Why Fans Will Pay for Music…

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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).

25 Responses

  1. Anonymous

    “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”

    Good point.

    “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

    BUT they earn $700 for every 1,000 iTunes dl’s! 🙂

    And here’s the good news:

    Fans are not only willing to pay for their favorite music — they will actually buy it if they can’t stream it for free on legitimate sites.

    Beyoncé, Adele, Coldplay, Daft Punk, Black Keys, Taylor Swift, etc. have proved that over and over again.

    That’s why audio-only streaming — on demand, and otherwise — is turning into a museum.

    Reply
  2. FarePlay

    The end of people paying for music has been highly exaggerated. It is simply part of a misguided marketing tag line created by players like Spotify who wanted the public to think there all that. They’re not.

    Reply
    • WhaWha

      “It is simply part of a misguided marketing tag line created by players like Spotify who wanted the public to think there all that.” Indeed, it’s also called a Self-Fullfilling Prophecy.

      Reply
    • Paul Resnikoff
      Paul Resnikoff

      Stack up all the people listening to music. Then, count the ones that are paying for that music, through a direct transaction (ie, premium subscription).

      The number of paying is tiny, though it is worthwhile to look at indirect methods of compensation (for example, listening to music in a bar or club, where PROs are paying publishers, for example).

      Reply
      • GGG

        Doesn’t this notion give you a positive reason to look forward towards streaming, though? Spotify aside, just the fundamental idea of streaming? If we can more directly monetize substantially more people, that’s better. You stream all the time, so what would you say is a fair price from both a consumer standpoint AND a pro-artist standpoint?

        For me, that’d be at like $15-20 but that’s not going to happen. Even if a service came out with the highest quality streams possible, that level of quality will be normalized in like 2-3 years, so a price that high will have to drop. I think $10 is fair, in the sense of actually getting people to do it.

        Reply
        • FarePlay

          “If we can more directly monetize substantially more people, that’s better.”

          I’ve been thinking about this sentence for a couple of days. Why? It represents the divide between what some would say “There’s more music than ever” and the others, like myself, who believe this is really a race to the bottom.

          We have all these great tools that enable many more people to record music and I think that’s great. But the reality is most of this music would never have been financed and recorded in the past, because frankly most of it is not good enough. From your perspective, this will probably sound elitist, but it is where the rubber meets the road. Natural selection, where the fittest survive and prosper and the others get left behind.

          Has great music slipped through the cracks and never gotten the attention it deserved? Absolutely. But this is different and for all of those who say music should be free, I say most of them will never have the talent to go anywhere with their music. Just because they can play an instrument doesn’t make them a professional musician with the talent to make it..

          To flatten the playing field so ‘everyone’ can make a couple of bucks from Spotify is insanity. Nearly all of these ‘musicians’ who knock the record labels would turn around and sign a deal in a heartbeat if they were offered one.

          I don’t care if everyone can make money from their music. I do care that those with true talent get rewarded for their work and don’t have to work at Home Depot so the legions of untalented get paid.

          Reply
          • GGG

            You won’t get an argument from me about being elitist haha. I’ve been in the local NYC scene for a long time. So I’m in full agreement that there’s a lot of mediocre or outright shitty music out there.

            The problem is you can’t stop it. As much as we would like it, there’s never going to be a time where we have some like music exam created, that you have to pass in order to record music. So the internet’s democratization is the best bet.

            But my idea isn’t about flattening the playing field (this whole music culture of everyone being in a band just innately makes that harder), it’s about monetizing almost every person on the planet. Radio does it indirectly, why shouldn’t we do it directly? Look at Taylor. She’s got over 72M Facebook fans, yet we’re praising her for selling 2M records. That’s insane. Imagine if just 40-50M of those people streamed her album. A good chunk will stream it multiple times, another big chunk will stream a single or two a ton, people like me who would never have bought it would check it out just because, etc. Before long, your recorded music revenue isn’t so shitty anymore if you can monetize that other 90+% of fans that have historically never bought your music for whatever reason.

            Philosophically, I really don’t disagree with anything you say in this post. The only issue I sort of take is your last couple sentences. Again, I sort of don’t disagree with your sentiment but you can’t crusade for artists’ rights and have this notion of subjectivity in the back of your mind. It gets way too messy, especially across genre. I mean, I can sit here and link you to the objective best musicians I know, but 90% of them are largely active in jazz/classical/world and/or are session guys. Wipe Spotify from the face of the earth, it isn’t going to get people to buy jazz records again. On the other side of things, I can easily argue Katy Perry doesn’t deserve a penny of the $44M wikipedia says she’s worth, at least not coming from the music side. But she is what she is and people like her for some reason.

