The Economics of Streaming Music

I guess I have an “Economics of XYZ” theme going on these days. Today’s entry is on the economics of “streaming music” and musicians’ earnings. 

From an article that Ben Sisario wrote on The NYT in January 2013, 

Late last year, Zoe Keating, an independent musician from Northern California, provided an unusually detailed case in point. In voluminous spreadsheets posted to her Tumblr blog, she revealed the royalties she gets from various services, down to the ten-thousandth of a cent.

Even for an under-the-radar artist like Ms. Keating, who describes her style as “avant cello,” the numbers painted a stark picture of what it is like to be a working musician these days. After her songs had been played more than 1.5 million times on Pandora over six months, she earned $1,652.74. On Spotify, 131,000 plays last year netted just $547.71, or an average of 0.42 cent a play.

“In certain types of music, like classical or jazz, we are condemning them to poverty if this is going to be the only way people consume music,” Ms. Keating said.

The way streaming services pay royalties represents a major shift in the economic gears that have been underlying the industry for decades.

From 78 r.p.m. records to the age of iTunes, artists’ record royalties have been counted as a percentage of a sale price. On a 99-cent download, a typical artist may earn 7 to 10 cents after deductions for the retailer, the record company and the songwriter, music executives say. One industry joke calls the flow of these royalties a “river of nickels.”

In the new economics of streaming music, however, the river of nickels looks more like a torrent of micropennies.

Since condemning anyone to poverty is never good, more data that shows the impact of streaming on musicians’ earnings in three different ways would have been good:

1. The extent to which “streaming royalties” replace “lost” MP3 and CD (?!!) sales,

2. Incremental streaming revenue from those who discovered and listened to someone’s works (one-time and repeat)

3. Incremental revenue from “conversions” = those that discover an artist’s music and then end up buying a song

From an article on Spinner.com, 

Most recently, the Black Keys declined to make their latest album, ‘El Camino,’ available for online streaming.

“[Streaming services] are becoming more popular, but it still isn’t at a point where you’re able to replace royalties from record sales with the royalties from streams,” drummer Patrick Carney told VH1.

As Spotify currently operates, it takes about 64 streams to equal one 99-cent iTunes purchase, according to a recent Billboard study. Even users who pay for the service with unlimited or premium accounts are still only making up for a fraction of the potential revenue an artist could be pulling in.

“For a band that makes a living selling music, it’s not at a point where it’s feasible for us,” Carney continued.

One data point does not a trend make, but still, it doesn’t bode well.

I wonder if this means that, soon, being a full-time or “career” musician will become unattractive, (even more so than it is now) deterring “market entry” for vast numbers of aspiring musicians?

And if so, wouldn’t humanity be poorer for that? 

In 1999, Microsoft Accurately Predicted 2 Things About The eBook Industry

Gazing into crystal balls and making predictions many years out is difficult (but lucrative, if you are in certain lines of businesses). While a few futurists have gotten some things right (Arthur C Clarke and geo-stationary satellites, anyone?) occasionally, more often than not, their predictions are a source of amusement to people in the future who invariably chuckle at how widely off the mark they were. 

Not so, Microsoft, who, in 1999, predicted the evolution of the eBook industry between 2000 and 2020. 

As Alex Madrigal writes in The Atlantic, their 2010 and 2012 predictions were pretty close to reality:

“2010: eBook devices weigh half a pound, run 24 hours, and hold as many as a million titles.”

Pretty much nailed it. In 2010, Amazon unveiled the Kindle 3G, the first Kindle to weigh under a pound. It had about 30 hours of active battery life. Interestingly, the one miss is in the storage capacity of the device. Real Kindles hold a thousand or so books, but, of course, you can delete and then download more as you go, so you have *access* to a million or so titles.

“2012: Electronic and paper books compete vigorously. Pulp industry ads promote ‘Real Books from Real Trees for Real People.’ “

This one is my favorite prediction. The implication here is that the cultural pushback on e-books would focus on the authenticity of paper books and the people who read them. And if you look around, physical books, in fact, have come to signal authenticity (“real people”). 

Take Nicholas Carr’s argument in the Wall Street Journal. “Readers of weightier fare, including literary fiction and narrative nonfiction, have been less inclined to go digital,” he wrote on December 31, 2011. “They seem to prefer the heft and durability, the tactile pleasures, of what we still call ‘real books’–the kind you can set on a shelf.” The physical weight of the book instantiates the heaviness of its ideas. And setting such tomes on the shelf is an indication that the purchaser is a reader of important things. 

