There has been a lot of debate over streaming services and the royalty rates they pay. Critics point to royalties from services like Spotify, where it takes 200 streams to earn the equivalent of one download, as evidence that these services don't provide a viable income for artists.
Damon Krukowski of Galaxie 500 argued these streaming services “are doing nothing for the business of music." While I don't want to diminish the challenges faced by artists in the current environment, I believe this argument casts streaming services in the wrong light.
It's fair for there to be a healthy debate between all stakeholders over the rates services should pay. But to do that constructively, it's important to put these services in perspective, which seems to have been lost in many of the arguments that I've read online recently.
I would argue that, rather than undermining artists' income, streaming services will offer a platform of unprecedented scale to distribute their music and reach new fans. These services will enable a model of artist development that requires significantly less investment than the “traditional" music industry model, allowing for a greater degree of autonomy and control.
I'd first like to address the 200 streams equals one download fallacy. Critics point out most purchased music isn't listened to 200 times, therefore streaming services undermine existing artist economics. The problem with this reasoning is that it equates each stream with a track that would otherwise have been purchased. This doesn't reflect the fact that music sales take place (largely) at the bottom of the marketing funnel — to a fan who has already decided to make a purchase.
Conversely, on streaming services listening takes place throughout the marketing funnel. In some cases, it's at the bottom of the funnel, where a fan is streaming a track rather than purchasing it. But it could also be someone listening to a radio service or playlist on an on-demand service. It could be someone sampling a track based on a review, tweet, or friends recommendation. These are listeners with varying degrees of awareness and interest in the artist, who are not yet ready to make a purchase. In the absence of streaming services these impressions simply might not have happened, or they might have happened but not been monetized.
Since music can now be consumed throughout the marketing funnel, streaming services are transforming how listeners move down the funnel. In the traditional music industry model, there was a clear delineation between promotional channels and revenue generating channels.
Promotional channels (broadcast radio, television, and press, etc.) were used to build awareness and expose an audience to new music. These channels combined broad reach with limited slots. Moving prospective fans down the funnel was expensive, since it took significant resources to gain access to those limited slots. But once that access was secured, significant value was created for the artist. The resources required to break an act were beyond the means of most artists, so their best option was to sign a recording contract, giving up significant rights in exchange for a chance to break through.
We now have a range of digital channels where access is not tightly controlled. These channels have broad reach combined with an endless supply of content. With limited barriers to promotion and distribution, the bar is much lower to get someone to listen to something new. But the bar is very high to maintain their attention. Listeners and fans, rather than gatekeepers, increasingly play the role of curator.
As streaming services do a better job of integrating social layers and building out taste graphs, we should have stronger feedback loops to efficiently facilitate this curation process. At scale, this could significantly reduce the level of investment required for artist development. Marketing becomes driven more by quality and relevance than by dollars.
In order to achieve this goal, reaching scale will be critical for streaming services. One key driver will be smartphones, which make streaming services mobile and accessible. Pandora, which experienced huge growth with the debut of the iPhone, is one of the earliest examples of this.
Subscription and other services are also gaining traction and should continue to do so as consumers become more familiar with these models. There are approximately one billion smartphone subscribers worldwide, which is only 15 percent of the total mobile phone subscribers today. As the smartphone market grows, this represents a huge opportunity for streaming services.
The limited marginal cost of consumption on streaming services enables artists to reach a much broader audience with their music. But they don't necessarily do a great job of capturing incremental value from core fans (something that was previously done by the music sale).
In the past, when fans purchased an album, they weren't only buying access to the music. They wanted to own a physical keepsake, read the liner notes, view the artwork, and be a part of the tribe, etc. Streaming services have unbundled “content access" from the rest of these motivations, but that doesn't mean fans still aren't willing to pay for them.
This is exactly what artists have been doing as they've developed their direct-to-fan channel over the last few years. And whether it's data from Topspin or Amanda Palmer, fans have demonstrated they are willing to spend upwards of twenty five dollars on an average transaction. A direct-to-fan channel is of course of little value without a way to build and grow a fan base.
Aside from the core fans, casual listeners also made up a segment of album purchasers in the past. They weren't (yet) fans, so when they made an album purchase they primarily wanted to hear the music. They had heard enough about the artist to want to give them a shot.
In a streaming environment, album purchasers who were just casual listeners (and never became fans) will likely generate less revenue. But if the artist can ultimately reach many more listeners, convert more fans, and do so with significantly less capital and more autonomy than would otherwise have been required, I'd consider that an opportunity worth pursuing.
Author's Note: “Streaming services" is a broad categorization that includes everything from internet radio services to on-demand services. While these services differ in functionality and the royalty rates they pay, in this essay I am referring to these services broadly since (i) similar criticism is often leveled against them all; and (ii) ultimately I think much of the potential value creation to artists will come from a healthy ecosystem of services across this entire spectrum.
