Why The Music Streaming Economy Isn’t Working

Why The Music Streaming Economy Isn’t Working

It’s been a long time since we’ve seen a more politicised technological phenomenon than music streaming. Between the endless cries of Taylor Swift, Apple’s not-so-secret plan to convince the labels to eliminate Spotify’s free tier, and Jay-Z’s highly-publicised tech venture, the battle for music supremacy has had it all. What it hasn’t had, is a smash hit.

Spotify is the clear leader of the pack with the largest user base of the bunch, with 75 million active users. But only 20 million of these users actually pay, and the business loses money every day. Ad revenue from free listeners may be enough to stem the tide, but it won’t be enough to keep the company afloat in the long run after it burns through all its venture capital money.

Apple won’t fare any better if cost is the mitigating factor keeping the majority of music streamers on the sidelines. Apple Music offers an identical $10 pricing structure to Spotify, minus the free tier. In fact, the absence of a free version might mean Apple Music fares even worse.

Then we have smaller players like Jay-Z’s Tidal which dropped the ball on day-dot by adopting the self-important mantra of a music platform designed to make musicians richer, instead of making its users better-off. Tidal never quite had its heart in the right place.

But if we really think about it, building a music streaming service that people actually want to pay for really shouldn’t be this hard. We have to wonder why so many tech companies have entered this space and stumbled. The fact is, it has nothing to do with the streaming platforms, and everything to do with the labels.

Changing roles

The music industry had been largely sustainable for decades prior to the internet ascendency for reasons attributed to basic economics. Music providers – producers, artists, labels and retailers – could provide music at a cost that largely aligned with the willingness to pay for many music consumers. A market for music existed.

Fast forward to today, the market for music – by volume and reach – has never been bigger. More people can listen to music in more places. We can discover music in remarkable ways, whether it be through Shazam, or algorithm-powered personalised radio stations. The barriers to listening and discovering music are lower than they’ve ever been.

But at the same time, the industry has completely turned on its head. The relative importance of players in the music value chain has shifted dramatically in a couple of decades, which has seen the music industry evolve from one dominated by brick-and-mortar distribution to one where the web has certainly solidified as the new paradigm.

If there’s one party in that value chain that has seen its significance wane, it’s that of the labels. Artists are now empowered with the tools to self-promote and self-publish, meaning much of the work that labels have traditionally done have been replaced by the web.

But tempting as it is to proclaim the death of the much-maligned record label, labels will continue to persist as an effective launch-pad for aspiring big-name artists, providing them with the mentoring and financial backing required to truly get off the ground.

And that’s the most important thing to understand: the role of the label has been relegated to that of an investor. With the roles of publishing, distributing and marketing swiped from their repertoire, the labels are simply specialised banks. Or venture capitalists for musicians.

“We’re prospectors man, we’re investors. We’re digging for gold.” – Mark Ruffalo – Begin Again.

Not that labels weren’t already investors, they always have been. They’re just not the gold anymore.

With that, there is no reason why labels deserve to hoist the power they currently do by owning the recorded works of many musicians, and deciding where and how they can be distributed. In far too many arrangements, artists are pawns to the label, simply another spinning cog in the operations of the music factory.

Labels owe this power to years that have long expired: when the act of music creation was often subordinate to the opportunity to be heard.

Because getting heard used to be really hard. Now, not so much.

Anybody with a camcorder and an internet connection can place themselves on the starting block to stardom. Think Megan Nicole, Kina Grannis or Sam Tsui.

But what does this mean for music streaming?

Streaming has always had a pricing problem. David Holmes of Pando has covered music streaming extensively and has brought light to perhaps the most compelling observation for why only 25% of Spotify’s users are willing to saddle up for the paid tier. Citing David Pakman on Re/Code, music consumers spent on average $64 a year on music at the industry’s peak in 1999. A yearly Spotify subscription costs $120. It very well might be the case that streaming is still overpriced.

$120 a year is a steal to access to the majority of the world’s music library, but a strong case should be made that consumers simply aren’t willing to pay as much for music as they used to. Regardless of legality, music piracy has disrupted the industry and reduced the price of music to virtually zero. Taylor Swift’s missive on the Wall Street Journal last year decrying ‘free’ music on Spotify as devaluing her art doesn’t hold much water; because if consumers really want it, music is free anyway.


