A couple of weeks ago I was having dinner with a couple of music industry friends — one who manages a few quite popular bands and another who founded a startup that streams concerts on the web — and at some point the conversation turned to music streaming services like Spotify, MOG, Rhapsody, Rdio, Pandora, etc.
In one corner, my music startup founder friend didn’t understand how making ones music available on such services could possibly be financially viable for anyone but the industry’s biggest stars (It takes four million streams in a month for an artist to earn the equivalent of minimum wage during the same month). In the other corner, my music industry manager friend argued that it’s not about the money, that the exposure the artists get through such services renders the little money they receive from having their music streamed inconsequential, that it’s all about creating fans who will buy tickets to shows, merchandise, etc. It was an interesting conversation that I’ve continued to think about occasionally since it took place, and I was reminded of it again today after learning that the Black Keys, like Coldplay and Adele before them, won’t be streaming their latest album, El Camino, on any of the services.
“We decided for this album to not allow music services to stream the entire album, because it’s becoming more popular, but it still isn’t at a point where you’re able to replace royalties from record sales with the royalties from streams,” Patrick Carney said in a VH1 interview. “So it felt unfair to people who purchased our album to allow people to just go on a website and stream the album for free whenever they wanted.” He added, “For a band that makes a living selling music, it’s not at a point yet to be feasible for us. It’s set up to be a little bit more fair for the labels than it is for the artists, I think.”
Here’s the VH1 interview in question…
So Carney says that it’s not profitable for artists to make their music available on streaming services. On the flip side of all of this is whether the streaming services themselves can ever be profitable. Gigaom argues that they cannot due to the outrageous demands on them made by labels.
Imagine a new hot-dog selling venture. Let’s also say there’s only one supplier to purchase hot dogs from. Instead of simply charging a fixed price for hot dogs, that supplier demands the HIGHER of the following: $1 per hot dog sold OR $2 for every customer served OR 50 percent of all revenues for anything sold in the store. In addition, the supplier requires a two-year minimum order of 300 hot dogs per day, payable all in advance. If fewer hot dogs are sold, there is no refund. If more than 300 hot dogs are sold each day, payments to the supplier are generated by calculating $2 per customer or 50 percent of total revenues, so an additional payment is due to the supplier. After the first two years, the supplier can unilaterally adjust any of the pricing terms and the shop can never switch suppliers.
Would this imaginary hot dog establishment be able to generate a profit? Never, because the economics are one-sided. The supplier will always elect the formula that captures the largest amount of money for themselves, completely disregarding the financial viability of the store. If the store miraculously managed to generate a profit, the landlord would simply raise the rates after two years.
Such economic demands may be imaginary for the hot dog business, but they are the stark reality that every digital-music subscription service such as Spotify, Rhapsody, MOG, Rdio, and others must confront. These details aren’t well-known because digital music service deals are always wrapped tightly with strict non-disclosure agreements.
I don’t know about you, but this all enrages the hell out of me. Here you have incredible demand for something where the people creating the product and the people who created the delivery system for said product are both being squeezed by the middle men? This has to be the first time in the history of commerce where this has happened, right?
Personally, I’ve been using streaming services here and there, and then when I do I usually use them as a tool to discover new music that I almost always turn around and buy on iTunes or Amazon — and then I often buy tickets to go see live performances by the people whose music I buy. Sounds like I’m the dream consumer for the artists, labels AND the streaming services! Why can’t people just be more like me?