Where The Money Went In Recorded Music (And How To Get It Back)

The perceived value of recorded music is free, and always has been! When we pay for music in any format, what are we actually buying?

• Vinyl: the disc, album art and loyalty to the band.
• CD: a more portable disc (Sony Walkman) and an opportunity to play the music we want to hear whenever we want to hear it.
• MP3 Download: access to have music on demand on our devices.
• Streaming: get rid of the ads.

Never are we actually paying for the music itself.

Instead, we are always paying for some other relative benefit. We literally pay Spotify $10 per month to get rid of ads, not to give us access to the music. We can get that for free.

So freemium is all we have now. That is a means to getting the greater audience to pay.

YouTube, Spotify, Pandora. The smarter these platforms grow the ad (freemium) model, the more musicians (and also labels, publishers, songwriters, producers and managers) have an opportunity to get paid.

The platforms must not only develop smarter advertising models, but also attract more listeners. The more listeners there are, the more advertisers will pay to reach them and the more people there are to pull up into the paid model, equating to more money in the pool for the platforms to distribute to the musicians and other rights holders.

You see, Spotify and the like doesn’t pay per stream.

It’s a bit more complicated than that.

Nearly 70% of total revenue is paid to rights holders. This is similar to the model that other digital services that came before Spotify employed, including iTunes.

There is a different value between a paying listener (premium user) and an ad-supported listener (free tier user). A premium user generates $120 per year in subscription fees, while the average free tier user generates about $14 per year from ad impressions. This averages out to $42 per year per user.

20 million users at 120/yr = $2,400,000,000
55 million users at 14/yr = $770,000,000
75 million users = $42/yr on average per user

The biggest variable is Spotify’s number of paid users as a percentage of total users. The higher percentage paid, the higher a “per stream” rate becomes using the following formula:

More details on this formula can be found on Spotify’s website. Looking at each step of the formula, it is clear to see that more users will almost always equate to an increase in the artist payout.

More than 80% of paid subscribers with Spotify started as free users. Get more free users in the door (who still generate revenue for rights holders) and many will migrate north into the more valuable paid subscriber territory.

We are left with two primary questions to answer:

1. How do we get more free listeners into Spotify, Pandora and the like?
2. How do we get more listeners to become paid subscribers?

Getting more listeners to the platforms.

The average age of a Spotify user is 27. Although they will grow older over time, we are still missing entire older generations adopting the platform. How do we get the older, less-tech-friendly crowd to adopt streaming music on a larger scale?

The answer is that the platform must become ubiquitous. Having an app on our phones is not enough. Spotify needs to be native in our phones, cars, homes and hotels. Spotify’s brand awareness programs through sponsorships, endorsements and advertising needs to step up its game. When Spotify’s largest day of awareness is Taylor Swift denouncing the platform, you know there’s a much bigger issue at its core.

Getting more paid listeners.

The network value of the platform is low. That is, a framework where the platform improves when your friends are also using the platform (Facebook and Skype for example). Spotify makes the implicit (product mechanics) social value difficult to figure out! Its integration with Facebook is brilliant, but where is the native value in also having your network on the platform?

User incentive, or explicit value, of the platform is nearly non-existent as well. Why can’t I give my friend a referral code for X free months of premium and in return, receive X free months of premium back? And it doesn’t have to be based on free service either. Have a friend use your referral code and receive two free tickets to Spotify’s Artists of the Year Tour featuring Coldplay, James Bay, and Twenty One Pilots. Okay, I made that tour up, but I’d be trying to get all of my friends to sign up for Spotify Premium with my referral code if this were true.

The Future.

We have quite some way to go in music streaming platforms. Whether it’s Spotify, Apple, Pandora or another platform that wins in the long term, one will ultimately dominate the majority. Just like how there’s one Amazon, there will be one music streaming platform that today looks a lot like Spotify.

With more users on the platforms, more music will be listened to and therefore paid for. This means more money in the pockets of the rights holders. So artists, songwriters, record labels and publishers should embrace the platforms, not run from them. This is the future of the recorded music business.

Until mass adoption happens, recorded music is not where artists will make their core dollars. The true money is made in licensing, touring and merchandise sales. May the glorified circus continue in the music industry as we all await the day a recording artist can make a living through recorded art once again.

About the Author

Matt Lee owns a marketing agency in Houston, TX. Having previously worked with Nettwerk Management, Ron Shapiro and a handful of other labels and artist management firms in Nashville and New York, he experienced the highs and lows of the music business and hopes to influence the future of the recorded music industry. He can be reached via email at matt@inboundconsultant.com or follow him on Twitter.