Michael Whalen: Why the Streaming Music Business is Broken

With Apple Computer (NYSE:AAPL) finally wading into the streaming music fray, it is time to check in with my brother Michael Whalen, the Emmy® Award Winning composer, music supervisor, copyright and music monetization expert who works at ground zero of the content wars. Michael has been a professor at NYU, The City College of New York and The Berklee College of Music in Boston. He is completing his first book on music monetization that will be available in 2016. His forthcoming album “You Are MyHome” will be available on September 18th, 2016. More information at: www.michaelwhalen.com Twitter: @mwhalenmusic

RCW: So Michael, we have not talked in a while about the evolution of the brave new world of digital media in some time. What is the latest bold prediction from the content wars?

MW: All music streaming services in the United States (Apple Music, Spotify, Pandora, Google Play Music, Tidal) will fail or become irrelevant while video streaming services (Netflix, Hulu, Apple TV) are the new television networks replacing broadcast, affiliate structures and local content creation. We've talked about this in past ZH posts. The big change since the last discussion is that the business model for streaming video has evolved while music is a complete train-wreck for artists and consumers.

RCW: That's a bold statement. So $AAPL and a lot of other smart people are chasing their tails on streaming music? Is there a business model somewhere here or is it all just blind hope chasing volume?

MW: There is a business model for music streaming services - however, at this point, Taylor Swift is basically speaking for most artists. Anyone who is starting a streaming platform has to see that the mathematics and the ethics regarding streaming (as it now stands) have been completely discredited.

RCW: How so?

MW: Running a music streaming service is the tale of two income streams: one is in the form of subscription fees that are essentially a loss-leader. The mathematics of the subscription fees versus the royalties paid never works and the outcry from artists (see Taylor Swift’s successful “open letter” to AAPL) is growing louder. The rest of the income to streaming services in the form of ad revenue, license fees and other service fees is where the profit is and is NOT paid out to artists.

RCW: So the artists are still treated as indentured servants on the great media plantation? I can just hear Frank Zappa up in heaven laughing...

MW: Pretty much. The royalties are very low. Then there is the issue of “breakage”: Breakage involves the surplus funds that can exist when a music service's advance payment, or minimum guarantee, to a record company or publisher exceeds the royalties earned. The advances and guarantees that record companies get from Spotify, Pandora or YouTube are in the tens of millions. So too the streaming services get fees from advertisers and investors that never cross into the accounts of artists. It’s like running a business where you are not paying for the product you are streaming. Frankly, the whole streaming model for music has to be completely reconstructed. It’s time for the music business to learn from the video business.

RCW: So you see video with a working business case but not music. Please continue...

MW: On the video side, it’s a completely different story. The video streaming services learned important lessons from the missteps of the music industry. You see a vital and booming environment emerging from Netflix, Hulu, Apple TV, Amazon Prime and more. Subscription fees are covering the content creators and incentivizing new content to be made JUST for those platforms. Breakout hits from Netflix like “House of Cards” and “Orange is the New Black” prove that the audiences are willing to pay for great content.

RCW: So is this good news for consumers?

MW: Yes and for digital artists as well. Many people in the television industry believe that this is a “golden age” of television production with the bar getting higher and higher. One of the most UNDER reported news stories of 2015 was CBS’ announcement that they will let their primetime content be included on Apple TV. Do you know what that means? CBS is sidestepping their own broadcast and local affiliate infrastructure to deliver content directly to the public. Other networks will follow - however, Les Moonves (CBS’s CEO) took an important step in the eventual transition of the television industry to the Internet. Interestingly, the Internet will also be eclipsed when the high-speed 5G cellular services begin to launch and that network will be 20 times faster than the Internet.

RCW: Point taken on the move by CBS to AAPL TV. Got incredibly modest response from media, BTW. But to your point about direct delivery, the delivery is still subject to a rather considerable monopoly on the "pipes" delivering wide content to our collective red couch. [photo] Cablevision, Verizon, TimeWarner, etc. still own the high bandwidth delivery slice. Walk us through the economics of TV streaming vs the music fiasco, side by side, and try to help us understand how creation of content and the ownership of the pipes delivering that content play from an artist and investor perspective.

