part of that hour is spent listening to a few moments of songs that we skip? Well, it quickly becomes clear that we skip over a greater number of tracks per hour than we listen to in full.

Now, according to Lamere, 24% of song plays are likely skipped within 5 seconds, 35% of are liked skipped within the first 30 seconds, while nearly half (48.6%) are skipped before the song finishes. If 48.6% of songs played are skipped before they finish, and 14.65 tracks are skipped per hour, then 30.14 tracks are played on average each hour (14.65 / 48.6% = 30.144).

As such, and supposedly, there would be 14.65 songs skipped per hour, leaving 15.49 songs to listen to in full each hour.

And so, since some proportion of songs skipped count as songs played in the pro rata calculation of royalties owed:

Songs we skip over, rather than songs we listen to in full, may account for nearly half of the royalties paid by modern music services.

As an aside, these numbers also suggest that the average song played on Spotify is clearly less than four minutes in length—a topic for another discussion.

 The Thirty-second Rule of Thumb

While webcasters in the US pay full royalties for songs skipped (even after a few seconds), there is some debate out there over whether music services such as Spotify, Rhapsody, etc. pay similarly. For example:

Tim Jonze over at the Guardian, while covering a story on silent songs on Spotify, suggested that songs skipped within the first 30 seconds do not trigger a royalty (thanks @rmirchandani for the link). Stuart Dredge, of Music Ally and the Guardian as well, has also suggested this royalty-free safe haven for skipped tracks.

And so, what proportion of royalties paid would be attributed to skipped tracks if only those tracks skipped after 30 seconds were counted? Let’s dig in:

If 48.6% of songs played are skipped before they finish, and 14.65 tracks are skipped per hour, then 30.14 tracks are played on average each hour (14.65 / 48.6% = 30.144) and 15.49 songs are played in full (30.14 – 14.65 = 15.49).

If 35.05% of songs skipped are skipped prior to 30 seconds, and 48.6% of songs are skipped prior to the finish, then roughly 13.55% of songs played (48.6-35.05), or 27.88% of songs skipped are skipped between 30 seconds and the finish of the song.

27.88% of 14.65 songs would be 4.08 tracks.

Under the 30-second rule, the total number of royalty bearing tracks played would be 15.49 (the full tracks) plus 4.08 (the tracks skipped after 30 seconds : or roughly 19.58 tracks.

4.08 tracks would be 20.86% of these 19.58 royalty-bearing performances.

I also did some maths based upon an assumption of the average song being four minutes in length, but those maths are truly too nerdy to show here.

My guesstimate, under the 30-second rule of thumb:

Under the 30-second rule of thumb, using the Echonest/Spotify ratios for plays/skips, 20.86%, or just over one-fifth of royalties paid would be accounted for by skipped tracks.

Under the 30-second rule, but assuming 4 minutes songs on average, 23.51%, or nearly a quarter of royalties paid, might be accounted for by tracks we skip after 30 seconds of play, but before the track is finished.

Browsing as a business model

A reasonable person would conclude that skipped tracks are evidence of music transactions that might not otherwise have occurred in a world of Track and Album sales. When we consider the apparent fact that a non-trivial proportion of royalties paid by music services are paid to the stakeholders of tracks we would rather not listen to than to those we would rather listen to, a new dimension to the royalty discussion emerges:

Browsing is now a crucial part of the business model for music.

Within this business model (browse over to the the business model canvas for a framework), browsing is a contributor to the revenue stream of music stakeholders, or the cost structure of music services. When, for music retail, the situation is reversed: browsing is part of the cost structure for music stakeholders—paid out in marketing dollars for endcaps, listening stations, etc.— while a contributor to the revenue stream for music retailers.

As a result, the dollars paid and received for these skipped tracks should probably be included within the broad discussion of music royalties, whether fair or unfair.

David Touve is an Assistant Professor and Director of the Galant Center for Entrepreneurship at the University of Virginia. He posts versions of his academic and policy work related to the music industry at Rockonomic.

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