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.

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? 

Just One Banker Officiated At Yahoo’s Tumblr Acquisition

That’s what Michael J De La Merced is saying in one of his columns today, at the NYT’s DealBook.

So how did the $1.1B deal come to be?

Leading the talks for Yahoo were Ms. Mayer and Jackie Reses, the executive in charge of development, with some assistance from the chief financial officer, Ken Goldman, this person said.

The only bankers on the deal were on Tumblr’s side. Its board retained Qatalyst Partners, the boutique investment bank run by Frank P. Quattrone. The deal team included Mr. Quattrone and Jonathan Turner, a co-founder who specializes in Internet and mobility companies.

The dearth of investment bankers echoes the last big deal in the social media space, Facebook’s takeover of Instagram. That deal was largely hashed out by the companies’ two founders, Mark Zuckerberg and Kevin Systrom, over a weekend last year – one that included a viewing party for the HBO series “Game of Thrones,” according to Vanity Fair.

I wonder why, though.

Some theories:

1. Yahoo knew Tumblr’s worth. So the discussion was not really about the valuation and terms (it’s supposed to be an all-cash deal, so that makes it simple). Instead, it was about convincing Tumblr’s founder that his/their independence would be preserved, post-acquisition. Not something you need bankers for…

2. Tumblr is not public. So I would assume that there aren’t a lot of regulations, policies and processes that require bankers’ expert assistance or advice. 

3. Ms Mayer and Ms Reses wanted to keep things simple, communicate clearly and move quickly – so why use bankers as intermediaries, potentially slow things down and add complexity? [Also, this reveals to the world that Ms Mayer is a highly hands-on executive, exactly the kind of CEO that Yahoo needs]

Anyone with more insights into the roles of bankers in M&A have a  better explanation?

Marissa Mayer’s Post About Tumblr, On Tumblr

Journalists were in a tizzy yesterday about Yahoo’s $1.1B Tumblr acquisition. Did Yahoo’s board, meeting and approving the deal on a Sunday, enliven their (the journos’) otherwise dull weekend?

Anyway, as my readers know, as a long-time Yahoo user, I have been rooting for Yahoo and Marissa Mayer for a while. So, good luck to Yahoo and congratulations to Tumblr’s management and employees. 

Ms Mayer announced the deal on Tumblr (where else?) about the acquisition in a charming post that is well worth reading (I’m a huge fan of charming, folksy CEO communiques, as you guys also know).

An excerpt:

I’m delighted to announce that we’ve reached an agreement to acquire Tumblr!

We promise not to screw it up.

You can read the rest of it here. 

Google’s Music Service – Catching Up or Getting Started?

Google unveiled its new music service, Google Play Music All Access, at its I/O conference last week. As Matt Peckham wrote on Time this week (he chose to call it GPMAA, BTW):

…GPMAA represents Google’s attempt to offer a subscription-based music service, streaming “millions” of songs — intermingled with up to 20,000 more, uploadable or song-matched from your personal library — for $10 a month ($8 a month if you sign up by the end of June). Chris Yerga, Google’s engineering director who steered this part of the keynote, explained that GPMAA would include common music streaming features like curated playlists, album recommendations and a build-your-own-radio-station feature.

Since the current streaming music market is dominated by the likes of Pandora and Spotify, both of which offer “freemium” models (free for a certain number of hours/features; beyond that, consumers pay), Google’s move is a bit unusual because its music library is similar to their libraries. Also, no ads. Just a paid subscription, with adaptive streaming sound quality. 

As Matt and several others noted, this doesn’t sound like a differentiated service. In fact, it actually sounds like a narrowly focused offering, targeting those that listen to a lot of music every month. 

So why do it? And what is its long game?
(You can bet a decent amount of money that this seeming head-scratcher of a move fits in with a larger strategy.)

Some thoughts on this topic come to us from James McQuivey, a Forrester analyst, who writes on his blog:

To be clear, music is one of the most powerful tools for engaging digital consumers because they use it every day and connect to it emotionally and socially. If Google failed to make a play for the music business, it would later regret it because its customers would remain forever tied to another digital service that could ultimately open a vulnerability in the company’s relationship with hundreds of millions of Android and Chrome users. The fear of ceding this permanent vulnerability to others explains why Google Play is adding All Access.

In fact, he thinks that Google should have created a first of its kind “media package” consisting of music, movies and video games. 

If only the company had reached beyond simply catching up to existing music players. Google’s PC, phone, and tablet based customer relationship puts it in a unique position to reach for a blended media subscription experience, something that expands the very notion of what media is and how people believe they’re paying for it. Imagine $24.99 a month for all-access music, Netflix-like streaming, two current movie downloads, and a lending library for paid games where you can “check out” one paid game for free for one week at a time. That would be a way to make Google Play media content do more than merely copy iTunes, Pandora, and Spotify, it would take media consumption beyond the reach of Netflix, Amazon, and anyone else. But evidently Google wasn’t ready to reach for the real prize.

That last sentence is the key, IMO: Google may have exactly those ambitions, but its not ready. Yet. 

The bundle itself makes a lot of sense in theory, at least to me. Why have consumers sign up with 4 different services, for their audio, video, movie and game needs, when they can just sign up with Google? (Or Amazon, for that matter, who may also presumably be thinking along those lines…) 

And if you look at the Google Play snapshot I included above or go to this site and click on Books, Magazines, etc., you may just be impressed at the choices that already exist. (Question – do you know that you can buy magazine subscriptions via Google now? How about bestsellers from the NYTimes’ list? No? Thought so). 

So if I were Google, while I develop Google Music, on a parallel track I would furiously work to increase my partnerships in Movies and TV (Priority #1: Add streaming video) and start work on that all-inclusive monthly media bundle.

If and when this happens, successfully, not counting its driverless car business and its cloud provider (ala Amazon EC2) aspirations, Google would have transformed itself into a twin-headed colossus: An ad-driven “free” online enabler or provider of all kinds of data/user-content driven services, and a non-ad-revenue driven consumer media distribution giant. 

What do you think? 

PS: A big caveat here is that consumers that are willing to pay for movies, those that are willing to pay for music and those that will pay for other kinds of media may all behave very differently and may (or may not) see the value in a bundled offering. Just because something sounds good in theory is no excuse to expect it to succeed in practice. So I would imagine that Google either already has models that tell it that bundled offerings may not succeed, which is why it hasn’t already offered one just using the libraries it has access to – or – its models are telling it that such a bundle will be a runaway success, and all it needs is access to vast content libraries and a reputation in this space, both of which it will build in the coming months and years. As they say, watch this space…