Music Streaming – Temporary gravy pt. II.

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Music label largesse signals a weakening position.

• Warner Brothers and Sony have both announced that they will share windfall profits that they earn from the streaming companies with artists.
• This relates to the return that they make from their shareholdings in the streaming companies which many have taken in part payment for granting streaming rights.
• They have not said how it will be calculated or shared among their artists, but the intent is clearly to improve their relationships with their artists.
• This relationship has become increasingly strained and the labels have been more than happy to allow the streaming companies to take the blame for the poor returns artists earn from streaming.
• All of the major streaming services (Pandora and Sirius are not streaming) are either privately held or buried inside much larger companies.
• This is why artists have wrongly assumed for years that it is the streaming services who are cashing in and underpaying them for their content when in fact it is almost certainly the labels.
• Both Apple and Spotify pay away at least 70% of their revenues to the labels who then share this money with the artists as per the terms of the contracts signed with their artists.
• This is where the big question mark lies as how much the artists receive and how much the labels keep for themselves is a black box.
• Given how much the artists appear to hate music streaming, I am thinking that the labels keep the vast majority of the revenue for themselves and give only a tiny fraction to the artists. (see here)
• I suspect that when a lot of these contracts with the artists were negotiated, music streaming was a minor issue given that the vast majority of revenues were coming from album sales and digital downloads.
• Hence, it would appear likely that the percentage of revenue paid to an artist of the revenue from a streamed track is orders of magnitude lower than that from an album sale or digital download.
• This is now beginning to change as awareness among the artists is much higher and the labels have realised that they are in danger of becoming obsolete.
• An artist goes to a label because the label can ensure that the music reaches as many people as possible and the artist can earn a better return even after giving the label a very large cut of the revenue.
• However, the labels are weakening because with digital, the label is no longer the only way to distribute music.
• The streaming services, Spotify in particular, know who their listeners are and what they like.
• Consequently, once they have enough users and the algorithms are good enough, the label becomes obsolete.
• An artist can easily go direct to the streaming service which can then market the music to millions of listeners who are likely to like the artist at almost zero cost.
• I think that the labels have realised this and as Spotify passes 100m listeners the balance of power begins to shift in its favour.
• The time is likely to soon come when the labels need the streaming services more than the streaming services need them.
• Hence, I suspect that in the next round of negotiations, Spotify and Apple will be able to reduce the amount that they have to give to the labels.
• This also moves power back into the hands of the artists as at the end of the day it is they that the users are paying for and they will soon have other options for distributing their music.
• Just like PC and handset makers, the labels are in the middle of the supply chain and as their position crumbles, so too will their profitability.
• I would not want to be holding the equity of any music label long-term.