The following guest post comes from Eric W. Neumann, founder of Mad Genius Radio.
Earlier this fall, Digital Music News published an article discussing all the reasons why fans won’t pay for music. But more recently there has been talk about the waning days of free music, as artists and labels push music streaming services to convert free listeners into subscribers. Looking at the shift in consumer behavior and artist expectations – as well as the parallels to other industries – I believe the “consumers won’t pay for music” argument is unfounded.
This all began in the late 1990s, when Napster and other peer-to-peer file sharing services first came onto the scene. Suddenly the notion that music should be free permeated consumer culture. (I’ve often wondered whether the imbroglio we see Spotify in today has anything to do with Napster’s Sean Parker joining its team in the early days). And now the debate about “free” versus “paid” services is coming to a boil.
When Taylor Swift pulled her discography from Spotify, several story lines emerged. A few are debatable, sure: whether there should be a free tier at all, whether premium content should be windowed for paying subscribers, whether artists can make up in scale what they lose in margin, and whether royalty payments were set too low to begin with.
But we need to remember that it’s the record labels that made these deals with Spotify (and other on-demand services) in the first place. They’re like VCs: they make bets, some good and some bad, and they often end up as the copyright holder of a catalogue of music. It’s their property to monetize, to say nothing of transparency. But I think Dave Grohl is missing the point. Not everyone is a Foo Fighter who can give away their music for free. Do his bandmates and label support his dismissive stance on collecting royalties I wonder?
Paying for Convenience and Choice
Time is the currency of the 21st century consumer. Hollywood discovered how to capitalize on the consumer subscription economy — Netflix and Hulu have become the preferred medium to watch movies and TV shows, all on-demand for a monthly fee.
This palette for delivering a personalized experience is painting every facet of retail: from monthly deliveries of product “boxes” like cosmetics, fashion, local/organic produce, personal grooming products, dog toys, and even marijuana, consumers pay for quality and convenience – on their terms.
The promise of ad-free, instant gratification is bringing more consumers over the paywall. Paid subscriptions are currently bringing in $371 million, up 23 percent from 2013. Spotify touts 12.5 million paying subscribers to its on-demand service.
That said, no one has a crystal ball. By all expert accounts, vinyl should be dead by now, yet today vinyl is the only segment that is growing (of album sales). Perhaps in 2025 music ownership will only consist of die-hard vinyl addicts like me – it’s hard to know. But for now and next year, music ownership is still measured in the billions of dollars, despite its declines with no foreseeable turnaround–currently (remember vinyl).
The sheer numbers around the profitability potential of subscription-based models should be enough to stave off the naysayers, but there’s another reason why this piece of the pie should – and I believe will – grow.
Why ads aren’t the solution – for the consumer, business or artists
The other side of this coin is streaming radio – the non-interactive services that cater to the majority of consumers. Free online radio is not a sustainable model, other than Pandora since it has 76 million active users. The number one complaint of Pandora is the volume of ads that diminish the experience and waste time (source: Jacobs Media). And if consumers are already complaining about ads, they will soon start to look for a better experience. Yet other free radio services (think Songza and iTunes Radio) have failed to attract enough audience to monetize at a high-enough level.
Furthermore, the ad-based business model may be equally to blame for unfair artist compensation. For every 1,000 songs streamed on a free, ad-based radio service such as Pandora, the copyright holder (performer and/or record label) makes $1.40. By contrast, they earn $2.50 for every 1,000 plays on a subscription-based radio player. These are 2015 rates and represent a 79 percent increase from free, ad-based radio services.
Highly publicized claims like those from artist and songwriter Aloe Blacc – that he only received $4,000 after Pandora played his hit song 168 million times – tell only part of the story. First of all, he was only referring to his portion (one-third) of songwriting royalties, not performance royalties. Without a deeper dive of his contract with Avicii, I can’t know if his deal is fair or not.
And that’s just for performance royalties. Songwriters (like Aloe Blacc) are paid out 535 percent more by subscription radio services than they are by free, ad-based services.
Ultimately, it’s the responsibility of the streaming service to create an equitable value proposition to consumers and the musicians on whom they depend to provide a service. That’s why now is the time for a reset in consumer and industry thinking – music isn’t free. Without audience on the scale of Pandora, a free-to-the-consumer, ad-based service can’t possibly afford a higher rate for artists/copyright holders. And that’s clearly what artists are clamoring for.
At my company, we believe that all boats can rise so long as consumers begin to understand how the business works and how their actions and choices have a lot to do with what ultimately lands in an artist’s bank account.
A former CFO for terrestrial radio companies, Eric W. Neumann started Mad Genius Radio in October 2014. Image by Aart van Bezooyen, licensed under Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).