The following guest post comes from music industry attorney Steve Gordon. It was written with the assistance of Mona Goodarzi, a senior at UC Berkeley, and Brooke Weinberg, a rising law student at Hofsta Law School who also works part-time as a booking agent with Gotham Rocks.
The recording industry has suffered a cataclysmic decline in revenue since 1999—the dawn of the digital era. Many experts and executives are now pinning their hopes that streaming, particularly interactive streaming services, such as Spotify and Beats Music will “save” the record business. And there has been a universal chorus of cheers amongst the most powerful in the business for Apple’s acquisition of Beats Music.
But the reality is that Apple’s acquisition of Beats will probably help Apple sell more iPhones, but it is doubtful that it will significantly benefit artists or indie labels, or anyone else besides Apple, Jimmy Iovine, Dr. Dre, and the three major labels.
Here’s why:
Current State of the Recording Industry: Cataclysmic Decline in Revenue
The following graph, which was generated by data from the Recording Industry Association of America (“RIAA”), shows the crisis that has beset the recording industry:
The graph shows that in 1999, income from sales and licenses of recorded music in the United States was approximately $14.5 billion. Since that year, revenues have dropped to less than $7 billion – a decline of more than 50%. After accounting for inflation, the drop is over 75%, meaning that the business is only 1/3 of what it was.
Worldwide, the figures are even bleaker. According to a report from the International Federation of the Phonographic Industry (IFPI) issued in early 2014, global revenues from recorded music were approximately $15 billion in 2013. In 1999, those revenues exceeded $38 billion according to IFPI’s report in 2000. That’s a steeper decline than in the United States.
But it gets worse. The following graph shows that, accounting for inflation, the recording industry in the U.S. is at its lowest level since the RIAA began keeping tabs on industry-wide income in 1973.
Reasons for the Decline: Apple’s contribution
Many have speculated on the reasons for the decline of the recording business. The two main theories are:
(1) the Internet has made it easy to provide and share unauthorized music, and
(2) the major record companies did not react fast enough to the digital revolution.
I think both theories are true, but for as much as any other reason, I think the emergence of iTunes itself was incredibly harmful to the business. iTunes turned what had been an album business into a singles business. Steve Jobs’ insistence on offering to sell individual tracks encouraged those people who continued to actually buy records to “cherry pick” their favorite songs rather than pay for an entire album. The labels probably thought they did not have a choice, as they were desperate to do something to compete with unauthorized P2P file sharing, and to monetize digital music.
The Emergence of Streaming as the Revenue Model of the Future
Revenues from CDs continue to decline. However, for the first time since the introduction of iTunes, income from downloading has declined as well as this chart indicates:
The current hope of the recording business is the possibility that streaming can save the day. There are three types of streaming. They are:
(i) Non-interactive “Internet radio” type services such as Pandora, Sirius XM, iRadio, iHeart Radio, Songza, etc.;
(ii) Advertising-based interactive streaming such as the free versions of Spotify and Pandora; and
(iii) Subscription services, such as premium Spotify, Beats Music, Rhapsody, and Google Play Music.
It is true that these three sources of new income have been growing, as the following chart indicates:
But Will Streaming Reverse the Record Business’s Cataclysmic Decline?
Probably not. Although the success of streaming in the last three years has softened the losses that the Recording Industry has experienced since 1999, the recording industry (1) has not recovered at all, and (2) is still declining—although not as fast as in prior years. The conversion rates from free ad-supported Spotify and Pandora to their premium services is disappointing. Expecting people to pay $10 per month—or any amount of money per month—seems almost absurd when you consider how music is so easily available for free, sometimes by the same services that are asking money for premium listening, and more often by quasi-legal software and apps such as programs for converting YouTube to MP3s or apps that make free playlists from YouTube.
And the money that music streaming services such as Spotify and Pandora earn from advertising is limited because money from advertisers will always be at the mercy of marketing budgets, which have been slow to adopt streaming audio as a place to buy. Neither Pandora nor Spotify are profitable; in 2013, Pandora lost $38 million.
Apple’s Purchase of Beats Music: Another Cynical Move to Sell Hardware at the Expense of the Recording business?
