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The Business Of Music-Streaming Services: How Deals With Record Labels And Publishers Are Made

10 September 2015, 2:49 pm EDT By Lauren Keating Tech Times
Music-streaming services could be the industry’s best solution to get consumers to start paying for music again after the Napster revolution caused a rise in illegal downloads. While consumers are on board, some musicians have spoken up against being unfairly compensated. Here’s how the business deals work between music-streaming platforms and those who own the licensing rights.  ( Flazingo Photos | Flickr )

Music is the soundtrack of our lives. And with the explosion of music-streaming services over the last decade, we've got a big playlist to choose from.

Streaming services have taken over the music industry. There was some doubt in the wake of music piracy platforms like Napster, but users are now willing to pay subscription fees for access to libraries of music. 

But as ever, things aren't so simple. Artists like Taylor Swift have famously spoken out against platforms like Spotify for unfair compensation, while musicians like Prince have pulled content from some services only to  offering exclusives on others.

How do these deals occur? What really goes on behind closed doors? Let's take a look at the shift from piracy to legal streaming, explore how these deals between labels and platforms are made, and talk about what's the big deal about exclusive content anyway.

(Photo : Kārlis Dambrāns | Flickr)

Do music streaming platforms solve the piracy problem?

Whether or not artists are on-board with streaming services, it appears they're here to stay. In the paper "Download or stream? Steal or buy? Developing a typology of today's music consumer" published in the Journal of Consumer Behaviour, music experts Gary Sinclair and Todd Green revealed that music consumers, like ex-downloaders, were often conflicted when deciding to illegally download music. Streaming services provide a way for these users to eliminate the guilt they sometimes feel by not financially supporting the artists they like.

The shuttering of torrent sites could certainly play a role in this. Ditto for the potential for spreading malware and low-quality files, the latter of which is the primary basis for Tidal's offering.

"From the research that we did initially on piracy on illegal downloading, we found that there was a high level of migration from people who were pirating music to moving across to streaming music because they found it cost-effective and convenient, and they found it a solution to what they were looking for in terms of their digital needs for music consumption, which the industry took far too long to come out with," Sinclair told Tech Times.

"The reason why Spotify was created was to take on piracy, so we needed to build a platform that was better than piracy and would actually lead to people paying for music again," Spotify rep Graham James told Tech Times. "I think it just changes your relationship with music where you don't have to download or pay for an entire album, you have access to it. It's access versus ownership."

Such platforms serve users what, but what about artirsts?

"This is the best solution for the consumer at the moment," Sinclair says, but "maybe not for stakeholders in the industry, as we are seeing with the bad payments."

Consumers weren't upset that Taylor Swift was leaving Spotify because of her ethical reasons for doing so, Sinclair says, but rather for their own selfish reasons of access.

"I think musicians are often in a difficult place because if they complain, then most people say 'Go get a real job,' or 'Well, you have the best job in the world. How could you possibly complain about the money you make from streaming?' so it kind of puts them in the whiny millionaires club," Green told Tech Times.

Green has spoken with musicians who now see other choices than playing ball with streaming services. While it's not a perfect model, consumers will probably buy eight to 10 albums a year digitally or spend $10 a month for a premium subscription like Spotify, and since young people aren't buying albums, at least these services provide some revenue. Still, "it's not great as far as the direct income for musicians," Green added.

But while some critics say well-established musicians might suffer from poor compensation, such services can provide an important platform for up-and-coming artists. Green also found in his research that music consumers were less likely to "steal" content from indie artists, opting rather to pay for their music as a form of support.

(Photo : William Brawley | Flickr)

Green and Sinclair found that people don't feel like they need to pay for music, younger users in particular. Consumers just want the best deal, and for something like $10 a month for unlimited music, how could they say no?

"One thing we have seen is the quantity of music that is being listened to is definitely much higher, and the consumers that we interviewed said the variety of genres they listen to now has increased a significant amount," Sinclair says. "And because they have music at their fingertips, they can go on to discover new bands and opt to see their gigs."

How The Deal Is Made

Music-streaming platforms don't openly discuss label deals. We only hear about them when artists, labels or publishers complain. When setting them up, streaming platforms like Apple Music or Amazon Prime Music approach the label with their plans, negotiating until both parties are satisfied. The length of the contracts varies from label to label, but most are around a year long.

