by Sabrina Wang
The music industry is like a typical second-hand car: a thin paint job of glitz and glam hides gummed up inner workings which leave the car one highway to heaven away from breakdown. The digital age has sent a metaphorical spanner into the works with streaming services and the increasing accessibility of music calling for new economic workings for the music industry. However, with more incoming revenue than ever, paired with widening internal economic inequality, it’s up for debate as to whether the economics of the music industry is in for repair or the scrap yard.
Spotify and other subscription streaming services have been the simultaneous salvation and downfall of the music industry. Since Spotify’s US launch in 2011, recorded-music revenues in the US have doubled reaching $12.2 billion in 2020 following 5 consecutive years of growth. The music industry is larger than it’s ever been in the digital age. And more people than ever are paying for their music with music piracy on the decline and both Spotify and Apple Music surpassing 100 million users. There’s a large stream of revenue coming in but it’s being subject to trickle-down economics formulas which ensure the seas of small artists get drops to share.
Streaming services such as Spotify and Apple Music charge an average of $10 a month for a streaming subscription. The streaming service then takes a 30% cut of this $10 pie and the remaining crumbs are split amongst numerous parties including record labels, songwriters, music publishers and artists through a model called pro rata which pays based on the song’s market share. This model means that small artists must compete with huge celebrities to make a less than liveable income. While Spotify hosts up to 7 million artists on its platform only 13,000 of them made more than $50,000 USD in 2020.
With worldwide lockdowns and quarantines cutting off live music as an option, many smaller artists who depend on touring are now realising the depressing state of the situation and are calling for change to a broken system.
So how did this system come about in the first place?
The Digital Music Revolution
Streaming services originally began as a solution to the rampant piracy problem which had plagued the music industry since the 1990s. File-sharing sites such as Napster emerged in the early 2000s allowing for more convenient and more free distribution of music. As a result, vinyl and CD sales plummeted with total revenues in the US halving, dropping from $14.6 billion in 1999 to $6.7 billion in 2014. It was the end of music as we knew it. Stunned at these increasing losses following the highs of the CD revolution, Record labels refused to adapt to the changing landscape, instead tackling the problem at face value successfully suing and shutting down Napster in 2001 while profits continued to decline.
iTunes was one of the first to embrace the digital age of music, ushering in a new era with the introduction of the a la carte model. Songs would now be sold individually, cheaply and most importantly, conveniently. Initially met with scepticism from record label old dogs, this model sold 1 billion downloads by February of 2006 – with Apple taking a 30% cut of every purchase. The problem was that while Apple thought they were selling music, what they had actually been selling was convenience.
Brainchild of Daniel Ek, the streaming service was the next breakthrough in the art of convenience. All music, all legal and all in one place. The one problem was: how do you get stubborn record labels to simply hand over all music ever?
And it’s here where we begin to see the root of why artists are paid fractions for their own work.
The Music Industry Cartel: Record Label Wardens
Ek offered record labels not only payment for streaming licences but also equity in his company, Spotify, and yearly cash advances. These dealings were intentionally hidden from the artists within the record labels and soon Spotify had obtained all music ever for a massively discounted streaming royalty rate. This left artists with a miniscule payment per stream.
Today this means $0.00437 per stream.
These low royalty rates are an artefact from when music was sold physically. Record labels could justify their share of the profits since they were manufacturing and distributing physical records that had production costs. Now these production costs are non-existent, yet the same archaic 15% royalty rate remains. Record labels have historically profited off short-changing their artists, giving them indignant cuts of their earnings. Remember that $10 pie? Well record labels take 50% of that. After Spotify’s 30% cut and other parties have been paid, current industry standards have between 14% – 25% royalties given to the artist.
These royalty rates are able to remain this way due to the monopoly the 3 major record labels hold over the music industry. Sony Music Entertainment, Warner Music Group and Universal Music Group, these 3 record labels account for 62.4% of all music sold, downloaded, and streamed throughout the entire world. After an investigation into the practice of streaming, Julie Elliot MP described the 3 labels as operating “like a cartel” with the UK government’s Department for Digital, Culture, Media & Sport’s Parliamentary Committee (DCMS) later calling for the Competition and Markets Authority (CMA) to conduct a market study determining the economic impact of the “market dominance” of the 3 labels.
With record labels holding onto the past for dear life, are there any solutions for change?
Solutions
One of the most commonly proposed alternatives, the user-centric model, illustrates a need for more development into updated strategies. The user-centric model applies the pro rata method to each user individually, rather than the current combined pool. This model, in theory, would result in a more even distribution of wealth however this redistribution has been found to be quite weak in studies and a further complication is that the value of each stream would change for each artist raising equity eyebrows.
In their report to the UK government the DCMS Committee pitched some more recent models aiming to increase the artist’s share of revenue and redistribute wealth. These included the equitable remuneration model and the artist growth model. Equitable remuneration in essence is a direct payment made to the artist whenever their music is played for the public. This model is actually already used internationally. In the UK it applies to services where the listener does not have control over what they are listening to, such as the radio. The DCMS’s solution would be to expand the coverage of equitable remuneration to include streaming services so artists receive an additional direct payment separate from their record labels.
The artist growth model also builds upon existing systems. This model retains the current pro rata model but adds a degressive scale to the value of a stream. This means that the initial streams received by an artist will have the highest value and subsequent streams will progressively be worth less. This approach would dilute the earnings of the top percentage of artists while redistributing more evenly towards the lowest earners.
The landscape of the music industry has been drastically shifted into the digital age. Yet the economic practices have remained trapped in a past era with the victims being small artists and performers. In light of the COVID-19 pandemic freezing the live music sector in its tracks, maybe this is the final push we need to get streaming economics back on the road.
References
https://www.nytimes.com/2021/03/22/technology/streaming-music-economics.html
https://rodneyorpheus.medium.com/the-digital-music-industry-an-overview-965915ae1fab
https://variety.com/2021/music/news/uk-government-music-streaming-dcms-report-1235070750/
https://www.managementstudyguide.com/new-economics-of-music-industry.htm
https://musically.com/2021/05/05/understanding-equitable-remuneration/
UNSW Economics Society 