On May 29, 2014, Apple announced that it would purchase Beats Music for $3 billion. In so doing, they acquired both the financially successful Beats headphones business and the far-from-successful Beats Music streaming subscription service. Apple may have wanted the streaming service even more than the revenue from the headphones business. Downloading is going down and streaming is going up. Apple already has an Internet radio service, iRadio. But Beats puts them in the interactive streaming business.
With over $150 billion in reserve revenue, the $3 billion that they paid for Beats was a drop in the bucket. Apple could also decide to charge less for subscriptions for Beats than Spotify charges, or offer Beats for free for a period of time after the purchase of a new iPhone, or even bundle for free with new editions of iPhones and iPads. Even if they had to pay major record labels minimum guarantees or advances and lose money on Beats, they could generate increased sales of their gadgets.
This was exactly Steve Jobs’ strategy for initiating iTunes. Although iTunes has sold over 25 billion songs worldwide, no one can be sure how much Apple has profited from iTunes. That’s because the store generally pays 70% for music content including recordings and songs, and on top of that, Apple has to pay for bandwidth, marketing, transaction costs, staff, overhead, and other expenses.
It is beyond dispute, though, that after the introduction of iTunes in 2003, Apple’s sales of iPods, introduced in 2001, skyrocketed.
In January 2007, Apple reported record quarterly revenue of $7.1 billion, of which 48% was made from iPod sales. Apple has made even more money from iPhones than iPods. In fact, iPhones are the most profitable product on earth. In the first quarter of 2014, which runs from the beginning of October to the end of December, the company earned a record $57.6 billion in revenue; 56% of that income came from iPhones and only 7.6 % came from iTunes, and some of that revenue was from movies, videos, and other content besides songs. But like iPods, the success of iPhones is largely based on its ability to play recorded music including free services such as YouTube and Pandora, and apps that allow you to listen to free music without advertising such as InstaTube.
The point is that Apple has used music to sell technology more than it has used technology to sell music. And if Apple bundles or discounts Beats Music with purchases of new iPhones, Apple will sell even more iPhones.
But even if Apple offers Beats for the same $10 as Spotify’s Premium service, the royalties to indie artists and indie labels will be as dreadfully low as Spotify has been paying. Even though Spotify claims to pay 70% of its income for music, the average per play pay-out is approximately .004. So for every 10,000 streams, an unsigned artist or indie label can expect to make no more than $40.
However, it is well-known in the industry that the three major labels receive millions in advances from Spotify, Beats Music, Rhapsody and the other interactive streaming services. Now that Apple has purchased Beats, it is doubtful that indie artists or labels will do any better than before. But the major labels can rest easy knowing that they will collect their millions in advances. Moreover, artists signed to major labels may receive no money at all. Because of the operation of provisions in the standard recording agreement that allow labels to retain monies for “blanket licenses” of their catalogue. For instance here is a provision from a standard major label recording agreement:
“…No royalties or other monies shall be payable to you or Artist in connection with any payments received by [label] pursuant to any blanket licenses under which the Licensee is granted access to all or a significant portion of [label’s] catalog of Master Recordings, Covered Videos, Records and/or any other type of materials contemplated by this Agreement.”
Apple’s acquisition of Beats Music is therefore great for Apple and the owners of Beats. But it will not help restore the recording industry to its former glory, and it certainly will not benefit indie labels or artists.
Top image by hobvias sudoneighm, licensed under Creative Commons Attribution 2.0 Generic (CC BY 2.0). All other graphs courtesy of the RIAA.
Well nobody thinks there is any magic bullet to restore the business to it’s former glory. Not without some serious tamping down of piracy.
However, Beats Music, if the curation things holds up, who knows, will probably help “churn” the 3/4 of the library that has never sold much or anything at all. If they are successful in that, it is absolutely a win.
Do not hold any hopes for Beats streaming to bring any revenues. Music has to be locked up to become merchandise again. Discovery moment monetization is simple and can deliver $100B industry by 2020.
Where do you get that from? I’m not criticizing but I heard of a panel at SXSW about that, that I skipped as it didn’t work with my schedule.
The “100 Billion” music industry…is that a concept, a book? Honestly curious, as I’ve heard it touted numerous places.
Chris, Discovery Moment Monetization is my own simple and bulletproof prescription for NEW MUSIC INDUSTRY.
