MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next.
It isn’t much of an exaggeration to say that streaming saved the music recording business.
In the early 2000s, music labels had seen their revenue cannibalized by unlicensed online music sources, but streaming services gave consumers a one-stop, on-demand shop for all the music they wanted. People once again began paying for music.
The result: seven consecutive years of sales growth for the recording business, with $15.9 billion generated by the U.S. recording industry in 2022, with 84% of that coming from streaming.
Yet that shift to the new digital era has left its scars on the industry. As some insiders have pointed out, music as a paid service is undervalued compared to other forms of streamed entertainment.
The new CEO of Warner Music Group, Robert Kyncl, illustrated the problem clearly at a recent conference.
“The price that the user pays per hour of consumption of music is half of what they pay for movies and TV shows on streaming services,” Kyncl told the audience at the Morgan Stanley Technology Media and Telecom Conference on March 8.
“if a subscriber comes to a DSP and starts the session with Lizzo, Lizzo should get multipliers on her [plays].”
Robert Kyncl, speaking on March 8
Kyncl noted that the basic price for music streaming services was set more than a decade ago, at USD $10 per month, and at most services, it hasn’t budged in that time. Had streaming services kept up with inflation, they’d cost $13.25 per month today, he said.
And the arrival of family streaming plans has cut average revenue per user (ARPU) to just $7 per month, Kyncl said.
But the former YouTube exec, who took up his role heading up WMG on the first day of 2023, has an idea for how to fix the problem: Change the royalty fee system to allow for royalty “multipliers” to the industry’s most valued artists.
The idea is to “separate user actions from algorithmic actions,” Kyncl told the conference, with more money going to the artists and labels that get playtime from user actions, rather than those whose music is served up by an algorithm.
“For instance if a subscriber comes to a DSP and starts the session with Lizzo, Lizzo should get multipliers on her views,” Kyncl said.
“Lizzo basically brought them to the platform… If she is consistently starting long sessions, even if it’s not all her content, but she’s a consistent long session generator, she should have a multiplier for that. If she is being searched for, she should get a multiplier for that.”
In essence, the idea is that an artist that fans seek out proactively should get paid more than their simple share of total streams, as is the case now with the “pro-rata” model of streaming royalties used by most streaming services.
Though Kyncl’s idea is, let’s say, still in the conceptual stage, it’s aimed very clearly towards fixing a growing problem in the industry, a problem that is about more than low royalty rates.
WHAT’S THE CONTEXT?
Kyncl is not alone in his dissatisfaction with the current pro-rata business model of streaming music – it’s an issue that is increasingly on the minds of industry execs, and the hunt is on for a solution.
Under the traditional pro-rata system, streaming services pool together all the royalty money generated by subscriptions, and pay that money out to artists according to their share of total audio files streamed.
But that share can be gamed.
“In order to entice consumers to subscribe, platforms naturally exploit the music of those artists who have large and passionate fan bases,” Sir Lucian Grainge, chairman and CEO of Universal Music Group, said in a note to staff in January.
“But then, once those fans have subscribed, consumers are often guided by algorithms to generic music that lacks a meaningful artistic context, is less expensive for the platform to license or, in some cases, has been commissioned directly by the platform.
“For example, just witness the thousands and thousands of 31-second track uploads of sound files whose sole purpose is to game the system and divert royalties.”
“once fans have subscribed [to streaming services], consumers are often guided by algorithms to generic music that lacks a meaningful artistic context, is less expensive for the platform to license or, in some cases, has been commissioned directly by the platform.”
Sir Lucian Grainge, Universal Music Group
Here’s a pretty incredible stat to illustrate the problem: A recent analysis found that, on average, just under 100,000 audio files are uploaded to streaming services every day, and of that, only 3,940 come from the three majors or their affiliates and subsidiaries.
Quality, fan-supported music being diluted in streaming services on an enormous scale.
WHAT HAPPENS NOW?
Grainge isn’t taking the situation lying down. A few weeks after his note to staff, UMG announced a new partnership with streamer Tidal aimed at exploring ideas for “an innovative new economic model for music streaming that might better reward the value provided by artists.”
A few months later, UMG confirmed another, similar alliance, this one with streaming service Deezer, to “investigate potential new economic models for music streaming that more fully recognize the value artists create.”
Deezer itself has been championing the idea of a “user-centric payment system” (UCPS) for several years, and in announcing its partnership with UMG, chief executive Jeronimo Folgueira laid out some of the ways streaming services game the royalty payment system.
“The current system has clear issues that need to be addressed, such as increasing amounts of non-music tracks uploaded on platforms, poor quality covers with misspelled artists’ names and songs to ‘steal’ streams, and people trying to trick the system with the length of tracks,” he said.
“This hurts true artists, makes it harder for new ones to emerge and also damages the fan experience.”
And Universal Music Group isn’t alone in working to move past the pro-rata payment system.
In fact, just months before Kyncl took the helm at Warner, the company signed an agreement with SoundCloud that allowed WMG artists to be paid according to SoundCloud’s “fan-powered royalties” (FPR) model.
Unlike with the pro-rata model, FPR looks at each individual streaming subscription, and splits up the money exclusively to the artists that the subscription owner played in a given month.
But the FPR model has at least one major drawback, which was well illustrated in a report from research firm Midia.
Researchers looked at the royalties made by 118,000 independent artists on SoundCloud who switched to the FPR model after the streaming service went live with the new business model in 2021.
They found that 56% of artists saw an increase in their take from the new payment model – but 44% of artists saw a decline.
And that could prove to be a serious problem for the major labels, especially if among those artists are big names with big contracts.
A FINAL THOUGHT
Kyncl’s “multipliers” model would almost certainly cut back on the kind of “gaming of the system” we see on streaming services today.
However, while it may seem fair at first glance, it’s likely to run into some of the same problems as the FPR model – it could easily prove to be a zero-sum game, where some artists win and some lose.
If a particular artist gets plenty of streams, but is commonly the second or third artist you go to during a streaming session, they will presumably lose out to the Lizzos of the industry under Kyncl’s proposed system.
Is it really fair for an artist to see their royalties cut back simply because they’re not the first that music fans go to when plugging in the headphones? And what would it mean for their relationship with their label if that were to happen?
Ultimately, the cleanest solution to increasing royalties for ‘premium’ artists (a subjective phrase) is one that music fans might not like: price hikes. Whether that’s implementing additional charges for subscribers to access certain types of content, or simply further rises in the standard $9.99-per-month music streaming subscription price.
New partnerships between streaming services and the major record companies make that likelier to happen, as we’ve already seen in the past year via mild price rises at platforms such as Apple Music, Amazon Music, Deezer, and YouTube Music.
Whether more dramatic price increases can be agreed in future – especially at Spotify – is anyone’s guess.Music Business Worldwide