(Photo : Sorosh Tavakoli | Flickr)

But all the deals and rates are a bit different. Spotify pays artists based on how big the percentage of the platform's total plays that artist's content makes up. Then it uses a formula to dole out payments. At the end of the day, it is the label or publisher who pays the artists.

"If we are going to operate in the market, we need to secure the rights to the music, which is deals with whoever owns the rights, which is record labels and publishers. So before we go into any new market, we make sure we have the rights that we're sharing," Spotify's James says.

A leaked Apple Music contract caused the service to decide to pay artists more, 71.5 percent of its revenue in the U.S. However, it's important to note that the approximately 70 percent will go to whoever owns the publisher rights to the recordings (the labels and publishers).

Steve Boom, the VP of digital music at Amazon, told Tech Times that as far as Amazon Prime Music goes, the "rates that we pay are consistent with the fact that it's a premium service, and the rates we pay are competitive with other premium services out there."

Bad Business For Indie Artists?

While some artists criticize their lack of control as far as labels and streaming services go, it's safe to say that big-name artists like Beyoncé and Taylor Swift will be able to make money. But what of independent artists?

According to a 2015 infographic by Information is Beautiful, signed artists make .007 cents per stream on Tidal, .0011 cents per stream on Spotify, .0019 cents per stream on Pandora and Rhapsody, and a low .0003 per play on YouTube. That means a signed artist would need 1,117,021 plays on Spotify or only 180,000 plays on Tidal to make the monthly minimum wage in the U.S. of $1,260 (2013 federal baseline of $7.25 an hour).

While these rates seem low, these artists presumably have thousands, and in some cases millions, of fans – and that adds up. Green revealed that in talking to musicians (those who make albums, he added), they said that its rhetoric to say the labels treat them poorly, but if musicians make bad deals with labels, it's thanks to poor management.

But while mainstream artists may not have much to complain about, what does this mean for upcoming artists? Obviously they won't be getting major play, but what they are getting is a chance to have their music exposed to more people. And this could lead to new fans, followers, and concert ticket buyers. Just as long as they are open to putting their music on a few platforms and not keeping it too exclusive.

"If you are an indie musician and you went exclusive on a platform, then it would be suicide because you want your music to be on as many platforms as possible," Sinclair says.

"For the likes of Prince and Taylor Swift, I suppose maybe really hardcore fans would maybe switch providers based on whether a particular artist was on them [the service]. But I think as a strategy for the actual streaming platforms like Spotify or Apple in general, I'm not sure how effective it could be. Because the switching costs to move from, let's say Spotify to Apple, for example, are actually really high—I don't mean switching costs in terms of financial, but in terms of the amount of work they put in to develop their playlists, maybe their friends are on Spotify, and even the hassle of switching providers," Sinclair says.

After downloading albums and setting up playlists, why would the consumer want to change? Sinclair says that one artist leaving a platform wouldn't be enough for a consumer to switch to another service.

(Photo : GabboT | Flickr)

So What's The Big Deal With Exclusives?

There are plenty of streaming options out there, from Internet radio like Pandora to on-demand services like Apple Music. Exclusivity helps companies set their offerings apart.

If a platform like Apple Music or Tidal has a few of the big names in the music biz that are loyal to their brand, then it makes that platform even more attractive. "I think they want an air of exclusivity, so it's sort of like if you start selling a luxury product everywhere then it kind of loses its appeal, or they might believe that brand stands for something better for music, or maybe they think they're just better run," Green explained.

Prince praises Tidal because it is more artist-operated, and is different from traditional record labels that he famously referred to as being like "slavery."

"I guess the knock against Apple and Spotify is they are tech companies, not music companies," Green said. "Their core competency isn't discovering musicians and launching the next big thing, but Jay Z has a label, and he's been in the industry for a really long time, so they care about the music industry, whereas Apple and Spotify are just really good at responding to consumer whims."

When Apple Music first launched, some criticized the platform for not having an interface that is different from the others. So like how Netflix has original series to set themselves apart, since streaming is streaming no matter how you dice it, teaming up with musicians and labels who support that brand helps differentiate it from the sea of others. "And if you get an artist like Taylor Swift on exclusive, then that seems to boost the image among fans," Green said.

While exclusive deals could possibly sway fans of that artist to switch platforms, it could also lead back to illegal downloading.