I am aware only one guy, Tommy Silverman of Tommy Boy Records quoting $100B dollars music industry.
According to his interview at Bloomberg TV he wants to get there wit Spotify!!! Good luck!
In any case, I am just mechanical engineer ready to give up my OBSERVATION of Music Industry.
Jobs is gone and wimps in charge instead taking the fight for own survival and well being of the industry started to follow Mr. Ek’s PROVEN BUSINESS MODEL.
One thing I have to say Ek’s hutzpah and brain washing ability borders with GENIUS.
It is amazing to see educated folks to put $100 billion dollars of merchandise in to the open and hope that Spotify or YouTube will deliver adequate lease payments.
MUSIC is prostituted for FREE.
LABELS! Time to learn from prostitution – it MAKES MONEY!
Both, pimp and the prostitute! We got no cash for Shazam (THE PIMP) and no cash of MUSIC!
Both, sex and the music deliver pleasure, let’s be creative and MONETIZE!
Maybe revenues in the 1990s were vastly overinflated because there weren’t any other options for consumers than overpriced CDs and what we’re seeing now is just a normalization and not a real decline.
The labels made their bed which is why the tech industry had to step up to give consumers what they want.
“overpriced CDs “
That doesn’t make sense. Consumers bought the CD, didn’t they?
So the price was right.
And they’ll be happy to pay that price again if we stop mainstream theft. Music is a necessity.
“overpriced CDs”
That doesn’t make sense. Consumers bought the CD, didn’t they?
So the price was right.
And they’ll be happy to pay that price again if we stop mainstream theft. Music is a necessity.
May be they bought 1 CD where they could buy 2 vinyls. CD was a bit overpriced in the 90’s. It did not respect the promiss that it would be cheaper than vinyls, which was one of the elements in advertising the switch from analog to digital. That is a fact.
and that’s probably explains the immediate success of napster and gnutella when those came out.
The only reason for piracy is laws that are not enforced.
Any service that makes it possible for consumers to steal without consequences will be a success.
may be, don’t know, but CD were still overpriced in the 90’s in comparison to vinyls.
I agree.
What’s an “overpriced” CD?
Music is a luxury item; the right price is whatever the seller sets it at.
– Versus
Some other things to consider as contributors to the decline in record sales:
1. Commercial radio station consolidation under a small number of big corporations who in turn trimmed and homogenized playlists so fewer new artists are getting promoted like they were back in the 90s and before.
2. MTV gradually played fewer and fewer music videos to the point where the thought of music on music television is a joke. The result is a huge loss of promotion for newer artists from a concentrated outlet on a mass scale.
Steve,
I’m sorry to see that you have been taken in by the nonsense about Apple’s primary objective in purchasing Beats being the interactive streaming music service.
(First, let me say that I like Beats Music – I am a paying subscriber, I’m happy to pay the $10/month, and I hope it keeps going roughly as is (though I fear it won’t).)
If Apple wanted an interactive streaming service, it long had its choice of developing one itself (as in iTunes Radio) or buying an existing one (Rdio, Rhapsody) for chump change compared to $3.2 Billion including headphones. Hell, it could have bought the perfectly decent MOG for two orders of magnitude less money before Beats bought MOG itself.
There’s one current theory on Forbes (http://www.forbes.com/sites/gordonkelly/2014/06/05/apple-to-abandon-headphone-jack-suddenly-beats-deal-makes-sense/) that Apple plans to gradually replace the standard 1/8″ headphone jack with a use of its Lightning connector to work with future Beats output devices. I’m not sure I buy this theory, but I buy it more than the theory that Apple spent over $3 Billion to buy an interactive streaming music service, no matter how good it is.
And it doesn’t even matter much how good the UX of the service is. Apple is most likely going to redo the design to make it resemble the 17,000 other features of iTunes anyway.
I strongly disagree with this statement from the article above:-
“iTunes turned what had been an album business into a singles business.”
More than any other digital retailer iTunes has developed the full digital album format bundled together with an artwork pdf. Our label’s sales of full albums on iTunes are strong compared to single tracks. Napster was all about single tracks. iTunes was the most credible monetized response to Napster and has strongly championed the digital album.
And let’s be honest, the pre-Napster album CD formula of 2 or 3 strong tracks and a bunch of fillers wasn’t exactly an honourable situation for the music industry was it. The record labels have been rightly called out for that.
