This article orginally appeared in Canadian Musician's 40th Anniversary issue in March 2019.
By Michael Raine
Five years ago, in Canadian Musician’s 35th anniversary issue, contributor Andrew Seale wrote an insightful article examining the evolution of music promotion and distribution in the digital age. While it wasn’t all doom and gloom – we do try to keep things positive around here, generally speaking – no one pretended 2014 was a euphoric time in the music business.
Caught in 15-year tailspin, by 2014, the global music industry was just hoping to stop the bleeding. “Disruption” is too euphemistic to describe the havoc Napster and its spawn caused from 2000 to 2014. From a record high of $27.8 billion globally in in 1999, the recorded music industry’s revenues were nearly cut in half by 2014, bottoming out at $14.5 billion (all figures in USD).
The “new normal” became a common phrase as everyone, from major labels to indie artists, accepted their fate and searched for anywhere other than album sales to boost revenue. Digital revenues were growing, but it was driven largely by one-dollar songs on iTunes. Streaming, though beginning to receive a lot of attention, was viewed almost as an experiment and conversion rates – getting users from free, ad-based tiers to paid subscriptions – were minimal. And so, that modest digital growth was significantly outpaced by cratering CD sales.
And then it all changed in 2015. For the first time this century, revenues climbed. But most importantly, the change of fortunes was thanks almost exclusively to this relatively new format. That year, familiar negative trends continued. In North America, physical music sales declined another 8.8 per cent while digital downloads fared even worse, down 12 per cent. Yet, amazingly, overall revenues were up 1.4 per cent due to an incredible 46.6 per cent increase in streaming revenues.
It was historical, not only because streaming reversed music’s perpetual losses, but 2015 was the first time that digital was the primary revenue source for recorded music, accounting for 45 per cent of all revenue versus physical’s 39 per cent.
Maybe nothing exemplified this more than an advertisement in the IFPI’s 2015 Global Report. In that same report revealing that streaming was the foundation of the music industry, there was a full-page advertisement from Napster. The same brand credited for unleashing the illegal downloading plague had been purchased by legal streaming company Rhapsody. Now, the infamous cat-in-headphones logo graced a full-page ad, saying “Thank You” in big, bold type to the music industry it nearly destroyed, while boasting that it had 3.5 million legal customers.
We had, indeed, entered a new era.
There was a stark difference in the way the music industry, particularly the major labels, reacted to the imposition of streaming compared to downloading. In 1999 and the years that followed, the labels went to war with Napster, even ludicrously suing individual users before litigating the company itself into oblivion. But it was obvious that music fans wouldn’t accept a return to a world of $20 CDs. They had seen what was possible and couldn’t un-see it. If Napster was gone, something else would take its place, and so began a game of whack-a-mole – Kazaa, LimeWire, Gnutella, The Pirate Bay, etc. – with a new enemy always popping up. By 2003, when the iTunes Store launched, the industry had lost a lot of ground and never caught up.
“I was of the opinion that the record industry should’ve embraced downloads in 1998 or 1996 when it was technically possible. I think things could’ve been different in the history of music, but nobody will ever know… but it’s obvious to me that the record business is full of very smart people and they looked at what happened [with Napster]. Basically, when they reacted negatively the first time, they were trying to preserve a distribution model that the public was not sure it liked, and they also tried to disintermediate a little bit. They realized from experience that it didn’t work,” recalls SOCAN CEO Eric Baptiste. “It’s sometimes liberating to realize that the best thing you can do is embrace the market and nurture it, feed it, and then let your product convince consumers. I think the record labels realized that. Also, the iTunes Store was really the first, at scale, digital proposition that anyone could understand. So, a lot of factors were at play and when streaming started to emerge, they knew it was probably pointless to fight the future. Provided you can arrive at good commercial and licensing terms, there is no reason to pick one technology or one approach over the others.”
[Pictured: SOCAN CEO Eric Baptiste]
It’s those commercial and licensing terms that are now at the core of the streaming debate. Those agreements determine where the money goes and, as you may have heard, not everyone is thrilled with the arrangement.
The numbers differ slightly from service to service, but let’s use Spotify as the yardstick since it’s the biggest and best-known company. Spotify’s licensing deals with the three major labels – Universal, Sony, and Warner – as well as many indie labels, dictate that it pays about 52 per cent of revenues back to the labels. In Canada, publishers and songwriters, via Spotify’s deals with SOCAN and the CMRRA, receive 12.78 per cent. That means the streaming service keeps roughly 35 per cent of its subscription and ad revenue, with the rest going to music rightsholders.
