Streaming Music’s Lose-Lose Situation

By Jason Epstein

As reported by The Verge, Spotify will be meeting sometime soon with some of the record industry’s major players in order to renew their licensing agreements.  They’ll most likely be asking for a considerable price break as well as the right to extend their free subscriptions to mobile devices, a feature that so far is only available to paying customers.  The streaming service also hopes to reduce artist payments even further.  As of now, Spotify spends around 70 percent of incoming revenue on licensing costs and just 10 percent on operational spending.

Spotify isn’t the only streaming service struggling with the concept of how to successfully run their business the way it was built.  Currently, Pandora is beseeching Congress to lower its rates for playing songs, while record companies are falling in line to put a stop to the attempt.  So far, it looks like Pandora’s lobbying is going nowhere fast.

Record labels tend to enjoy the income reliability from streaming music services.  Unsurprisingly, this cash flow from streaming services to record labels mirrors user’s listening- not buying habits, i.e. smaller, more predictable increments rather than constantly dwindling sales after a brief windfall.  On the other hand, users like them these services because they’re free, can introduce them to new music and suit their web-connected lifestyles.  But streaming services themselves seem to be having a problem maintaining their own business model.  Honestly, does anyone think the Spotifys and Pandoras are living “paycheck to paycheck” so to speak?  Because that’s certainly the way they make it seem.  Instead, maybe they can improve their advertising revenue through the acquisition of new partners.  Maybe they should provide increased incentives to convert their free service customers into paid plan customers.

If streaming services aren’t reaching profitability, but artists are also not making any money, then where is the money going?  Most likely it’s going right to the record labels that receive payouts and equity.  But if that’s the case and they depend on musicians to create what they sell, then is this model not so sustainable after all, despite the consumer popularity of it?  That also begs another question, why do artists even allow themselves to be involved in the first place if they stand to make so little money?  Linda Perry, for example, is a musician who wrote Christina Aguilera’s hit “Beautiful”.  So far, she has made a grand total of $349.16 from 12.7 million plays.  Ouch.

Whatever the outcome will be, artists are likely to keep losing.  Either Spotify will have more to spend on their operational costs and increase their profits by paying artists less, or record labels will keep charging their current licensing rates without sharing the love with their artists, not unlike a wealthy CEO playing god with his plebian workforce.

Take a look at our recent commentary on streaming music revenues here.