And the truth is, music shouldn’t be worth as much as it used to. Buying records used to mean paying for distribution, plastic, paper, and often brilliant album artwork. Buying music online now means paying for abstractions of code with marginal costs of production that sit at a very tidy zero. Or very close to zero.

If the music industry wants to make the online transition sustainable, then it needs to respect the economic parameters that dictate the true value of their work. The last thing they should be doing is trying to make people pay more for music than its worth, which is exactly what the labels have been fighting for.

Before launching Apple Music, Apple lobbied to reduce the monthly price of streaming to $5, a price point that would undoubtedly have invited more consumers into the market. The labels refused. Apple offered $8. No dice. So Apple has had to settle for $10, a deal identical to Spotify’s and therefore doing nothing to save the streaming ecosystem from dysfunction.

Consumers still won’t pay, the industry will continue to bleed money, and Taylor Swift will still be mad.

Of course none of this would happen if the labels didn’t have a level of power that completely outweighs their usefulness. We can attribute the predicament to greed, capitalism or however way we want to spin it. But the truth is, the streaming economy isn’t working because there are too many players in the music supply chain who want a slice of a pie that simply isn’t big enough.

In a frictionless market, the internet would have expended of the labels the moment the internet hit the fore, and we’d have the right-sized pie for the right number of slices.

The reason the industry can’t settle on a price point that works for everyone – musicians, distributors and consumers – is because the labels continue to suck outsize wads of cash out of the system.

Research by Ernst and Young has revealed that labels receive over 45% of the revenue from music streaming, with just under 17% of the money going back to the artists and songwriters. 20% of the revenue is retained by the streaming platforms, a fair percentage given that the back-end costs required to run a streaming platform are substantial.

But labels persist to reap exceedingly generous rewards from the music ecosystem, not because they deserve any of it, but simply because they can.

Sadly, there’s not a lot we can do about it. Streaming’s pricing conundrum continues despite the fact that it would make good business sense for the labels to allow platforms to halve the price of streaming and rope a lot more users into their ballpark. Given it costs next to nothing to produce an extra unit of music streaming, it makes sense to bank on scale.

But why settle for 75 million $5 subscribers when you could fight for 75 million $10 subscribers? That’s the game the labels are playing, and as long as they have the power to dictate those distribution rights they won’t let up until they suck the marrow out of that ploy. It won’t work, because for good reason most consumers aren’t willing to pay. But they won’t give up.

The only thing that will save this industry from itself is if artists stop giving up their distribution rights and signing up for sh*tty deals.

That will happen, as new artists minted in this streaming age will recognise the value of labels as nothing more than bankrollers. No sane entrepreneur – whether it be a start-up founder or an aspiring musician – would give up ownership of their art, submit themselves to crazily inequitable profit sharing arrangements, whilst still being forced to do the heavy lifting. It’s insane that it ever slipped this far.

But right now, we’ll just have to wait and see whether an antiquated label-driven business model and music streaming can co-exist. The longer the war goes on though, consumers and indie artists will continue to lose as pricing continues to linger as a prohibiting factor.

Taylor Swift definitely has a point: artists aren’t getting paid enough. But her compass is completely out of whack if she thinks Silicon Valley is the party trying to rip her off.

The remarkable thing about technology is how keenly it reveals inefficiencies in the market. The real truth is, nothing has changed between decades – the labels have been funnelling money out of the system for years. The only difference now is they don’t really deserve any of it. Their power has outlasted their usefulness.

Swift would be much better off using her leverage to decry the greed of labels. If she really knew what she was talking about, and if she really cared about smaller artists like she claims, that’s exactly what she’d be doing.

There should be plenty of money in the industry to keep musicians and consumers happy. If only the labels didn’t take so much of it away.

“The album doesn’t have any overhead, because we did it. And then distribution, it’s not going in stores, it’s going online and publicity would be word of mouth? So I think what I’m wondering is, why do you get 9 out of 10 of my dollars?”- Keira Knightley – Begin Again.

Leave a Reply

Your email address will not be published. Required fields are marked *