Is there a revenue stream in streaming music?

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The question on Justin Roberts' lips summed up the angst of an ever-anxious music world: "Why would anyone want to purchase a record ever again if you can just listen to it for free?"

The Chicago-based, Grammy-nominated kids musician was discussing his decision to make only the title track of his new album, "Recess" — rather than all of its songs — available on the increasingly popular and controversial on-demand streaming service Spotify. Yes, he wants people to hear his music, but he also wants those who like it to own it, a notion that may soon be seen as quaint even though the money he receives from song streams is just a tiny fraction of what he nets from sales.

When screenwriter/author William Goldman wrote, "Nobody knows anything," he was referring to the movie business, but the phrase could apply to this moment in the recording industry, which may be on the brink of salvation or damnation depending on who's doing the talking. Dramatic transformations are taking place, with the upsurge of online services facilitating a transition from people playing music they own to streaming music on the Internet.

For connected consumers it's never been easier to check out new music, either on demand via services such as Spotify (which has licenses to stream the bulk of major labels' catalogs) or YouTube (a video website that nonetheless serves as a prime music-listening portal, no subscription required) or by listening to an Internet radio service such as Pandora or Apple's newly launched iTunes Radio. But some musicians are complaining about the scant royalties they're receiving from these companies, all while the industry has yet to signal that long-awaited rebound.

To the contrary, Nielsen SoundScan's tally of 4.68 million U.S. album copies sold over the last week of July represented the lowest weekly total since the service began tracking sales in 1991. Were those crummy numbers due to more people streaming music instead of buying it — as some record label officials contended — or merely the unsurprising result of a down summer in which anticipated albums by such superstars as Beyonce and Eminem failed to surface?

The Spotify folks certainly aren't accepting the blame. Launched in Sweden in 2008 and introduced in the U.S. in July 2011, Spotify is presenting itself not just as a convenient service for consumers but also a panacea for a recording industry that's been in decline since piracy and illegal file sharing took hold in the late 1990s.

The service allows you to listen to anything in its vast catalog (more than 20 million songs globally, it reports) either for free with ads or for $9.99 per month for unlimited, uninterrupted service that also works on mobile devices. If the Spotify model succeeds, the reasoning goes, listeners will be paying for music they'd previously been enjoying for free, and musicians finally will receive fair financial compensation for their creative efforts.

But for now some musicians are dubious, and the Spotify backlash gained a high-profile flag-bearer over the summer when Thom Yorke — whose band Radiohead in 2007 embraced the brave new digital world when it offered its album "In Rainbows" for a pay-what-you-want-to-pay price — pulled his side-project Atoms for Peace's recent album, "Amok," from the service. As he wrote on Twitter: "Make no mistake new artists you discover on #Spotify will no (sic) get paid. meanwhile, shareholders will shortly being rolling in it. Simples."

Atoms for Peace member/Radiohead producer Nigel Godrich argued in a series of tweets that Spotify is "bad for new music" and that "if people had been listening to spotify instead of buying records in 1973 I doubt very much if (Pink Floyd's 'Dark Side of the Moon') would have been made. It would just be too expensive."

The local independent label Drag City is keeping its catalog off Spotify and all other streaming services, even as most labels big and small play ball. The Chicago-based Bloodshot Records has its music on Spotify, though label co-owner Nan Warshaw remains wary.

"Sales are certainly being cannibalized by piracy. It's less clear how much they're being cannibalized by these other things," she said, though she added: "If the streaming services like Spotify become a predominant model, then very few if any labels can survive on that kind of money. It's certainly better than people stealing music, and we do see a small payment, and we are getting sizable checks from Spotify every month. However, it's not sizable when you look at the number of times a song was played."

Ken Parks, Spotify's chief content officer as well as Spotify North America's managing director, doesn't buy claims that his service has had a negative impact on sales. For one, with about 24 million registered users — 6 million of whom pay for the service — Spotify doesn't approach the market penetration of, say, YouTube, which Parks called "by far the largest music service in the world." YouTube reports that each month more than 1 billion unique users visit the site and more than 6 billion hours of video are viewed, with music being the most-viewed category.

Parks argues that Spotify isn't big enough to cannibalize that many sales, and when the company does achieve a larger scale in the U.S., as it has done in Sweden and other Nordic countries, he believes it will help the music industry's sales grow, not shrink, and musicians will reap the rewards.

"We are in the very early days of this service," Parks said. "We consider ourselves just scratching the surface."