Finally, the author of this article doesn’t exactly know precisely what Apple are going to do with Beats, so how can he be so sure that it’s bad for indie labels, artists etc?
Nice graphics but there is nothing in the article that hasn’t been said before many, many, many times
‘Apple’s acquisition of Beats Music is therefore great for Apple and the owners of Beats. But it will not help restore the recording industry to its former glory, and it certainly will not benefit indie labels or artists.’
Since when is it Apple’s responsibility to ‘restore the recording industry to its former glory’? Is that why they’re in business?
Newsflash- Apple is in business to make money for Apple and its shareholders. Apple doesn’t give a flying fuck if little Johnny and his merry band of headbangers make it big or not, or even if they make a decent living from making music. Why would they? As long as they’re moving product and making enough profit to pay their employees and develop new products, which, if they’re smart about budgeting for marketing/promotions, will fly off the shelves the same way just about everything they’ve ever produced has, why would they care if any bedroom producer and their wubwubwub dubstep hits the big time or not?
It’s not their obligation to save the recording industry. They’re in the business of making money the way they best see fit.
Hi Bruce,
Although I generally agree with your POV, if one only read industry expert comments such as the following remarks, one might think that this deal will be good for the music business and for artists:
“‘It’s all wins,” said Daniel Glass, owner of Mumford & Sons label Glassnote Records. “It’s a win for everybody and the fact is the value of a copyright, a master, went up a lot. Think about it: The perception and value of music went up because of the amount of hands this will be in.'”
The point of the article is that the Beats deal is not necessarily good for artists. Moreover, if you read the text from the standard contract that I quoted in the article, you will see that pursuant to that clause, labels do not have to share any portion of advances received from streaming services with their artists.
Well, that was a downer.
I must question this, in my infinite naiveté:
What if piracy were really stopped (or even reduced substantially)?
What if musicians formed unions (or the equivalent) and demanded better deals?
What if indie labels similarly demanded better deals from the various distribution, sales, streaming, radio companies?
For the most part, this article nails it. There was a built in contraction when the recorded music switched from bundled music to digital singles… no way around that.
And, based on the same number of participating consumers, there would be another contraction built into the transition from ownership to access. But if the number of participating consumers expands, the recored music industry could end up in very healthy shape again. The idea is to scale exponentially, & it’s not really going to make tons of sense until the number of consumers streaming looks like the number of consumers LISTENING to CDs in 1999, rather than the number of consumers BUYING CDs in 1999. That’s an incredibly large part of this discussion that almost always gets missed.
Will it be as healthy as it was in 1999? Probably not, if only because of the fragmentation of media (though it could be argued that the revenue being made in 1999 was unsustainable, regardless of technological disruption). Concentrations of attention have moved from print and broadcast media to social media, and breaking into a consumer’s social feed is exponentially more difficult than getting a music video on TRL. It used to be that nearly all consumers got their music recommendations from mtv or radio, now it’s less than 50%. As a result, music just doesn’t play the role in most people’s lives that it played in the ’90s.
Even still, I’m excited about the possibilities of streaming. Especially for the monetization of catalog tracks. In theory, any success at the label is going to trickle down to new artists in the form of recording advances. Does the scale-based nature of the streaming economy put indie labels and artists at a disadvantage? Of course, though theoretically the disadvantage is somewhat offset by the move of concentrations of attention away from expensive broadcast & print media outlets. But even if they are truly at a disadvantage, if we see more scenarios like Nirvana upstreaming from Sub Pop to Geffen, everybody wins.
Blue rays and DVDs are going to be deleted and all movie outside the box office will be digital 06/06/2014.
Guys, cmon now, don’t take your eye off the ball:
http://blogs.wsj.com/moneybeat/2013/08/19/googles-ipo-nine-years-later-only-nine-stocks-beat-it/
I don’t understand why Apple didn’t buy AKG, or Beyer Dynamic – just to name two good headphone manufacturers.
This is NOT about headphones. It is about Jimmie and his 7 year licenses.
“I don’t understand why Apple didn’t buy AKG, or Beyer Dynamic”
…not to mention Sennheiser. Imagine that: A Neumann microphone in your iPhone! 🙂
And Apple wouldn’t have to deal with criminal executives, either.
