The Music Streaming Dilemma: A Dialogue for Bettering the Music Industry
When CDs were popularized in the early 1980s, record labels worked endlessly promoting these shiny little plates and gained huge profits. Among the first artists to release their works on CDs was the legendary English rock band Pink Floyd. However, little could they foresee, digitalization would eventually almost shatter the music recording industry in the 2000s. When burned CD files met the internet, driven by the popularization of home and personal electronic devices, piracy ran rampant. Music sales declined, and artists saw their music being freely distributed across the web without receiving payment in return. Amid the depressing scene, digital streaming providers (DSPs) arose as a solution to the piracy problem. With its vast collection of various music aggregated onto one platform, DSPs like Spotify offered what piracy couldn’t — a safe and hassle-less place to listen to music that can be easily personalized to the individual’s tastes.
However, in 2013, Pink Floyd — along with many other respected high-profile artists — voiced their frustration with these DSPs. In an opinion piece on USA Today, members of the band claimed that “nearly 90% of the artists who get a check for digital play receive less than $5,000 a year” (Waters et al.). This sparked an ongoing, decade-long discussion on whether DSPs actually work — whether it’s a blessing or a curse to the industry (especially the artists), and whether it has a future. Data accumulated over the years only painted a more grim picture of where the recording industry is heading.
DSPs typically run on unsustainable business models with insufficient artist payouts. However, while DSPs could consider changing their payout models, artists and the industry might be better served by embracing new technologies and revenue streams.
When digital music streaming first began, this promising technological breakthrough attracted a large user base and faithful investors. Created by Daniel Ek, Spotify’s hype also inspired the inception of various other DSPs. Even digital music giants like Apple eventually moved away from their online music marketplace, iTunes, in favor of their DSP Apple Music (Hogan). However, despite being in a high-growth field, DSPs struggle to function as standalone businesses, which challenges the self-sustainability of the DSP business model. Apple Music and Amazon Music, capturing a combined 27% of all paying DSP users worldwide in 2022 (Stassen), function as subsidiaries of larger conglomerates. They are treated more as services within the Apple/Amazon subscription ecosystem, or even as a premium members’ benefit in Amazon Music’s case.
Resultantly, these DSPs do not publish individual quarterly reports, which leads to difficulty in assessing their profitability and longevity. (Due to the lack of business information on some DSPs, some parts of this paper will mainly use Spotify as an example. However, that is not to distract from the importance of these other DSPs in the context of market share and business models.) Music recording rightsholders (the labels and artists) who hold them accountable for ethical artist payout might often find their efforts futile. Arguably unfair tactics like playlist rigging and stream farms are more protected under such lack of transparency, which can lead companies into conflicts with rightsholders. Spotify, the most notable standalone DSP, made a net loss for most quarters since 2016 (Zandt). Even after a triumphant first-quarter profit in 2022, the company slipped back to losing 166 million Euros (approx. 174 million in USD) two quarters later. Despite consistent growth in premium subscriber count over the years, Spotify’s fluctuating profitability calls into question the stability of its business model. If subsidiary DSPs also face the same profitability problems as Spotify does, then who knows when the investment money for DSPs ceases?
Aside from struggling as a business model, major DSPs’ payout model also does a disservice to artists, forcing them to resort to other revenue streams. For decades in the past, artists could make a living off selling their music. Distributors of albums usually negotiate a “wholesale price” with music stores (physical or online) that does to the artist’s label, and artists usually earn their royalty share (or a percentage) of that price. Despite a gradual decrease in the wholesale value since 2003 (DataWrapper), an artist with a 30% royalty negotiated with their label can still earn around $2-$3 for each album sold.
But things have changed after the DSP takeover: despite the still-rich physical sales profit margin, deflated income from DSPs forced artists to prioritize touring. On Spotify, it takes around 2000 streams for the artist to earn the same amount, taking into consideration of royalty rates. (Estimated using Music Gateway’s royalty calculator; please take into account the assumed 30% royalty rate. Please note that DSPs usually do not calculate royalties on a per-stream basis in practice.) Assuming a song averages three minutes and 30 seconds, it takes around 7000 minutes, or 117 hours, of Spotify streaming to earn the artist what they would’ve earned with an album sale. In my personal experience, it can take years for an individual listener to generate that amount of streams for an artist. After over four years of using the music stream tracking service Last.fm, I have accumulated over 2000 streams for only one artist. This slows down many artists’ recouping processes by a significant amount of time.
And that was just a simplification of how streaming payouts work. Most DSPs do not actually operate on paying a fixed amount of money per stream to rightsholders. Instead, the market-dominating DSPs like Spotify and Apple Music follow a “pro-rata” payout model. In the case of Spotify, this model can severely disadvantage smaller artists. While Spotify keeps roughly 30% of its total generated profit and distributes the rest — the other 70% to the shareholders. It might seem that the shareholders are getting the larger chunk, but the chunk is then divided among the record labels (plus independent artists) based on what percentage of total streams they occupied during the time period for the payout. While labelless artists can keep what they get from that to themselves, artists under labels receive only their share according to the royalty rate written in their contracts. The record labels would then divide that 70% into a majority portion that they take away, and a usually smaller portion as royalty for the recording artist whose records are on Spotify. With an industry-average royalty rate of 10% to 25% (Brabec), artists often end up getting close to nothing.
