The 5 things you need to know about the economics of streaming music [Jay Gilbert]

Most artists and many in the music industry don’t begin to understand the economics of streaming. Highly respected music marketer Jay Gilbert dives in to explain streaming economics both as they are now and as they could be in the future.

By Jay Gilbert, Co-Founder / Digital Strategy at Label Logic and curator of the “Your Morning Coffee” Newsletter

According to the RIAA, streaming now accounts for nearly 85% of the music business’ revenue in the United States.

Streaming has given our industry something it never really dreamed of, regular monthly revenue; figure $120 per year / per user in the best-case scenario. In the first half of 2021, revenue grew 27% to $7.1 billion, up from $5.6 billion over the same period last year!

I believe that, as an industry, we’ve done a poor job at educating artists about how the economics of streaming works. Is streaming paying out too little or are the rights holders holding on to too much? Would raising payouts break the system as Mark Mulligan from MIDiA so eloquently points out? What about raising subscription fees and limiting ad-supported tiers? 

Here are 5 things you need to know about the economics of streaming:

1. Streaming services don’t always pay ARTISTS, in most cases, they pay the RIGHTS HOLDERS. That’s typically the label or Distribution. So, when you hear about DSPs like Spotify not paying artists enough, look to see if they are represented by a label. What royalty rate did the artist agree to? (15% – 25% is common). Is the artist recouped?

2. Streaming services payout nearly 70% of the revenue they take in. But when I asked music industry attorney and pundit Chris Castle about this, he told me “Bear in mind the revenue is not the service’s gross but it’s a negotiated number that doesn’t include certain items.  It also doesn’t include the market value reflected in share price, especially true of pure-play music services like Spotify.  Although, like the artist royalty, you can’t really know what is to be included unless you see the deal between the rights holder and the DSP.”

3. The #1 music streaming service is still YouTube, not Spotify.

4. A stream is not worth a download, downloads aren’t worth a CD and a CD isn’t typically worth a premium vinyl package.

5. We all want artists and songwriters to earn more revenue from streaming. Is the answer as simple as raising subscription fees?

I asked Billboard writer Glenn Peoples to weigh in. He told me, “Not that modest prices increases will make a big difference, but I think artists have a good argument to say they shouldn’t subsidize Spotify’s growth at all costs while keeping prices down. Spotify would say more customers, not profits, are good for artists right now. And that might be true.”

“Pro-rata” vs “user-centric” models

Currently, as an industry, we use a “pro-rata” model. Some believe that a “user-centric” model would be a fairer way to compensate rights holders and ultimately, writers and artists.  What does that mean?

Music-streaming services like Spotify, Apple Music, and Amazon Music collect monthly streaming revenue and then proportionally divide those royalties to rights holders (and DIY artists) by a pro-rata share of their streams compared to all streams.  This means that fans pay for music they don’t listen to, and bonuses the most popular tracks.  Soundcloud’s “fan-powered royalties” offering is user-centric.  

The “User-centric model” pays all of a fan’s subscription for actual usage (although that doesn’t work that well in ad-supported services.) For example, if I listen to The Accidentals “Vessel” album exclusively all month, their royalty split is applied to 100% of my $10.

Could the answer lie somewhere in the middle, where the subscriber chooses which model the subscriber wants? Are we missing opportunities to engage fans on DSPs by offering a deeper experience, connection, and offering?

Smart people are working on a solution, but the UK’s DCMS and CMA haven’t agreed yet on what to do (if anything). So, instead of cursing the darkness, let’s work together to light up the way.

Jay Gilbert is the Co-Founder / Digital Strategy at Label Logic, Curator of the “Your Morning Coffee” Newsletter, and Former Executive With Universal, Sony, and Warner Music Group.