            And look, I’m also all for people staying off Spotify if they want. So if we get to 100M subscribers across different platforms, and people still withhold, that’s their prerogative. But I really don’t know what future options are. Vinyl will rise more, but I don’t see people reverting back to non-collectible physical in the foreseeable future. And I think people are over paying $10 for access to 1 album when you can pay that for access to millions. And yes, you can say just get rid of that latter access, but I don’t see that happening.

          • FarePlay

            I believe, GGG, that the great stuff has a cance to rise to the top and while they’re genres I don’t care for, I certainly don’t have a lock on what’s good and what’s not. When I saw Dave Matthews in 1995 at the Greek Theater in Berkeley, I had no idea that within a year they would be huge. I mean a jazz fusion rock band? That first LP was incredible or second or what ever the aficionados call Under The Table.

            But where we are now in terms of compensation models doesn’t leave much hope for a lot of very talented artists. I don’t have the solution other than to leverage what we have to work and raise the public perception that music has value and is a worthwhile investment. Not a loss leader to sell advertising.

          • GGG

            Again, I agree in theory, but I think you look at things without taking into consideration what the music culture is actually, currently like. Remove streaming from the equation and you still have an endless stream of mediocre people making mediocre music. You still have Tunecore/CDBaby/etc letting mediocre people put their music on the same platform as Beyonce. You still have an endless stream of music blogs needing to promote an endless stream of music in order to drive traffic. You can’t go online without being hit over the head with an endless stream of your social media network promoting their mediocre music.

            So sure, take away streaming and some bands might make some extra money selling music short term, but it’s not going to fix the simple fact that music taste/consumption/spending is incredibly decentralized, and there’s so fucking much out there. And not only that, people obviously DO want to take in as much as they can, but it’s just not financially possible the old fashioned way. I just randomly went to Pitchfork and without moving your curser you can already see about 15 artists that have been posted about in the last 6 hours. And maybe you’ll say “tough shit, you’re not entitled to experience an artist’s work.” And I can certainly understand that mindset to a degree, but I’d prefer that not to be the case. And right now, streaming is best thing offered (which yes, can be improved) that mediates those issues. And I don’t want to sound like I think streaming numbers as they stand now are the best, obviously they need to improve. But the fundamental idea of monetizing almost any proactive listening is great in my book.

  3. YouDontKnowMe

    “Free online radio is not a sustainable model” — this is pure bullshit. AFAIK, Spotify was subscription-only at first, now it has a free tier. Rdio was subscription-only at first, now it has a free tier as well. Ads on Pandora Radio? I hate ads, but ads on Pandora are not that intrusive as on terrestrial radio, so I do not listen to the latter – at all. Ads on Digitally Imported are like once an hour for half a minute tops, completely non-intrusive. And don’t forget that pretty much all TV in the U.S. has ads, even cable TV for which people pay $100/mo and more and even PBS stations have ads that bracket the segments. So Americans are not bothered much with ads. I am a minority, coming to the U.S. from a country which did not have ads for most of its history, the only TV I can watch is local PBS affiliate and Netflix. But everyone I know does not care.

    Eric, I tried your service. Amateur 1990-ies looking user interface, confusing with lots of settings that no one will use besides nerds. Maybe you will get five subscribers, of which three will be your family members.

    Reply
  4. Just Mad

    Mad Genius is a joke. More like Mad Rippoff of Radical.fm. Really bad form Eric – would’ve expected more from you. Unreal!!.

    Reply
  5. Kevin L

    Eric, I tried your service too. Sorry but its too confusing and the music that it picked was not very good. I dont see you making a dent in this market.

    Reply
  6. dave

    Spotify announced they were coming to our country, gave away some free memberships, and we have heard nothing about them since. No marketing, adds, presence or buzz. Definitely no buzz.

    Reply
  7. Casey

    I’ll be honest. I don’t think there is much of a future in paid-only, music-only, internet radio. Free/Paid internet radio combo models haven’t even proven very successful.