That is not to mention DSPs’ bundling options — pairing up its service with another type of streaming service provider to offer competitive deals and capture market share. Bundling (and discount options) add to the DSP’s user base, but since users choose these options to pay below the standard membership price, they decrease the marginal revenue from that user. One can describe music streaming revenues as a giant cake; it might look large as a whole, but after slicing something up for everyone, an individual slice can be too small to fill one’s stomach — literally. Classical musician Tasmin Little revealed in a 2020 tweet that, despite receiving over five million streams in six months, she made a meager 12.34 pounds (around 15 USD) — barely enough to buy a meal (Little). While other revenue sources might be available for Little, the two relatively lucrative fields — touring and merchandising — could be less accessible to musicians like her, who are not in the mainstream music circles.
In Pink Floyd’s USA Today opinion piece 10 years ago, the members stood up for smaller artists like Little. To them, letting artists get paid fairly is a “matter of principle.” A decade later, however, the industry is still plagued with the same problem — what is the solution to the streaming problem? With a consumer base acclimated to easy, on-demand access to giant libraries of music, gatekeeping access might be futile (and probably worsen piracy problems, ironically).
Multilayered plans and efforts to gatekeep music that do not generate additional user value could be futile solutions born out of reactionary attempts in capturing profit.
In an internal memo from Universal Music Group (UMG), one of the largest music groups in the world, CEO Sir Lucian Grainge expressed his dismay with the state of streaming. In particular, he blamed illegal streaming farms, fake artists (artist profiles that were rumored to be used by Spotify to take up space in total streams (Caramanica and Rosado), and functional music (such as those “coffee shop background music” playlists) for chipping away from payout to real artists (Burger). Grainge’s concerns are legitimate, as all three factors would inflate the total stream or distort rightsholder payout proportions. In other words, the same-sized cake would need to be divided even more times, and slices that go to labels and real artists would get even smaller. As for solutions, according to Music Business Worldwide, UMG is rumored to favor negotiating for a multilayered streaming plan, where regular paying users can access most of the catalog except for a small portion that’s only available to higher-paying users.
However, from a user’s perspective, these types of plans might not seem attractive — under the current DSP models, premium users can access most new music at the time of release. The multilayer plan model would not bring users additional benefits unless the plan provider further lowers its basic tier subscription price — a counterproductive move. From a user perspective, paying the same price or more for less access to music is unappealing. Decreasing the consumer’s welfare could just push them to find substitutes within and beyond legal realms — including good ol’ piracy. Furthermore, exclusive music locked for paying members is also at risk of being leaked and illegally distributed. After years of battling music piracy, the industry should have already learned the lesson — limiting access to music will only benefit the black market. Users are unlikely to pay more for exclusivity if the exclusivity cannot be enforced. The multilayer model, or any model that relies on gatekeeping music, might just be an excuse for the music industry to profit from what it already can create, instead of embracing new models and innovations.
A better alternative might be the “User-Choice model.” where technological innovation can help diversify artists’ revenue streams. Already used by Tencent’s QQ Music, the largest DSP in Mainland China, the User-Choice model reportedly allows both the streaming platform and the artist to gain lucrative revenues by facilitating direct user-artist interactions (Burger). One of the most attractive features is direct tipping (a.k.a. “dashang”), where users who really enjoy a piece of music can tip the creator directly — with the platform taking a portion of the money, of course.
As an occasional user of Chinese-based social media, I can attest that the dashang feature is very commonplace, and applies to digitally shared works not limited to music too. There are caveats, however, as Music Business Worldwide mentioned Spotify’s previous flirtation with the idea during the pandemic: “the lack of an established micropayment culture for Western music streaming platforms (in contrast with sales platforms like Bandcamp), may have contributed to what seemed a lukewarm fan reception.” (Burger) Intuitively, the cultural and technological barrier might render the idea hopeless. But compared to the more traditional options that rely on extorting money out of music listeners by gatekeeping music that can hardly be gatekept in the first place, integrating micropay technology (and thus encouraging micropay culture) might be more feasible and constructive.
The User-Choice model might even be bettered by adjusting to the West’s scattered payment system and providing experiential incentives for using micropay. Streaming apps can integrate themselves with digital payment systems such as Apple Pay and Google Pay, streamlining the tipping process. And better yet, to bypass the App Store developer’s charge, use a redirected online payment page for users to get special in-app currency. To allow more artist-fan interactions, streaming platforms could implement a commenting/messaging feature, where artists’ superfans have a chance of getting replies from the artist themselves. The portion of dedicated fans who are willing to spend money beyond their subscription fees for special benefits and interactions could potentially become very lucrative — maybe even more lucrative than the general DSP subscription base that pays a fixed monthly fee.
After years in the industry and experiencing ups and downs — different music formats and different disruptions to the industry model, Pink Floyd is insistent on their stance on artists’ rights. Maybe after decades of struggle, the industry can finally see a healthier change. To realize that, the industry should embrace all changes coming its way and find innovative revenue sources for its artists, who are the backbone of the music that it operates on.
Emily Zhao is an avid music listener and music industry enthusiast. She currently minors in Music Industry at the University of Southern California.
References:
DataWrapper, Average wholesale price per music album/track.
Brabec, Jeff. “Music & Money: Recording Artist Royalties.” ASCAP, 2007.
Hogan, Marc. “What Apple’s iTunes Shutdown Means for Music Fans.” Pitchfork, 3 June 2019.
Little, Tasmin. “Tweet.” Twitter, 18 May 2020.
Payen, Guillaume. “A Sustainable Future for Streaming.” SPIN, 29 January 2021.
Special thanks to Mike who discussed the current state of DSPs with me, and to Sarah for hearing out my ideas.
