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? 

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. 

Cirque du Soleil And The Economics of Las Vegas Shows

A few months ago, when I was in Las Vegas, watching and enjoying yet another Cirque du Soleil show (isn’t that what we do in Vegas?), as always, the sheer scale of it all impressed me. And it made me wonder about the economics of these shows, beyond the $50 or $100 tickets (sometimes more) that revelers see, and enjoy buying. 

Thanks to Google, selected and interesting details of the underlying economics come to us today from Christopher Palmeri, by way of a 2004 Businessweek article (Yes, that is 2004 and this is 2013, but I imagine that while costs today are likely much higher, the fundamentals are probably still the same):

Like most other Cirque shows, Kà, which means “fire” in Japanese, has been a group process. The project began in 2000 when casino giant MGM Mirage told Cirque founder Guy Laliberté that it wanted a new attraction for the MGM Grand, which was launching an upgrade of its restaurant and entertainment offerings. The casino giant agreed to foot the entire bill for a $135 million, 1,900-seat theater built according to specs just for Kà. Some $30 million more in costumes and other production costs are split evenly between Cirque and MGM. So are the profits. Like the three other Cirque shows playing at MGM casinos in Las Vegas — Mystère, O, and Zumanity — this production will never tour, creating an only-in-Las Vegas mystique that is part of the draw — and which also assures MGM its steady cut.

…

Cirque executives are betting that Laliberté is right again and that folks will shell out big bucks to see Kà — seats range from $99 to $150. Cirque generates about 80% of its revenues at the box office; the rest from show-related merchandise, including custom clothing and $39 DVDs of Cirque touring productions such as Quidam and Varekai. And Cirque gets plenty of help from MGM Mirage, its deep-pocketed partner. MGM’s three existing Cirque shows bring more than two million visitors a year into its casinos. Only 20% of them actually stay at the casino hotel that hosts the show, but showgoers drop an average of $30 apiece on dinner or drinks at the property. Based on ticket and merchandise sales alone, MGM figures it earns a return on its total investment in the mid-teens, only slightly below the 18% return it shoots for with its casinos overall. And the Cirque shows expose the casinos to a desirable base of consumers. “They’re sophisticated, and they have high incomes,” says Robert Baldwin, president of MGM’s Mirage Resorts division.”

Those two paragraphs contain a number of interesting details:

a. The cost of producing shows in Vegas is extremely high. The cost for Ka alone, in 2004, was more than the cost of all 36 broadway musicals in 2003, for example (source: the article). 

b. With that kind of an investment, we have the potential for a classic “hold-up” situation, and the attendant problems. 

c. But the exclusivity (to Vegas, and I am going to guess, the host Casino) clause significantly weakens the hold-up problem. The full contract and its various Ts and Cs should make for some boring but fascinating reading.  

d. The shows are nearly as profitable to the Casino owners as the casinos themselves. 

e. Casinos use the shows to attract a different demographic vs the one that comes in just for betting and gaming. This, in terms of marketing, is brilliant – the ability to use gaming floors and sophisticated shows in the same space, to target two very different sets of customers, and still making similar returns on both. 

Now go read the rest of my blog.

Tesco’s US Adventure – Fresh & Easy, But Also Costly

Tesco, the world’s third largest retailer, after Walmart and Carrefour, entered the US market in 2007. 6 years and 1 billion pounds later (1.2B pounds, per a NYT piece from today), it is leaving – once it decides exactly how to exit. 

Failures are never pretty for shareholders or employees, but the point of this post is to briefly discuss how consumer behavior regularly defeats executives and large multi-national companies in “foreign” markets.

Of course, consumer behavior defeats execs and local companies in “home markets” on a regular basis too – just ask J C Penney. But when a company tries to build on domestic successes, abroad, it faces a number of problems such as regulations, contract risk, local partners, foreign exchange fluctuations, etc.

But the biggest problem is consumer behavior.

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Why Did Starbucks Cut Coffee Prices?

Recently, Starbucks said that it would reduce the price of its (bagged) coffee, sold in grocery stores, by 10%.

The simple explanation is that coffee prices, as reflected in Arabica coffee futures, are quite low and this enables them to “pass on the savings” to customers. A more ambitious explanation is that this makes them more competitive with Folger’s and Maxwell House and others that sell bagged coffee in grocery stores also.

But the best explanation, in my opinion, comes to us by way of an article on Businessweek by Kyle Stock and includes insights from Rita McGrath, a Professor of Strategy, at Columbia Business School.

Here’s the summary, presented by yours truly, with some additional commentary (since just clicking on that article is obviously hard):

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Jeff Bezos Writes To Amazon’s Shareholders

“Amazon exists to serve customers. Serve customers well and profits – in the long-run, revenues in the short-run – will follow”.

That seems to be the summary of Amazon CEO Jeff Bezos’ most recent letter to shareholders.

One excerpt from the letter that illustrates Amazon’s customer-specific philosophy at work, that I liked:

When you pre-order something from Amazon, we guarantee you the lowest price offered by us between your order time and the end of the day of the release date. “I just received notice of a $5 refund to my credit card for pre-order price protection. . . What a great way to do business! Thank you very much for your fair and honest dealings.” Most customers are too busy themselves to monitor the price of an item after they pre-order it, and our policy could be to require the customer to contact us and ask for the refund. Doing it proactively is more expensive for us, but it also surprises, delights, and earns trust.

Another excerpt, this time about investments in businesses that may only pay-off in the future, is also worth reading:

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