    At its highest Pandora One only had something like 3.5 million subscribers? That was at the $3 per month price point. It is now $4-5 per month and their paying subscriber base is almost certainly declining. Slacker reportedly had something like 500-600 thousand paying subscribers. There have been no reported numbers since and if the fairly flat Triton Digital rankings say anything, they probably have less Radio Plus subscribers now than they did. Last.fm’s subscription service seems to have been more or less unsuccessful. Itunes Radio is commercial free with iTunes Match, for only $25 per year. Yet iTunes Radio has not been considered very successful.

    Spotify is between $5-10 per month. Their internet radio may absolutely suck compared to some of the alternatives out there, but they have it and a lot of people seem to be happy with it. And to top it off, they offer on-demand playback which is significant. Why would someone subscribe to an internet radio service for $3-5 per month when they can pick up Spotify for as little as $5 per month? There are a few people out there, myself included, who are willing to pay for a good internet radio service and a subscription on-demand service. But most people are seemingly picking one or the other and the trend doesn’t seem to be in radio’s favor.

    Reply
    • Name2

      While no “radio” service will ever surpass the old pre-Napster MOG in my book, Spotify has a great feature that lets you establish a station based on one of your private playlists. So, if you’ve got a diversified 1,500-song or so playlist that you occasionally defer to shuffling because old-reliable and because “I don’t wanna think about it.”, use that playlist as a source for a “new” radio station, and you may be pleased with the results.

      Reply
  8. Willis

    Fans won’t pay for something that they don’t feel they own. Renting a virtual item isn’t happening. Content owners and creators need to get real.

    Reply
    • Name2

      You sound like me 5 years ago.

      What people apparently WILL pay for:
      Practically unlimited library in the cloud; good fidelity; portability; syncing; CONVENIENCE.

      People paying for this know that this is what they are paying for – it’s not everybody’s dream to have the basement of a hoarding music nerd.

      Reply
    • Wrong Victim

      Willis – “Content owners and creators need to get real.”

      Umm.. you do realize that content creators have litle say on how their product is used, dont you? (the exception is on-demand, which is the ONLY one we can “opt out” of) … if you have a problem with these business models, you have a problem with the distribution company NOT the creator…

      Reply
      • Willis

        Content creators have a lot to say about it if they retain their rights to what they created.

        Reply
    • Versus

      Fans pay for cable TV. They do not “own” the programs.
      Fans pay for services like Netflix. They do not own the streams.
      Fans pay to go to the movies. They do not own the movies.

      Reply
  9. Nissl

    I’m so very tired of talking about streaming as a good/bad binary. Look, in the long run, *some* form of streaming is necessary for music to compete with the convenience of streaming TV and movies at places like Netflix, Hulu, and Amazon. At the same time the current structure, where everything gets put up for free on release day, leaves a ton of money on the table. Just look at other media. Netflix is paid only, has a restricted selection, and is heavily windowed. Hulu is heavily windowed in the free tier and still has ads in the paid tier (yuck). And so on.

    In the future there should still be a free tier to entice people, but it should be heavily windowed other than the singles that are already on Youtube. I’m talking 6 months to a year, no deluxe editions ever. That is still a phenomenal deal, basically the entire history of recorded music up to the most recent year for free. And it allows labels and artists to promote new albums and tours and squeeze a bit more out of their back catalog.

    The services should be able to trade this in exchange for getting artists like Taylor and Beyonce not to hold out on their premium tier. Perhaps window that tier for release week or hold back deluxe editions for a month, adding a $15-20 HD tier with no restrictions.

    Also, with heavier free tier windowing in place, they could think about doing rentals. What if you could check out a new album for a couple of days for $1-2? Maybe for $5 a month you could check out 10 new albums? Then you have a nice smooth curve up to a full subscription.

    Reply
  10. Versus

    The “music is free” propaganda also was justified on the basis of irresponsible and disingenuous “information wants to be free” mantra of the Internet hippie-techno-utopians.

    That stance was absolutely hypocritical, since most of their own work is at the level of “information” (software designs, algorithms, circuit designs, hardware designs, etc) which require strong intellectual property protection. The technicians and masterminds of this utopia are certainly not willing to let their “information” be “free”.

    Reply
  11. Versus

    Yes.

    The norms of our transactional system are not set in stone, not given to us, but chosen, taught, promoted, and enforced by us as a society.

    A wrong turn was taken where music and other intellectual properties were radically devalued. Another turn can be taken to correct this wrong, which accounts for the new technologies as well, including streaming.

    Reply

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