If someone compares a Beats headphones with an AKG or a Sennheiser studio model of the same price, they are in for a big surprise. Beats is a joke. You might as well just buy a cheap Shure set and even then you are getting more for your money!
We are always speaking about music comsumption via headphone. The hearing-aid industry must be rubbing their hands, a whole generation is grwoing up, who will have hearing damages. Hay anyone thought abotu this???
thats why Apple bought beats, to blow out our ears now and develop/sell Beats iAids in 10 years (complete with free subscription to Beats audio of course).
Absolutely right in regard to labels not paying artists any of the advances they receive for licensing their catalog to ISPs. I think that this is the primary issue for artists to rally around and demand their fair share. Kudos Steve and Co. for raising this issue.
Wow, I have so many issues with this article I’m not sure where to start.. Its not so much that I think the author is ‘wrong’, but more how they skew the facts to fit their theory..
for example Quote “But it gets worse. The following graph shows that, accounting for inflation, the recording industry in the U.S. is at its lowest level since the RIAA began keeping tabs on industry-wide income in 1973.”
Actually that doesnt make it look worse.. It shows that in 1981 the drop was ‘almost’ as bad..
Hey! guess what else was happening in the early 80’s VS now?
an economic depression!!
Quote “I think both theories are true, but for as much as any other reason, I think the emergence of iTunes itself was incredibly harmful to the business. iTunes turned what had been an album business into a singles business. ”
Thats weird, I remember a significant singles industry, then as the CD became the dominate format it was priced out of existence.. (I believe the practice of “mixtapes” taught people to accept piracy a lot faster then it might have otherwise)
either way , piracy was the harmful part, not Itunes .. What people wanted was choice, and the overpriced CD’s (on avg) was not allowing it.
Nearly any time you can force people to buy something that they don’t want in order to get something that they do, you’re going to make more money. You see this with cable packages, automobile packages, etc. Unbundle those packages & many of those products will simply collect dust.
Your use of harmful is just semantics… the point is that there was a built in contraction to the switch to unbundled digital downloads… the point is the contraction, not whether it’s a legitimate or illegitimate contraction. By “harmful to the business,” he means less revenue & the consequences thereof, which he’s completely right about.
Consider this… N*Sync sold nearly 10m albums in 1999. If the album were available as unbundled digital downloads, how would that have affected sales? Let’s say both singles go diamond, that’s 20m single downloads. And another 4m album sales. That’s 6m album equivalents.
Now let’s also factor in media fragmentation. No MTV, no TRL… interest in terrestrial radio music discovery nearly cut in half… and maybe, rather than buying the album or even the digital downloads, a lot of young consumers are content with just watching the videos on YouTube. Maybe the videos rack up a combined 1.5b views. Now how do sales look? Well, they look a lot more like Justin Bieber sales. A couple million album sales, a few million single sales, and a billion or two youtube views. I’d be willing to bet that some of Justin Bieber’s biggest fans have never even listened to a Bieber album all the way through.
Piracy has some effect, but not nearly as much as unbundled digital downloads or media fragmentation. Piracy has been a massive distraction from solving the real issues.
So what you are really saying is iTunes cast a much needed spotlight on the industry’s practice of bundling two or three desirable tracks with a heap of “fluff and dross” (Bob Lefsetz’s description not mine) to sell an album. And let’s not kid ourselves, the very high cost of LPs and CDs meant we were unlikely to be honest and say two-thirds of it was mediocre. Our pride just wouldn’t let us. So, with the notable exceptions of, relatively speaking, a small percentage of great albums from soup to nuts – that was a bad thing why?
Too many people spend too much time moaning about what was than concentrating on the present. This has turned into one big blame game. It’s businesses being businesses.
Yes I agree that artists are suffering but it’s a different world now, music is worth less – this is how it is. No amount of articles and debates like these are going to change that.
Embrace the changes and run with it because complaining opinions are never going to make a difference!
Bottom line is the PRO Rights organizations (ASCAP- BMI- SESAC) , SoundExchange et al must stand up for the artists, writers, master holders, and enforce the copyright exploitation payments related to the ©℗ ownership.
