The following guest post comes from Kevin Rivers, founder of Venzo Digital, a company that automates the entire digital distribution workflow on iTunes and offers it to artists for free. Venzo spans music, ringtones, and apps.
December 21th, 2011: “Jeff Price: Why the Music Industry Doesn’t Care About Selling Music Anymore…“
In this discussion, Jeff argues that neither retailers nor distributors care about selling music and neither do they care about the artist. In this response, I’m going to demonstrate why the music industry does care about selling music and how it can affect their bottom line if they neglect the music in which they carry.
Jeff explained that digital retailers don’t need to sell music or make money off of music simply because it doesn’t serve a real purpose. In other words, digital retailers only see music as a way to up-sell other products rather than a driven focus:
“Take iTunes, currently the obvious substitute for the traditional record store. If Apple happens to make money from the sale of the music (which, some suggest they didn’t for many years ), all the better — but, the main purpose of iTunes is to make money for Apple by selling Apple products and gaining market share for its operating system.”
Now, while Jeff is indeed correct that iTunes was created by Apple to up-sell their hardware products (i.e. iPods, iPhones, iPads, iMacs, etc.), music plays a vital and critical role in Apple’s new bottom line and iTunes’ success. For example: iTunes makes on average $2 billion every quarter. That’s $2 billion every 3 months.
And before the App Store, more than 70% of that revenue comes from music sales.
Today, music sales now account for more than 45 percent of iTunes overall revenue. Without music, iTunes wouldn’t be the dominant player in digital retailing, people would not be buying more iPhones, iPods, iPads, and iMacs, and iTunes itself would lose significant value.
Sure, iTunes can survive off of app sales, movie sales, TV series and books. But they would also have to cut staff and reduce their work team in order to remain a key player. While many people who buy iPhones are buying them for apps, they are also buying them for the music.
Why? Because that’s what iTunes is known for.
This principle also applies with Amazon and Spotify. To say that “the digital music stores and services of today (Pandora, iTunes, Amazon, Spotify, and others) can make money without ever selling — or even streaming — all the music they ‘stock’.” is like saying “a music artist can create music without sound.”
Here’s more of what Jeff said:
To reach their goal Spotify believes they must have:
(1) a huge number of subscribers, a vast catalog of artists,
(2) a user experience that customers find pleasing, and
Making money off the music, or having the music it carries being streamed is, at this time, an afterthought. And when the inevitable financial exit for Spotify does come, the artists will make no money from it despite being at least half of the equation. This may explain why the major labels, all of whom own a piece of Spotify, do not appear worried about Spotify’s royalty rates.
Their eye is focused on the true financial prize: owning a percentage of a company that gets bought for billions.
Not exactly: the major labels may not care about Spotify’s royalty rates, but they do care about Spotify’s overall revenue performance. Spotify is losing money faster than boiling water and the majors know it. This is the only reason why Spotify is pressured into acquiring more subscribers and reaching ubiquity.
While Jeff is right in regards to artists not receiving any payout should a financial exit occur for Spotify, the sole value of the service is the catalog. Spotify needs those streams not only as a way to pay rightsholders (though arguably, not to artists) but also as data points to understand the performance of the service.
Ask yourselves this hypothetical question:
If Spotify had 100 million paying subscribers and not ONE of them ever streamed a song on the service, would Spotify be more or less valuable?
Although life was not a bed of roses between the traditional labels, artists and distributors, they all had the same goal: get CDs onto the shelf of the physical retail store, get them sold and collect the money from the sale. Arguments were over how this money was split, not whether the music should be sold to make the money.
Not so for today’s digital music distributors — think CD Baby, IODA, InGrooves, TuneCore, ReverbNation etc. There is little to no cost of failure if the music doesn’t sell.
What Jeff says here is true only to flat-fee distributors (i.e., CD Baby, TuneCore, ReverbNation, etc.) and hybrid distributors (i.e. IODA, INgrooves as they are owned by Sony Music Entertainment and Universal Music Group, respectively). This doesn’t apply to percentage-based distributors.
Why? Because if their catalog doesn’t sell well, it can have a significant impact on their bottom line. This is why percentage-based distributors are more likely to work towards making the artists succeed. They have to help the artist make money otherwise both parties lose.
If anything, distributors need artists just as well as artists need distributors.
This paradigm in and of itself is not the problem. But add to it that many of the board members and management of these new companies are not from the world of the music industry; they are from the world of technology, banks, software, hedge funds, private equity or technology firms that have no background in the music industry. Their goal is to get as high a financial return as quickly as possible by taking the company public or getting bought – both of which can be done without selling the ‘product’ they carry.
There is no reason or incentive to build an artist’s career or sell the music.
Jeff’s TuneCore is a far cry from current management, which doesn’t consist of too many music industry executives. However, in this competitive market of digital distribution, no company can be bought without the ‘product’ they carry. It’s true for distributors, and music services as well.
Image by Phase Locked Loop, licensed under Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).