So, who’s making the money? We really only have Spotify to go on, since it’s the only major service whose quarterly financial results are made public. In total, the Swedish company’s 2018 revenues were around €5.25 billion. Worldwide, it has 207 million users, 96 million of them paying subscribers. Impressive, right? The fact is, Spotify’s fourth quarter 2018 was the first time in its 10-year history that it posted an operating profit. It has lost hundreds of millions of dollars over the last decade and its biggest cost, by far, is royalties to music rightsholders, which are primarily labels and publishers.
Meanwhile, after that decade-and-a-half of declining sales, the three major labels are seeing their fortunes rise exponentially. According to Music Business Worldwide, the major labels together earned $13.14 billion in total in 2018 and $6.93 billion of that came from streaming. That is about $19 million per day from streaming alone.
In Canada, according to the IFPI, subscription audio streaming was valued at USD $160.9 million in 2017 (Canada-specific totals aren’t released yet for 2018).
On the performing rights side of the equation, SOCAN’s Canadian members earned CAD $62 million from all internet-based licensed music in 2018, a 27 per cent increase over 2017.
On a macro level, few people dispute that things are better now for the music industry than they were a decade ago. Just look at those revenue totals! But are things better for the average professional musician? Or even smaller labels and publishers? Among many, there is a definite sense that they aren’t. And if we accept the belief that average artists aren’t better off despite the influx of money into the industry, then who or what is to blame?
“It’s a numbers game,” asserts Miranda Mulholland, who wears many hats these days as a professional musician, indie label owner, and artist advocate. Over the last couple of years, she has advocated for fairer remuneration for musicians in the digital age, making her argument to the Economic Club of Canada, the federal government’s Heritage Committee, MIDEM, and even the World Trade Organization.
The reason large labels are making eye-popping totals while most individual artists and smaller labels struggle comes down to catalog size. The streaming services pay out according to market share of total streams. The bigger and more popular the catalog, the greater the market share. Universal Music Group, for instance, owned nearly 40 per cent (!) of all the music streamed in the U.S. last year.
[Pictured: Miranda Mulholland]
“When I look through my distribution deals and when I do the math, it’s about 0.0045 cents for a stream [on Spotify’s ad-based free tier]. This is an indie artist, so not mainstream but someone who has had some success on playlists and radio and is a known entity in the Canadian marketplace,” reveals Mulholland. “Then it’s 0.006 cents for the subscription-based. YouTube is drastically lower. I mean, it is about 10 per cent of that. You know, with complete honesty and transparency, my label has been around since 2014 and I put work into it, I have paid for publicists and obviously have deals with artists, but we just broke even five years later. And this is with low overhead, because it’s just so difficult.”
(Note that the per-stream rate fluctuates based on total revenues divided by total streams per pay period, so the rate will differ slightly across services and pay periods.)
An upside to streaming is the notably low distribution costs in comparison to moving physical products. In fact, Mulholland says, “I am making the choice now to not keep putting CDs in warehouses and doing distribution that way. It is just too costly and I don’t see the return. And then with the different deals, you sort of have to buy your albums out of the warehouse. It’s just a money-losing scenario.”
So, that is one way that streaming saves costs, at least. But, again, Mulholland lays out the math. “The return on making an album these days is so ridiculous. Even if you did a cheap one, so let’s say $10,000 is what you make your album for, which is pretty cheap, and you want to get expertise and have a producer and good mics and a nice studio, etc. Or, you do it yourself but it’s still your time and energy and how long did it take you to write the songs? Maybe a year to get 14 songs that you whittle down to your nine best? And then you make your album and need to hire a publicist so that it doesn’t just get lost and that can be $3,000 to $5,000 for a campaign. So, already you’re at $15,000, and if you do that math on streaming coming back at you, that is going to take a long time to recoup.”
“The funny thing is that people used to get mad at us for painting Spotify in too positive of a light, like on our blog and podcast,” recalls Kevin Breuner, the VP of Marketing at CD Baby and a member of the indie band Smalltown Poets. “There were so many positive stories we were telling about it really empowering artists’ careers in new and different ways and that they were really seeing success. At the same time, a lot of the industry was just negative headline, negative headline, negative headline. A lot of artists, and the industry as well, it’s just that they were trying to make sense of it as if it was the same as the download world, but just getting paid less, and as if a stream should equal a download, which is just not the case.”
