5 Musings From A Digital Music Exec Who’s Been Doing This A Long Time And Isn’t Even That Old
Guest post from Robb McDaniels, Founder and CEO, INgrooves Music Group.
I have been at the helm of INgrooves Music Group for nearly twelve years now, and have largely chosen to keep my head down and mouth shut (must be that New England upbringing). But once in a while, it is necessary to speak up and make sure you all know what I know. Here are five things on the top of my mind these days – feel free to connect with me if you want to do anything about any, or all, of them.
1. WHY MARKET SHARE MATTERS
I have long wondered why major labels and publishers care so much about “market share”, seemingly above even generating profits (at least at the distribution/JV level). I now realize that it is because there is so much non-recorded music revenue generated from the market share metric. Things like equity stakes in startups, non-recoupable advances and fees from retail and promotional partners, black box funds from performance royalties not collected by indies and “in store” promotional space. What’s sad is that most indies don’t realize that the better economic terms they receive on their distribution deals from the majors actually result in them earning less money in the long run. By giving up their rights to collect these ancillary streams, which often aren’t shared back with them, some indie labels are sacrificing a healthy and wealthy future for short term gain.
2. STREAMING SUBSCRIPTION VERSUS YOUTUBE
I have a lot of compassion for artists who are voicing their displeasure for royalty payouts from streaming services; it must be quite disconcerting to see this shift happen in real time (although I also question whether or not some of them are even being reported to correctly – the sheer amount of streaming data that has to be processed opens up a lot of room for error). However, I don’t have a lot of compassion for the artists that complain about these payouts but then have all their music all over YouTube. Fact is that Youtube’s CPM is less than half of Spotify’s for most artists. Spotify, and most other legally licensed streaming services like Rdio, Beats, X-Box Live and Deezer, monetize 100% of their streams (either from monthly fees or ad sales), whereas YouTube only monetizes about 5% of theirs – YouTube is responsible for about 70% of the music consumption activity in the world but only 3% of the revenue.
This is the biggest problem by far in the music industry today. We need to work with YouTube to monetize more effectively, which hopefully will begin in earnest when they finally launch their subscription service. We all hope (and pray?) that YouTube will do a better job of monetizing music content for the benefit of the artist and label community. Google certainly doesn’t have any issues monetizing the data from YouTube streams – their annual PROFITS are equal to the global recorded music sales (both around $15-$16b). Doesn’t that seem a bit screwy?
3. BASIC MATH:
For the past few years, the average amount of money spent on recorded music by consumers has been around $40-$45. That means some people spend a lot more, and some people spend a lot less (Pirates! Thieves! Or maybe just price conscious shoppers?). If everyone signs up for streaming subscription services and spends at least $120/yr on recorded music (12 months at $10/month), then that’s nearly THREE TIMES as much in the pot for the industry to share, and that doesn’t include the amount that fans are increasingly spending on deluxe products like vinyl. Not to mention that fact that independent labels and artists seem to over-index on the streaming services because of a willingness for consumers to experiment as well as passive listening from playlists and algorithm based radio stations (by way of example, INgrooves Music Group’s market share on Spotify in the US is nearly double what it is on Soundscan, which only tracks physical and download sales).
Don’t we all realize that the entire industry would be a lot healthier if everyone switched to subscription services TOMORROW and stopped downloading and buying CDs? In doesn’t take a rocket scientist to understand that the early adopters of Spotify, Beats, Rdio and other streaming subscription services were tech savvy music fans who likely spent a lot more than the average on recorded music. Why spend $600/yr for the 50 CDs I want when I can spend $120 and get ALL I want!?!? So let’s embrace these services as the savior for the music industry – an opportunity for us to take back the value of the fan experience from the mobile device.
4. THE GREAT MERITOCRACY IS AT RISK
One of the great things about the Digital Revolution, which began with Napster’s emergence in 1999, has been that it has been based on a Meritocracy. Great music, regardless of its origins, rises to the top. No single creator or owner has been able to “pay” for promotion in the various digital retail storefronts, providing a level playing field for indies and majors alike. Well, now this might be changing and I think that everyone in the ecosystem from artist all the way to fan should rise up and voice their opinion about this potentially alarming development. Heck, even recommendation algorithms would be incorrectly influenced by digital payola. Watch out.
5. TOO GOOD TO BE TRUE?
Remember when your mom used to tell you that if it is too good to be true it usually is? Well, I think that this is the case with some of the DIY services out there, especially the ones offering to distribute all the music volume you want for a fixed fee. Inevitably, this model breaks down as their fixed costs rise higher than the low fees they charge you and artists and labels will be stuck without a distributor or, worse yet, out some money that is never passed through. There are some great DIY services out there, like Reverbnation, that are part of long-term, stable companies that aren’t a bunch of smoke and mirrors.