MW: OK, here’s (very basically) how the economy of music streaming works vs. video streaming: So, music artists (and writers) are paid on a streaming site for EVERY play. On Spotify (Apple Music’s math is very similar) artists earn on average less than one cent per play, between $0.006 and $0.0084, to be exact, according to Spotify Artists, a website that explains the service to artists. Furthermore, the calculation of IF and WHEN that royalty is paid is also subject to “other factors”. Therefore, a large MAJORITY of artists whose material is actually streamed on Spotify NEVER GET A CENT for the streams of their music.

RCW: That does not seem right. How is this possible?

MW: Well, remember that the operative model is indentured servitude. In fact, Spotify has been filing lawsuits and complaining from the beginning because the company says that it pays out “70%” of gross income to artists. However, that’s 70% of the subscription fees - not the advertising revenue or other license fees that it charges. Spotify recently did another round of financing for $250 million - Wall Street values the company at worth more than $4 billion dollars. Needless to say, the valuation isn’t based on a 30% margin of subscription fees. Music streaming cannot survive on how the math is currently constructed.

RCW: But you believe streaming video does work?

MW: Yes. As of April 2015, Netflix had more than 65 million global subscribers and more than $1.5 billion is gross subscription revenue. Netflix CEO, Reid Hastings, said Netflix subscribers streamed 5 million Hours Of Content In 2013 Q3. For simplicity, let's assume the streaming rate stays constant through the year for a total of 20 billion hours a year. In reality, this number varies seasonally and grows as Netflix acquires more subscribers. Another HUGE factor is the AGE of the movie, the country is being streamed in and the type of content it is: feature, episodic TV, documentary, etc. The new media website, Tech Crunch, reports that Netflix Spends $2 billion per year on content. So, given their gross revenue and the fact that they reported a $71 million profit - - one can assume that money for their productions come from other sources as well as subscriptions and that they are doing pretty well at reselling their content around the globe.

RCW: That is pretty impressive. How did music get so screwed up?

MW: The two MOST important differences between video streaming and music streaming are:

1) Video streaming platforms are making a name in creating original content.

2) Video platforms do NOT have all video - they curate their collections to hold down the monthly license fees and price it and market it based on popularity and exclusivity.

This begs the questions: Will Jimmy Iovine and his colleagues at Apple Music start making original content or start licensing content exclusively? Will the “curation” of the Apple Music catalog include removing whole tracts of content that are more popular? This would make the remaining catalog easier to monetize. Less content = more even distribution across the remain catalog and at higher rates.

RCW: How do you make this economic model work for music? Do we need that guild for digital artists we've discussed for years?

MW: Yes, the guild idea is actually emerging on its own. There are several coalitions coming together for artists - here’s one I respect: https://futureofmusic.org

RCW: But if streaming is doomed - - then what is the future of the music business?

MW: I think technology will continue to provide alternatives. Remember when we talked about Louis CK (https://www.louisck.net/purchase/live-at-the-beacon-theater) going off on his own producing a web video for Christmas a few years back? He killed it, better than 10x return on his investment. Now hundreds of artists are “going commando” free of any connection to the legacy distribution channels. Imagine artists creating their own platforms for monetizing their music that cluster around artists of the same genre. They will create vast co-ops where they can make markets with 3rd party market warehousers of advertising and promotional messages. Some of this is already beginning to happen - there are labels that have become “boutique” streamers. But the key is putting the power and money in the hands of the musical artists and the writers, as is increasingly the case in video, to incentivize a new era of great music. It’s working in video. Time for the musicians to learn the lessons that the video guys in Hollywood learned from them...

RCW: Thanks Michael. Good luck on the new CD.

Comments

[malek]

 the Internet will also be eclipsed when the high-speed 5G cellular services begin to launch and that network will be 20 times faster than the Internet.

Wait... what??
Because until 2020 or so, when 5G might be launched, the cable-/fiber-based internet will not get faster by much?