Additionally meant to write:
“enforce and raise the payments schedule related to the ©℗ ownership so it is equal to everyone whether a small or big label” Those organizations can also lobby for a requirement that, “Notwithstanding any contracts the pledging of exploitation rights for lump sum advance payments to the detriment of the content creators must be shared across the board with the ©℗ owners, or the content can not be used.”
The Doctor.
You are leaving out one of the esential game changers – YouTube – the largest music discovery – single-song driven behemoth – Apple has nothing to do with that — and you seem to place it all on Apple’s doorstep – that is misplaced – good post but Apple is not the devil here —
Guys; read a history book. Look at the facts. The business has resisted every technological innovation since sheet music (yes, a tech innovation last century) and every time, the business resisted, shrunk, finally adopted and grew to 2X is former size. The RIAA, NMPA and all the other incumbents will continue to put out “facts” that protect their incumbent member interests, trying their best to control the conversation.
Bottom line, suing your customers is a bad business model. Litigation of market share is a failed strategy.
And the argument of piracy being solely responsible for the decline of the business is simple a fairy tale. There are far more factors that contributed to the decline of music (see above, suing customers would be on that list) that to continue to over simplify the argument just makes the arguing party look dumb.
And as for Apple contributing to the decline, I say “horseshit!” Apple fixed a problem that the incumbents simply had NO ABILITY to fix. I was there when Jobs launched the iTunes music store, and his philosophy was simple: provide a compelling alternative to free. And he did. It is not Apple’s fault that they understand customer service, and simple refused to jam 9 shit tracks down peoples throat so that they could have the one track they really wanted. Customers first, period.
Music will be fine. It’s woven into the human condition.
The business will also be fine, as it re-invents itself again – for the 5th or 6th time over the past 100 years – and the people who keep standing where the cheese was bitching will starve. Those of us who know the cheese has moved will be the ones who continue to eat.
Which one do you want to be?
Grow up, stop whining and go DO SHIT!
The flaw in all of this is that streaming is the worst of two business models. It is paying rates that are comparable to broadcasting, but it is paying them to major labels. I don’t necessarily have a problem with $40 for 10,000 streams per se (how does that compare with a song being played once on a major radio station in New York or LA, and the artist being paid performing rights revenue from ASCAP or BMI?). I just think that the labels should be taken out of the streaming mix. That they managed to insert themselves in there in the first place is a demonstration of their clout (and the comparable lack of clout of artists and musicians). The best we could hope for is to somehow get this in front of the Copyright Tribunal (maybe ASCAP, BMI and SESAC could do so, as advocates for their songwriter and publisher members?). But really, I’m not very hopeful of that sort of action at this point.
Easy—just shoot all the folks who commit piracy. Just shoot the bastards…
And do it publicly.
The article seems myopic & has no logic. One of the problems is the music industry’s denial of digital realities and thus, failure to exploit them. It was stuck in an old business model built around albums and the mechanical license rate that is the basis for basically everything in the huge record contracts. It got away with attempting to use the mechanical rate in the new medium of Internet sales, inaccurately interpreting copyright law, and failed to readily jump on the opportunity to create new licensing schemes that would have kept the industry alive.
At the end of the digital music industry day , colossal technology companies pirated government issued patents and copyrights to increase the sales of their core products !
If ASCAP and BMI do succeed in changing the laws so that they can negotiate licenses, there will still be a cap on how much they can charge, the DOJ will not get rid of that because they fear monopolistic behavior. At any rate, this will not help the artist because the change will be de minimus and it will hurt the distributors who are all already operating at losses, including Pandora and Spotify. The real change which will permit a fair and equitable environment for creativity needs to be a wholesale reworking of artist’s royalties with labels so that the legacy language in existing contracts is modified so that artists get a larger percentage of the performance rights which, according to the article, generate 14 times as much royalty income as the songwriting copyrights. There should really be an awareness campaign to make artists aware of the fact that labels don’t do what they used to do and therefore should not receive 90% of the performance royalties. In fact, labels, which used to be “manufacturers” need to be re-classified as “agencies” and reduce their share of income to 20% or less given the fact that they are not subject to the same amount of financial risk as they used to be when they had to finance manufacturing.
APPLE + BEATS: Apple should cut all ties and run! Help stop it and sign.
http://www.ipetitions.com/petition/stop-apple-beats-acquisition
Great industry analysis here, what for the future of music?