There’s a lot here for you to noodle on, and a lot beneath the surface that I have left for you to decipher and take a level deeper. You might be surprised by what you find…
Great assessment. The issue with subscription services is that they have to motivate their users to pay. Many of them are “good enough” at free, so it works for most music fans. They need to make free a bit more painful (e.g., more ads) and make paid way more gotta-have-it. Then we’ll see real revenues in subscription.
Hi,
Robb, if you’re interested, I wrote a response to this article here:
https://medium.com/@pud/open-letter-to-robb-mcdaniels-founder-and-ceo-of-ingrooves-11b2bc746c2f
Philip
Founder, DistroKid
And I wrote about both you on Digital Music News: http://www.digitalmusicnews.com/permalink/2014/08/18/ceo-war-ingrooves-blasts-distrokid-distrokid-fires-back
Ari Herstand
“Inevitably, this model breaks down as their fixed costs rise higher than the low fees they charge you…”
Except fixed costs, by definition, don’t rise with increased volume….
Very interested in your point about meritocracy. Arguably indie record labels created access to great music outside of the dominant/major system. And as long as there is an equal-access internet, then the same will happen with distribution no?
Hmm.. Got to disagree on the “Meritocracy” front. Yes you might be able to release a project an make $10.00 from it.. But there is no Meritocracy getting you to the top of this game.
“Remember when your mom used to tell you that if it is too good to be true it usually is?”
The phrase is: if it SOUNDS too good to be true, it usually is. If it is too good to be true, then you’ve already established that it’s already too good to be true, so it not only “usually” is, it ALWAYS is.
One problem here is even if a $120 a year subscription is almost 3 times more than the average consumer spends on music now, in order for it to actually matter the payouts need to be equal to or at least nominally in-line with other traditional situatios. Not only are they not in-line, they’re highway robbery. It doesn’t matter if consumers put more into the pool if most of the pool never makes it to the artists.
I feel so much better now, since the upshot of this post is no different than any other in the eyes of a writer: MUSIC HAS BEEN DEVALUED. DEAL WITH IT.
“Why spend $600/yr for the 50 CDs I want when I can spend $120 and get ALL I want!?!?” Umm – you mean why spend $600 when I get spend $0 on Spotify Free and get ALL I want? “Let’s embrace these services as the savior[s] for the music industry.” How do you figure? Like the poster said above – gotta make the free services a lot less appetizing somehow before they become saviors.
…when I can spend 0$…
Good stuff but even with meritocracy there is still a stunning amount of mediocrity to sift through.
First of all, saying that fixed costs increase due to increased demand violates the very economic definition of the phrase fixed costs. Yes, marginal cost vs demand can be noncontinuous, but that doesn’t make it fixed. But here’s the larger point: most of the costs these guys are describing are also cost factors that are decreasing over time.
When I ran HOTorNOT, we supported over a million users each day. This was over a decade ago, on way more equipment with much higher cost per computing cycle, back when transit cost $1,000 per Mbps. Last year, Instagram sold to Facebook for over a billion dollars with over thirty million active users and nine employees. NINE.
Bandwidth today can be had for under $1/ Mbps. It will continue to drop. Storage costs drop over time as well. That is why Gmail came out with the “x Gigabytes free” model, because they knew that cost per user would drop over time anyway.
Customer Service costs? They would go up if your company’s response to more questions would be to hire more heads rather than adjust the product to not lead to those questions in the first place. I know at HOTorNOT by taking that approach, it only took me 2-3 hours a day to support 10 million monthly visitors and over 100,000 paying users. That kind of mentality can be applied to most other functions including accounting.
My only conclusion is that these guys think Distrokid’s model can’t last because they are projecting their own cost structure on Distrokid.. but here’s the painful truth: that’s wrong if Distrokid is just doing things more efficiently than you. Less people working there leads to employees that care more, less meetings that waste time, and better product that scales better/cheaper.
I remember a lot of people making these kinds of arguments against Google when they started out. The companies that made those arguments don’t exist anymore, and in some cases, the founders of those companies work at Google now.
Good rule of thumb: the guy who is launching public attacks about specific competitors is doing it because he’s scared. The guy kicking ass doesn’t have to badmouth others, he just kicks ass and customers roll in. Kudos to Distrokid for kicking ass.
Apokaful (www.apokaful.com) doesn’t even try to make money. It’s not part of the equation anymore. All that’s left if to tour and that get old real quick.
Sadly YouTube is now serving the role that radio once did of allowing an artist to promote themselves more effectively. Fans that follow you on YouTube are not filtered out as they are on Facebook and so that is the one place where some form of dialogue can exist without gatekeepers preventing it. I would hope there would be a realization by all these companies that killing the goose is not beneficial to the long term, but the majors seem to have everyone convinced only their geese are relevant these days and sadly their market dominance proves them right, it ends diversity and the richness of the art form of course, but commerce is their goal and celebrity based marketing is their weapon of choice, culture and diversity are dirty words…