Let's hit the pause button here to examine the distinct ways in which these online services operate.

• Pandora has been by far the biggest player in Internet radio, announcing that it had 72.1 million active users in August (a 28 percent increase over 2012) who streamed 1.35 billion hours of music, this after the company revealed in April that it had surpassed 200 million registered users. (iHeartRadio, Slacker and SomaFM are among those playing catch-up.) But the Sept. 18 launch of iTunes Radio promises to change the dynamic: Early last week Apple announced that it already had attracted more than 11 million unique listeners to its service, and Pandora's stock price dipped by 10 percent.

You can create a Pandora "station" based on an artist you like — anything from Lady Gaga to Muddy Waters to Gorky's Zygotic Mynci — and you'll hear music from that artist as well as supposedly similar works from other artists, as determined by the company's algorithms, plus the occasional ad if you sign up for the predominantly free service. But although creating a Lady Gaga station will enable you to hear Lady Gaga songs, you can't ask Pandora to play you "Poker Face" or any other specific tune.

• Spotify, like its less popular competitor Rdio, is primarily an on-demand streaming service, allowing you to preview only music that interests you, though it also offers a Pandora-like radio application. On Spotify you can call up "Poker Face" or Muddy Waters' "Mean Red Spider" or Gorky's Zygotic Mynci's entire "Barafundle" album, and that music will stream as often as you'd like to listen to it.

• As for YouTube, even though its global director of musical partnerships Chris Maxcy stressed that "YouTube is not a music service," the Google-owned site has become a go-to source for checking out music, whether on an official band video or audience-shot concert footage or audio-only album tracks that a fan has posted and the artist hasn't ordered to be taken down.

Russ Crupnick, senior vice president of industry analysis for the Long Island-based NPD Group, said there's much consumer overlap among these services, with about 80 percent of Spotify users also listening to Pandora.

"Spotify tends to appeal to the more engaged music fan, where discovering new music and selection are really critical," Crupnick said. "That's a smaller audience, whereas YouTube tends to be ubiquitous among teens and twentysomethings but not as much among older audiences."

How these services pay artists varies as well. Internet radio sites such as Pandora operate under a government compulsory license, meaning that royalty rates are fixed, and a company generally need not seek permission from a rights holder to play any music. (Songwriting payments go through a performance-monitoring agency such as ASCAP or BMI; payments for the recording artist are collected and distributed by SoundExchange.)

The royalty formulas contain many moving parts, but at this point Pandora's rate for the artist usually amounts to about one-tenth of a penny per stream, with the money split 50-50 between the artist and record label, which results in the artist receiving about .05 cents per stream. The songwriting royalty, calculated as a percentage of the company's revenues, is generally lower. iTunes Radio's royalties have been reported to be a bit higher than Pandora's.

In contrast, U.S. broadcast radio, which reaches many more people per spin than individual Pandora streams, offers zero royalties to performers but about 4 percent of total revenues to songwriters.

With Spotify playing songs on demand rather than as part of broader radio playlists, its per-stream reimbursements to artists are higher than Pandora's. Spotify's royalties are not government-controlled but rather result from direct license agreements between the service and the music's rights holder, generally the label. Although those terms are not public and may vary from deal to deal, Daryl Friedman, the Recording Academy's chief advocacy and industry relations officer, said musicians have told him their Spotify royalties often work out to about a quarter or third of a cent per play.

Given YouTube's wide variety of partnerships and programs — which might involve setting up channels and/or sharing ad revenue — plus the un-countable number of videos that make unauthorized use of copyrighted materials, its payouts are even harder to pin down. Maxcy said the company won't reveal specific figures, but it has paid more than a half billion dollars in royalties over the past couple of years. (Parks said by the end of this year, Spotify "will have returned a billion dollars to rights holders.")

Much of the debate over online music services has focused on royalties or lack thereof. As Cracker/Camper Van Beethoven frontman David Lowery put it in a blog headline: "My Song Got Played on Pandora 1 Million Times and All I Got Was $16.89, Less Than What I Make From A Single T-Shirt Sale!"

"Right now we don't have enough revenue coming into the system to show up as real money for the artists, and artists are concerned," Friedman said. "Today it's producing crumbs for artists and songwriters. Whether those crumbs will add up to bread in the future is the question."

