What Streaming Services Pay Artists Doesn’t Matter. . .Yet.

What do streaming services pay out, anyway?

Everybody is trying to answer this question for every streaming service. I’ve seen articles about the amount that Spotify and Pandora pay out in royalties and how that number breaks down on a per-play basis. Yet for every article that talks about how these services represent growth in a new marketplace, there are articles showing the opposite. I’ve even seen a graph showing data indicating that Spotify’s model is unsustainable.

The conversation about streaming services is everywhere. It reached a fever pitch last Thursday night, with reports that Apple is working to launch a streaming radio service. There must be money in it, right?

I've been reluctant to weigh in on the question of how much streaming services pay artists because of the complexity of the discussion. Each service is experimenting with its model, its pricing, and its offering, and each has different statutory rates to use. All of these variables result in different royalty calculations. Also, because they are licensing content from record companies and music publishers, the payments they make are often not disclosed. Additionally—and to make things even more complicated—regardless of what the label or publisher gets paid, the payment to the artist is still dependent on their individual label or publishing deal. Together, these factors make it nearly impossible to compare services.

I tend to think of streaming services as radio replacements. When you think of them in this way, two truths emerge:

First—regardless of the payout—streaming income represents a step forward for artists. This revenue stream was not previously part of the mix of products and services they could capture. In fact, terrestrial radio stations (like "non-interactive" services) don't pay record companies or recording artists for the recordings they play. Only the songwriters are paid royalties in connection with what is on terrestrial radio. (The reason for this stems from the long-established premise that radio airplay represents “free” advertising that drives record sales, and therefore no statutory rate exists.) Any payment derived from streaming represents a new revenue stream. That’s good news at a time when other revenue streams are shrinking.

Second, when you consider the reach of a radio station in a major market, you get some perspective on the difference between one radio play with an audience of millions versus one person streaming a single song. The reason that radio remains a powerful promotion vehicle is because of that reach, and currently the audience on streaming services just doesn't compare. Therefore, the “low” payments we hear about are simply due to the fact that there aren’t enough plays to generate more income. Despite the inability to compare these numbers, however, as the audience for streaming services increases, so will the revenue, and likewise, the per-stream rate.

My radio analogy might not be entirely accurate, given that some streaming services (Spotify, Deezer, Rdio) are “interactive”, allowing their consumers to choose the songs they want to hear, while others (like Turntable.fm and Pandora) are “non-interactive”, playing songs without direct intervention on the part of the customer. (For a good discussion of all of these terms, check out this post.) But this will likely change as well.

As I've discussed before (here and here), I think that Spotify is immensely important. It is transitioning consumers to an access-type subscription model by normalizing the process of streaming for music fans used to buying physical products, while at the same time legitimizing streaming for those who previously pirated music.

How this all plays out remains to be seen, but the proliferation of services demonstrates that startups are experimenting in this space. These companies—and the VCs who fund them—see promise in the model, even if the current situation is not particularly stable. That promise means that the situation will improve, and payments to artists will too.

An 18th Century Music Model Applied To A 21st Century Revenue Problem

Joseph Haydn: The original subscription model?

When we discuss how artists and musicians make money, we tend to think of a transactional economic model where there is an exchange of money for goods. This is because recordings have long been a dominant revenue stream in the music business. However, music is intangible, and so musicians are technically selling multiple products: recordings, concert tickets, merchandise, publishing, etc., all based on their art and the engagement it drives in fans. Musicians must learn how to monetize these products—as well as completely new ones—by focusing on fan engagement and individual brand identifies. Selling subscriptions is just such a new strategy.

Netlifx and Spotify are well-known examples of media companies using digital subscription models. Netflix built a movie subscription service that was instrumental in disrupting the movie rental business. Spotify, which launched in the US only about a year ago, is doing the same in the record business. The emergence and burgeoning success of these companies is helping the subscription model to take hold as a new revenue source for record labels and individual artists as well.

I’ve been thinking about this lately in terms of arts patronage. What if artists connected directly with supporters in ways that were less like transactions and more like relationships?

Arts patronage has a long history. When one studies music, one learns about Joseph Haydn, the Austrian composer who lived from 1732 to 1809. Haydn was one of the most prolific composers of the Classical era, writing more than 100 symphonies, essentially inventing the string quartet form and influencing both Mozart and Beethoven.

One of the important elements to learn from Haydn’s career is the impact of patronage on his livelihood.  After many years of trying to scrape by, his work became noticed by aristocrats, and he was ultimately hired to provide music for the Hungarian Esterházy family. As Kapellmeister, he was a full-time employee, composing all of the music for family events and entertainment, hiring and conducting the orchestra and singers, and managing the music library. He held this position for 30 years, and took part in several orchestral concerts and opera performances each week.

Haydn would not have had such success without this position; it provided full-time employment and served as a way for him to constantly refine his skills. As he learned after leaving the service of the Esterházys, his work for them made him recognizable throughout Europe, further enlarging his success.

While Haydn’s subscription model is one of the most famous from the last couple of centuries, some modern versions of arts patronage are emerging using crowdfunding and subscription models.

Among the most well-known crowdfunding services are Kickstarter and United States Artists. Both of these services help artists and musicians appeal directly to fans to raise funds for a specific project. They manage the subscription process and provide a framework for patrons to invest. The agreement by which they host the project and help facilitate the transfer of money creates structure, accountability and legitimacy, ideally providing both creator and patron with a successful project and an enjoyable experience. No conversation about crowdfunding would be complete without mentioning the incredible success of Amanda Palmer, whose legendary Kickstarter campaign raised $1.2M dollars. (Yes, that “M” is for “Million”.) This sets a pretty high bar, but serves as proof that this kind of project-specific funding can be a viable solution.

A different offering closer to the Haydn-era patronage system is that of trumpeter and composer Dave Douglas’ label Greenleaf Music. Greenleaf offers three levels of annual membership, from $25 to $125. A basic subscription provides a player that streams all of the label’s music. Higher levels provide even greater benefits: exclusive downloads, discounts on merchandise and tickets to events, including meet-and-greets with the artists themselves. While not used to fund complete projects, it is an innovative way to build an on-going relationship between the label and fans that goes beyond the traditional transactional model. It is also forward-thinking in its strategy of cultivating new revenue streams.

Lastly, a recent addition to this conversation about modern, DIY arts patronage is Drip.fm, a platform specifically created to aid in the mechanics of setting up and managing a subscriber service. While currently in closed Beta, Domino Records has announced a subscription program using this service. As they describe themselves, Drip.fm represents a way for a trusted label to regularly supply content to subscribers. As Domino's head of digital, Kurt Lane, explains: "What we liked about the idea of Domino Drip is that it combined the direct to consumer philosophy with the ongoing relationship that a subscription model provides." It will be interesting to watch this company develop, as it signals that the subscription model is seen as viable enough that startups specifically interested in entering the subscription service space are attracting funding.

Patronage and subscriber programs have always been integral to arts funding. While they may not currently provide all of an artist’s revenue, when implemented inventively, they can definitely provide an additional and sustainable revenue stream. These multiple revenue streams will be the key to every artist’s future endeavors.