For Breuner, streaming’s value for artists is not just in the dollars and cents, or at least not directly. In particular, artists no longer need a label’s distribution resources to get their music to fans. “One of the big things… is that we’re moving from a buying economy to a play economy, where for the artists, all you’ve got to do is get your fans to hit ‘play.’ So that takes the pressure off being a salesman to your fans because you don’t have to go out and say ‘buy this’ and ‘get out your wallet.’ It’s just a matter of if you can get creative enough to intrigue them to just push the play button. If you can get creative, and we’re creative people, that’s a much better proposition than trying to get people to take their wallets out and it’s a much easier thing to do because all that matters is whether our music is good and being able to harness creativity.”
[Pictured: CD Baby's Kevin Breuner]
It’s been difficult for many artists to wrap their head around that fundamental shift, says Breuner. But he adds that some of the major streaming services, including Spotify, Apple Music, and the recently-revamped YouTube Music, have smartly embraced and empowered artists by sharing data. They’ve created artist portals where independent musicians can see their analytics, upload new music, submit it for playlisting, etc. “I think so much of the music business has approached the market as if the artists don’t matter because, historically for the music business, they really didn’t care about the artists. They looked at it like, ‘We have major labels who are suppliers of the music and whatever happens to the artists, that’s their business, and we’ve got these storefronts.’ So, Spotify said that, ‘Hey, this independent artist segment is massive and growing and if we give them access to data and tools, they will send their fans links to Spotify.’”
So, beyond being just a revenue source, streaming is a useful promotion and distribution
tool for artists, according to Breuner. This is where the playlist ecosystem has been especially important, he adds. “We’ve seen lots of artists get on lots of playlists that really drive exposure for them.
Even just the playlist ecosystem that Spotify themselves curate – and I’ve heard them say there are 4,000 to 5,000 Spotify-branded playlists – they can’t fill all those playlists with just straight-up major label content. They have to use independent content and I think they’ve said they use around 40 per cent independent music.”
Mulholland, however, disputes just how beneficial some of this is for the majority of artists because of the passive listening habits perpetuated by playlists. “[Playlists] are another helpful thing where people can find something that they like – that there is always discoverability and that you’re going to hear something that you like and then go find that band. But I strongly doubt that that happens all that much,” she says. “For my band, Harrow Fair, we were added to a playlist and saw a huge spike in that song, hundreds of thousands of streams, but there was no difference, really, in the rest of the album. So, it is not like people are finding the songs and then are like, ‘Oh, I wonder who that band is?’ and going and doing that. I think that is a bit of a myth.”
Another complicating reality of streaming’s royalty structure is that it provides advantages to some genres over others. Genres like pop and rap with younger audiences benefit because those fans tend to spend more hours per day listening to music. As well, industry watchers like Cherie Hu, who writes for Billboard and Music Business Worldwide, have pointed out that genres like classical and jazz have struggled because of metadata issues where, for example, original composer and performer get mixed up, resulting in payment mistakes. As well, those genres also lose in a structure where all streams over 30 seconds are treated as equal. So, a 40-second interlude on a hip-hop record earns the same amount as a 14-minute symphony movement.
But for artists and labels, too, streaming is impacting a lot more than just the bottom line. Its influence extends to things like A&R and album release strategies. “We’re urging every artist in every genre to think about the song-based universe that we’re living in,” says Chris Taylor. Over his 20-plus years in the business, Taylor has been an entertainment lawyer for Drake, Gordon Lightfoot, and Avril Lavigne, among others, and also founded the label, publishing, and management company Last Gang (Metric, Chromeo, Death From Above 1979). Since 2016, he has been the global head of music for Entertainment One.
“We’re still getting managers and artists that are booking a tour before an album is finished and then rushing to finish an album and drop it before tour dates and – surprise, surprise – one song does OK and the other 13 they worked on forever almost get completely ignored,” Taylor continues. “People are just not listening in the album format anymore. I can see the desire, from an artist’s standpoint, to want to have a collection of work that is a moment in time and has a particular theme. But from a commercial side, if your objective is to have your music listened to by as many people as possible – and I would say that is 95 pet cent of the artists I deal with – you need to pace out the material. Otherwise, you’re shooting yourself in the foot.”