The royalties issue hits home for musicians who, over the past decade and a half, have seen music sales plummet from $14.6 billion in 1999 to $7.1 billion in 2012, according to the Recording Industry Association of America. Even as many see the emergence of iTunes, which generally pays the rights holder 70 cents on the dollar, as a positive development, downloaded-music sales (often of individual tracks rather than albums) have not compensated for the decrease in physical-product sales.

Some musicians view the current dynamic as another meet-the-new-boss-same-as-the-old-boss scenario as companies valued in the billions of dollars plead poor when it comes to sharing revenues with the creative people who provide their content. At the same time, Spotify and Pandora continue to report losses each year, and Pandora contends that it is paying out too much in royalties to sustain its business, which is why it has pushed for passage of the Internet Radio Fairness Act. That bill, which in effect would lower royalty rates, could not overcome opposition by labels, publishers and musicians to gain passage when it was proposed in Congress last year, and it has yet to resurface.

Pandora's position is that it currently must pay out such a high percentage of its revenues in royalties that it can't turn a profit, and Internet radio hasn't yet exceeded 10 percent of all radio listening.

"You have one company that owns about a 75-percent share of the market," Pandora co-founder Tim Westergren said, referring to his own company. "That's not a healthy sign. That's a direct consequence of the rates being too high …. The problem is that the cost of growth encourages us to grow more slowly."

The counterargument is that Pandora has chosen to maximize its subscribers, the bulk of whom pay nothing, instead of maximizing revenues through increased ad and subscription sales, so musicians shouldn't have to foot the bill for this strategy.

"Maybe they should go out of business if they need to lower their royalties any more," Lowery said. "Here's a case where Pandora probably needs to increase their paid subscribers instead of relying on an ad-supported model to create more revenue. What they've done instead is turn to the government and ask songwriters and artists to give them a handout."

As for YouTube, Bloodshot's Warshaw said "the payment on that is dramatically low. A lot of people are using that as their primary source for music, so that is a hair above piracy."

Lowery likened YouTube to "a shakedown service" in requiring artists to sign a contract in order to have say over — and be compensated for — their work that appears on the site.

Maxcy said YouTube and its content providers make money from the ads that appear with videos, so rights holders must sign up with YouTube to get that process going. "We won't monetize any content on our platform unless we have a license from the artist," Maxcy said.

But are those who harp on royalties seeing the forest for the trees? After all, the big record-store chains have folded, terrestrial radio stations' playlists have constricted, and satellite radio has yet to grow popular enough to fill the void.

"It's like, 'Wow, I can be found on Pandora? I can be found on iTunes? I have a chance to be discovered, (whereas) K-Rock is never going to play me,'" Crupnik said, adding that the streaming services are catering to the industry's more valuable consumers. "The Spotify user is spending about 80 percent more than average on stuff: CDs, digital downloads, concert tickets, merchandise. The Pandora person, because it's a broader audience, I think it's about 30 percent more than average."

Chicago-based soul singer-songwriter JC Brooks said because these services are among the few outlets for new music discovery, "they can use that to bend you over a barrel" and pay low royalties, but he still looks to them for their promotional value.

"I want to get into people's ears," he said, admitting that he actually was pleased the first times he saw that someone had uploaded JC Brooks & the Uptown Sound albums to YouTube and piracy sites. "One of my happy moments (was when) my mom found our first album on a torrent site. It was like, someone cared enough to put us on a torrent site? Yay. That is one of the flattering aspects of piracy."

Wisconsin-based singer Kelly Hogan, who has lived in and continues to perform often in Chicago, said she's still trying to get up to speed on this increasingly complicated business. "I have to always overcome that thing of 'All of this is evil. I just want to play music,'" Hogan said. "But you have to be smart."

She said she takes with a grain of salt companies' claims that "'the bigger we get, the more royalties we'll pass on.' I don't know where in history I've ever seen that."

Los Angeles-based electronic artist Ryan Farish said YouTube's Content ID program, which automatically identifies his music when it's posted by outside parties, gives him credit, a cut of ad revenues and a songwriters' performance royalties — helpful given that the video "Remember Me," a 2006 photo montage tribute to U.S. soldiers set to Farish's "Pacific Wind," has more than 31 million YouTube hits. Farish said he received $506 from Google Advertising for 590,698 YouTube plays in March for a dozen videos using his music that other people had posted, though the exposure is more important.

"It's given me a vehicle to reach people, and that absolutely does trickle down to sales on iTunes, Amazon and Beatport and Google Play," he said.