"There's tons of total Apple fans boys out there, so I think they have a massive brand loyalty to begin with, and they have deep pockets as well," Green said. "So if they are able to move people away from Spotify, then maybe one outcome is that people will start downloading illegally again because well, I'm on Spotfy right now, I don't really have access to other streaming services, so if one of my favorite bands were on Apple Music only, I would have to buy their physical copy."

And let's face it, why pay for an album when you can stream it?

(Photo : Tidal)

While exclusive deals might prevent some streaming users from accessing their favorite musician's new CD (like Prince who just released his exclusively on Tidal), Amazon's Steve Boom said that people don't shy away from using more than one platform. "Our research shows that people tend to use multiple services depending on what they are trying to do at a particular time. If you think about the way people listen to music, 50-plus percent of all music consumption still happens on AM/FM radio, so no music listener is monogamous, and music is all around is," he said.

Apple Music has exclusively premiered the video for Keith Richards' latest track "Trouble," and Drake's "Energy." Spotify, meanwhile, released a new track from Muse's new album for its Premium-tier users and will feature music and videos from SFX's Beatport (EDM music from the festival) on its platform.

In its first round of exclusive content, Tidal released a remastered edition of Daft Punk's Electroma film. Pandora launched an exclusive performance recorded in NYC from artist Josh Groban called "Stages" back in May.

Amazon Prime Music is another example of the various ways platforms offer exclusive content. It recently launched Amazon Acoustics, a playlist of 32 exclusive recordings performed by popular and up-and-coming artists that is available to Prime members.

"We are always looking to do something kind of new and interesting. If you take a set back from the playlist and think at a business level what's happening with Amazon and some of the other platforms, just like consumers are transitioning how they interact with music from buying to streaming (they are still buying, obviously, but streaming is growing really rapidly), our business has been transitioning as well," Boom said. "We're transforming from being just a retailer to really being a service, a media service, a music service, and in that kind of world, we want people to come back every day to discover new music, and play it and fall in love with it and find new artists. And the Acoustics project falls into that broader transiting."

While premium functionalities like unlimited song downloads on mobile phones, on-demand music programming (aka curated) playlists, new artists, and new stations added in its ad-free radio gives people a reason to come back, offering something like Acoustics gives members another reason to check out the music service.

But this isn't the company's first go. Amazon previously brought original content just to its service via holiday collection playlists in collaboration with 42 artists. Why did it choose to try bringing exclusive content during the holidays? "Well, because we're Amazon, it's kind of an important time of year for us," Boom said.

And because its Acoustics playlist features maybe lesser-known artists, this brings us back to our previous point of exposure for indie artists. "We chose Acoustics because we felt like as a format or as a genre, it strips out all the other stuff, and lets us focus on the song and the singer," Boom said. "By doing that it gives us a chance to really introduce our customers to some artists they may not know yet. And that's actually one of the biggest issues in the music industry: how do you get artists exposed to listeners in a way that those listeners are really going to listen to the music and hopefully become a fan?"

(Photo : Amazon)

To gets these exclusive deals, since Amazon's holiday collection was a new concept, it spoke directly to artists, managers, and the occassional label, Boom said. However, this time around it was "half, half," Amazon reaching out to artists they wanted to feature and some reaching out wanting to work on this project. Amazon only got involved with record labels when the labels wanted to get involved.

"We have relationships as a music company across the industry," Boom said. "And then in terms of the songs themselves, I think in almost every case, the artist recorded the song just for this playlist."

Beyond these playlists, Amazon Prime Music offers the typical content catalog. And their standard deals don't vary too greatly from other services. Amazon has been in the music business since 1998, developing long-standing relations with labels because it has been selling their content for years and is the largest retailer of CDs and vinyl in the world, and the second-largest retailer of digital downloads in the world. This is just one example of ways more companies may continue to get a piece of the streaming pie.

According to Boom, Amazon has plans for more original projects in the future, including a project surrounding children's music coming up this fall.

While music streaming may not the perfect solution for the music industry, it is a step in the right direction. No business model is free from flaws, and we can only hope that both mainstream and indie artists continue to be compensated fairly and get the exposure they deserve to be able to earn their living.

For consumers who may feel entitled to get free music, streaming platforms seem ideal. While the future of these services is unknown, their impact on the way we consume music is clear.

 

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