[Pictured: eOne Music's Chris Taylor]
Some artists and managers clearly understand the new reality, Taylor says, while others “are still living in 1997 and they need to put out a record that fails before they realize we’re right about this and we’re watching this all the time. One of the objectives is to make more money and sell more music and get more exposure and sell more concert tickets and everything else. So, we’ve had a number of artists who have been adamant and have gone ahead with dropping albums and, you know, they could’ve done a lot better had we had a paced-out plan with a new song or two every three months as opposed to dropping a full album on people. It’s just not the way the world is working anymore.”
On the A&R side, streaming data has helped labels identify unsigned artists who are making waves and building fanbases. For better or worse, it’s taken some of the musical instinct out of A&R and made it a more numbers-driven process of discovery and projection. But for artists with the data on their side, this may put more bargaining power in their hands.
“I think what’s happening now is that anything that is getting signed is already emerging, if you know what I mean. There is a tendency for artist and management teams to get out into the world, get their music up on [streaming services], and build some sort of audience for them prior to getting record label interest. I think there are very few examples now of artists who are finding record label partners before they’ve done anything themselves,” explains Taylor. “Inevitably, every act that is attracting record label attention these days has something going on, whether it’s streams or followers or some sort of data that backs up the fact that the world cares. So, it is not as speculative as it used to be. Secondarily, once that data starts to reveal itself, there are a lot of record label suitors who are at the table and are ready to do business, which creates a competitive landscape for artists, which is great.”
Of course, how the world works today is not how it’ll work in the future. If streaming has turned the music industry on its head in five years, what might do it five years from now? We have an indication already, and it won’t disrupt streaming so much as alter how we interact with it.
“It seems clear to me that voice is going to be the major interface of the future,” says Baptiste at SOCAN.
The rise of smart speakers has been rapid. Nearly 10 per cent of Canadian homes already own a Google Home, Amazon Echo, or other smart speaker. And unsurprisingly, music is a key feature. A 2018 report commissioned by the British record industry trade group BPI and the Entertainment Retailers Association found that music is the most common use of smart speakers. The report also found smart speaker users listen to more music per day and, crucially for the music industry, are more likely to pay for a streaming subscription. A complicating factor, though, is that, in an era where streaming is accused of making the music listening experience too passive, smart speakers exacerbate that trend. In fact, extremely generic phrases like “play music” are among the most common commands for smart speakers.
“The questions you ask speakers are more vague and generic, so it is going to be more important to have good metadata powering all this,” says Baptiste. “So, for SOCAN, it’s another reason that validates our strategy to be a big player in the metadata area and to make sure that we have as much information as possible – accurate information on sound recordings and musical works. And we always tell members, here and around the world, that their music should be discoverable by new smart speakers. I think smart speakers are going to be very, very big.”
Taylor agrees, saying he has regular conversations with eOne Music’s digital and sales departments about the importance of metadata and searchability on smart speakers.
It’s important to remember that, despite three consecutive years of growth in recorded music between 2015 and 2017 and that this trend is expected to continue, there is still a long way to go to make up for those 15 years of losses. Global recorded music sales were $17.3 billion in 2017, with streaming accounting for $6.6 billion, making it the largest and fastest-growing segment. But there is a long way to climb to reach the highs of the late ‘90s. Nonetheless, there are some bullish predictions floating around.
A report compiled by Morgan Stanley Research (that an investment bank is compiling a report on the music industry says a lot in itself ) points out that “while digital downloads generated only $5 billion at their peak in 2012, paid streaming has already exceeded that, with $10 billion in 2017.” It then adds that passing 100 million paying music subscribers globally in 2016 was a huge milestone, but estimates it will take only two more years to add another 100 million and could get as high as 575 million paying subscribers by 2022, with that growth driven largely by smart speakers and connected cars.
There is a lot here to take in and consider, and we’ve only just scratched the surface of this conversation. Looking at the big picture, it’s hard to be entirely pessimistic – who isn’t happy to see the music industry growing again? – but is the current framework for streaming the fairest? Maybe, like Taylor says bluntly, “fair is where you end up,” but it’s still the early days of streaming and where it might end up, nobody knows for sure.
Michael Raine is the Senior Editor of Canadian Musician.