He concludes his essay with a vague idea that has a lot of currency among certain intellectuals: “There’s something about a crisply printed, tightly bound book.” Note the construction: “there’s something about.” I personally suspect that if anyone were to spell out precisely what that something was, it would sound kind of silly, like talking about why you like your favorite t-shirt: It would reveal too much about the qualities we want our objects to impart to us. (I say this as someone with full bookshelves and hundreds of Kindle books. I want my books to say the right things about me, too.)

You can read the full article here, and see how close, or off the mark, their other predictions were. The original Tweet on which this article seems to be based can be found here. And the print ad that the Tweet in turn references can be found on Flickr (of newfound 1TB storage and redesign fame) here. 

Finally, since the predictions extend to 2020, discerning readers looking for chuckles may want to bookmark those links.

How Not To Sell Commodity Products – Lessons From “The Office”?

Neil Irwin, of The Washington Post’s Wonk Blog fame has some advice on commodity product selling, based on the (late) hit NBC show, “The Office”. 

The entire business seems premised on the idea that a personal touch and better service will be enough to make up for prices that are higher than at Staples or Office Depot. It’s more likely that the office managers in charge of paper procurement at Scranton area businesses would be more annoyed by the constant harassment from their paper salesman than pleased by the enhanced service. If you’re selling a complex product essential to certain business operations, like software or key manufacturing equipment, it makes plenty of sense to have a large, talented staff of salespeople and customer relations experts. But this is just … paper. Dunder Mifflin sells a commodity, but it’s staffed like it sells something unique.

Do you agree? I do. 

For more advice, wisdom and observations, read the rest of his very readable piece here.

Phone Companies Selling Consumer Behavior And Location Data – Why Not?

The truism about free online services – Gmail, Facebook, et al (yes, Tumblr too) – is that you are the product, since it doesn’t cost you anything to use them. 

But what if you are paying for something? Do you own the data about your behavior, location, etc.? Or does the service provider have the right to create another revenue stream (beyond what you pay them) by selling that data?

Anton Troianovki’s article (paywall) in the WSJ today highlights this issue in the context of phone companies monetizing subscriber data. 

The idea, as he writes is this:

When a Verizon Wireless customer navigates to a website on her smartphone today, information about that website, her location and her demographic background may end up as a data point in a product called Precision Market Insights. The product, which Verizon launched in October 2012 after trial runs, offers businesses like malls, stadiums and billboard owners statistics about the activities and backgrounds of cellphone users in particular locations.

A potential use for this:

Clear Channel Holdings Inc., one of the world’s biggest billboard companies, has agreed to conduct a trial of the Precision service, according to Suzanne Grimes, Clear Channel’s North America president. She says the service could allow billboard owners to measure how likely someone driving by is to go to the store being advertised. “You’ve got an industry that was historically about eyeballs,” she says. “Now you know more about who those people are and what their behavior looks like.”

But, as the article goes on to say, there are privacy issues. Similar efforts in Europe have run into problems. And Verizon offers its customers a way to opt out on its website.

Two thoughts on this:

1. I think that Verizon could actually go a step further and offer customers say, a $5 rebate, if they opt into the program. In the age of Foursquare and geo-tagged Facebook posts and Tweets, I would imagine that younger demographics may find this to be very appealing.  

2. Yes, this is a new way to monetize subscriber behavior…but how is this different from a magazine’s subscriber list being sold to other publishers targeting the same industry? Since I am not being coerced into buying something, if my behavior and usage data is used to serve me more relevant ads and promotions, isn’t that a good thing? 

Sunk Costs – A Useful Fallacy?

As anyone with a passing interest in economics (which, by the way, I think every literate human being on the planet should study or make more than a passing attempt to understand) knows, the “Sunk Cost Fallacy” is a big deal.

It is also something that prevents us from making rational choices in many cases, even in our daily lives. But does it serve a useful purpose? 

Yes, it does, argue two economists:

That is the counterintuitive theory that Sandeep Baliga of the Kellogg Graduate School of Management and Jeffrey Ely of Northwestern University’s Department of Economics advance in their paper “Mnemonomics: The Sunk Cost Fallacy as Memory Kludge.” The authors argue that human beings—even rational ones—have a limited capacity to remember the original reasoning behind their decisions. If that capacity is exceeded, the information could be lost—so we need a mental placeholder that can remind us of why we decided something, just as tying a string around your finger reminds you that you need to pick up milk on the way home from work. This kind of ad hoc “memory device” is called a mnemonic. Mnemonic devices often encode some aspect of the relevant information as well, just as the letters in the mnemonic name “Roy G. Biv” stand for the first letters of the colors in the rainbow.

You can read the rest of the article (remember to also read the comments!) here.