Likewise, Farish called Pandora "a lifesaver. I can't even count the number of people who have told me that they've discovered me on Pandora, and I know for a fact that it contributes hugely to my sales on iTunes."

Lowery disputes that Pandora is necessarily helping people discover his music because it most often plays songs of his that already were hits, such as Cracker's "Low." But Farish said Lowery shouldn't complain.

"I haven't heard the band Cracker mentioned since the '90s," Farish said. "He's exactly who needs Pandora right now. Don't bite the hand that feeds you. Seriously. Pandora is pushing your music to new listeners."

Farish said over the previous quarter his music had 5,238,000 plays on Pandora, compared with 107,760 on Spotify. "Spotify is not working for me to introduce my music to new people like Pandora is," he said. "Does that take away from sales? It's possible."

Lowery said he's "kind of ambivalent about Spotify. They sincerely believe they are helping artists and the music business. They may well be, but the jury is out."

David Macias, president of the Nashville-based Thirty Tigers distribution, marketing and management company, contends that Spotify has gotten a bad rap from its critics. "They're sort of saying 'All big companies are the same, and they're bad and they're out to screw us,' and I just feel like that's intellectually lazy and not getting us closer to understanding what's going on," said Macias, who rebutted Yorke and Godrich in a Billboard column. "I have yet to see a serious economic critique of Spotify that convinces me that it's a bad thing for artists."

What Macias sees is listeners shifting from an acquisitional model, in which they pay to own music, to one in which they consume it as if it were a utility, like water. You still pay for the latter but don't think about it every time you fill a cup.

When Spotify investor Ashton Kutcher was in town recently, he said that artists who feel undercompensated by Spotify "should call their labels. Their labels are screwing them." Macias said musicians are being unrealistic if they expect to make a lot of money from Spotify when the service here is akin to newly planted saplings. Instead, he said, they should look to Sweden, where Spotify has grown to forest proportions, and the country's overall music revenues have increased each year since it launched.

The Swedish recording industry association, GLF, reported that recorded-music revenues were up 12 percent in the first half of 2013 over the comparable 2012 period, with digital revenues accounting for 75 percent of that figure and streaming constituting 94 percent of the digital income. At the same time, physical sales declined 24 percent and downloads dropped 20 percent — so one could say that streaming cannibalized sales while growing the overall industry.

Spotify's Parks said revenues for global music superstars (who currently may gross more than $400,000 a month on the service) as well as small- to mid-level artists would only grow as the service catches on in the U.S. Parks said if Spotify grew to 140 million users with 40 million paid, compared with the current 24 million and 6 million, payouts would increase fivefold.

"The key to this business is scale," Parks said. "iTunes wasn't paying out a lot in 2003 when (the iTunes store) launched because they were small. The way we look at it is 7 billion people enjoy the music, and most people don't pay for it."

At $120 a year, Spotify's paid subscribers already are spending more money on music than more than half of U.S. consumers, though a Nielsen study released this spring noted that 40 percent of consumers do 75 percent of the music spending, laying down $200-$400 a year. One way the streaming model intends to create new income is this: If you burned, say, a disco mix CD for your friends, such sharing would generate no income for anyone, but if you posted such a playlist on Spotify and friends listened to it there, money would be paid out for each song stream.

"It's important that people be able to share music again in a way that doesn't deprive artists of royalties when that happens," Park said.

But for Justin Roberts, the reality remains that his album sales have fallen off dramatically despite his Grammy nomination for 2010's "Jungle Gym," and even though he releases his own music, the half-penny he estimates receiving per stream from Spotify and the fraction of that he receives from Pandora don't begin to cover his recording costs. He'd prefer a system in which streaming a song cost, say, a nickel ("I think it's worth 5 cents to listen to a song"), and if you listened to it enough times, you'd get it as a download. As it is, Spotify, unlike Pandora, doesn't include a link for buying songs.

"As a small artist it makes a big difference to me if one person buys my CD or buys a track on iTunes, because the number of times anyone would have to listen to a song to generate any meaningful amount of money is more times than most people would ever listen to a single song," he said, noting that he doesn't want to have to launch a Kickstarter campaign to fund future albums. "It's frustrating to see something that I spend a year of my life working on and a large amount of money to make be almost completely worthless when it comes out."

Hogan sounded resigned to not cashing in no matter which model prevails.

"I'm a musician," she deadpanned. "I'm used to not getting paid."

mcaro@tribune.com

Twitter @MarkCaro

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