How Big Labels Squeeze Artists Out of The Growing Streaming Pie

Spotify Pie

Goldman Sachs expects global music revenues to reach $142B by 2030. Despite such bullish predictions, artists are still struggling. Streaming and label execs have found a way to siphon this growing market from talent generating the value.

Their streaming ecosystem reduced the artists’ share in revenue by fundamentally changing their business model. The shut down of live performances increased the effects of this squeeze tenfold.  And since tech companies are making out like bandits from this new “stay at home economy,” Kayne West argues that artists deserve a share in the profits. Quite literally. He argues that artists deserve stock shares, and it makes sense when you consider how the internet reshaped the music business model. 

The Dark Ages of Illegal Downloads

The digital age created the market pressures needed for a new music business model to emerge. Does anyone remember Limewire? Millions of people illegally downloaded songs to janky K-mart mp3 players.

This platform and others like it almost killed the music industry. In the late 2000s – Revenue hit record lows from 2010-2014, and physical record sales fell from its high of $22.9 billion in 2001 to $4.4 billion in 2019

The internet didn’t just open up the opportunity to free music. The increased consumer music spending budgets created a vacuum. Innovators intuited that our love for music did not change, so they filled the market vacuum with a premium way to access and enjoy music.   

Streaming services like Spotify offered access to an unlimited number of tracks at any time, anywhere. No one had ever experienced access to music like that. This novel service convinced consumers to spend some of that extra spending budget on a streaming subscription. 

2014 marked a course reversal. Revenue from streaming subscriptions started to grow faster than the decline in physical sales. Streaming was a music industry renaissance, but the future isn’t bright for everyone. This innovation changed the revenue model away from direct sales in favor of subscriptions. So many artists and musicians are not seeing a lift from streaming profits because their royalty payout structure has not been adjusted for a subscription model.  

Payout Model During Peak Record Sales

Our last article on the Importance of Intellectual Property Rights to Kanye and UMG explains just how artists and labels receive royalty payments for their composition and master recordings.

In the early 2000s, back when the music industry was getting $22.9 billion in record sales revenue, artists, on average, made 70% of their income from mechanical royalties. Today that percentage is less than 10%. Artists have compensated for that difference in revenue with performances and teaching. The reason artists were able to make more in royalties in the early 2000s is that consumers paid for the music’s value immediately instead of overtime. 

How Value Is Split Between Artist and Consumer 

The purchase of a song or album gives access to an infinite number of listens. The market fixes the artist’s value of their music to the sale price but sets the consumer’s value to the number of listens. For example, if someone pays $0.99 for a song and only listens to it three times, the consumer value is $0.33, and the artist’s amount is fixed at $0.99. In this model, the artists get the value of the song immediately, and the consumer discovers its value over time:

How Direct Sales Payout Structure Works:

Under the old model, artists would sign away the rights to their master recordings and split the rights to compositions with the publisher. In return, the label would use its resources and distribution network to get physical copies of the artist’s music in front of consumers. 

Artists and publishers, on average, would receive 11%-15% royalties on record label sales. For the most part, record labels made these payments in the form of mechanical royalties. These percentages would undergo a lengthy list of deductions for distribution, marketing, and production costs. Regardless of the deductions, artists would still see an average of $0.091 per album sale. 

Even though these margins were only 11%-15%, artists could sustain 70% of their revenue through royalties because they did not have to wait for the full 9 cents to pay out over time. 

How Value Grows for Artist and Consumer

Say a fan buys an album on each release date. The value stacks like a staircase for the artist because it is immediate. Conversely, the consumer stacks the music’s value on an exponential line with each purchase.

Under the direct sales model, consumers would incrementally build a music collection until they found the desired diversity. At that point, their purchasing of new music would taper off. 

This model wasn’t a utopia for small artists. The labels’ access and control over the distribution network made them gatekeepers of the industry. Even though getting in the door was challenging, artists found sustainability once they signed an agreement with a label. 

Payout Model For Streaming

Today, although artists get paid the same 11-13% of revenue in mechanical royalties, the new model slows the growth rate. Subscription streaming gave the consumer more control over their total investment into each track. So now, the streaming service pays the artist for the listens of each track over time. The total value averages out to be the same, but it makes it harder for new artists because they have to wait longer to receive that value in full.  

The graph below shows that it would theoretically take the same time it took for five albums to receive the cost of 1. 

The streaming ecosystem doesn’t just push the total payoff into the future; it also shifts wealth to more prominent artists. When you total the average yearly streams of the top 200 performers and measure it against the total streams of the year, the bottom 50% of streaming artists only receive about 14% of streaming revenue. The most likely explanation for this disparity is that users can more efficiently discriminate their taste. Instead of paying for 12 songs to only enjoy 3-4, users fraction out their subscription fee based on how much they like each piece. This discrimination means that top hits absorb a much more significant fraction of revenue under the steaming model.  

So struggling artists competing for the 14% slice of revenue also have to share 57% to the label for master recording royalties. Artists are getting the same 11-13% cut in mechanical royalties they got in direct sales, but for a much smaller share of the pie. 

The Diminishing Role of Record Labels

Today’s most critical difference is that access to extensive distribution networks isn’t needed to make music available to consumers. Labels are receiving a generous share of the growth without investing in the direct sales model’s distribution. 

Essentially, Labels are getting paid for doing less. This disparity is a critical factor in the negotiation of music contracts today. It is why Kanye West may have a sound argument to get his master recording copyrights. But this isn’t enough. Kanye is advocating for a complete overhaul of the industry and is examining multiple creative solutions. One solution that has garnered a lot of interest is providing streaming shares to artists. Our next article will conclude this series with a look at these solutions in the context of the future of streaming.   

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