The Beggars Group chairman, Martin Mills, recently told the Guardian that “(…) 22% of the label group’s digital revenues came from streaming – and that the majority of its artists earn more now from track streams than track downloads” in 2012. Though the article does not report absolute figures, the revenue can be considered rather high with a roster including Adele, Jack White and The xx.
A member survey of the global rights agency Merlin representing more than 20,000 indie labels including Beggars Group/XL Recordings, Rough Trade, Naïve, Tommy Boy, Cooking Vinyl and Naxos unveils that “92% of respondents saw streaming and subscription revenues grow between 2011 and 2012, with a third enjoying increases of more than 100%” as recently reported by Musicweek. The same study shows that 24% of indies across the world and 30% of European indies generated more income from streaming than downloads in 2012.
These figures suggest that music streaming seems to be a promising revenue source for record labels. In the following the economic potential of music streaming and the underlying business model are analysed from the record labels’ perspective.
Is Streaming the Next Big Thing? – The Labels’ Perspective
Music streaming as a revenue source for record companies
In a Musicweek interview Merlin’s CEO, Charles Caldas, expects to collect in excess of $65m for its members from streaming platforms in 2013 – an average of US$ 3,250 per member. If we consider a usual distribution of 20% of the members receiving 80% of the total revenue, successful labels such as Beggars/XL get US$ 13,000 on average whereas the less successful ones have to be content with US$ 812.50 annually.
If – as Beggars Group chairman Martin Mills points out – the artists are paid a 50% share of the streaming revenue at best, a successful indie label will earn US$ 6,500 in 2013. A less successful label, in contrast, will have a net profit of US$ 406.25 – not much to cover the overhead costs. However, not many labels pay that much to their artists and may earn a higher net profit.
The major music company Warner Music Group, which is owned by Access Industries, states in its recent quarterly report (April-June 2013) that “(…) sales of online and mobile downloads have constituted of the majority of our digital Recorded Music and Music Publishing revenue, that may change over time as new digital models, such as streaming and subscription services, continue to develop” (p. 40). In the past few quarters the streaming and subscription revenue grew at a significantly higher rate than download revenue in the recorded music segment. In the nine month period ended June 30, 2013 digital revenue grew by 14% to US$ 735m compared to the past period. “This increase was driven by equally strong growth in both downloads which increased $51 million and in streaming and subscription services which also increased $53 million, offset by the decline in mobile revenue of $12 million which reflected the continued decrease in demand for ringtones and ringback tones” (Quarterly Report for the 3rd quarter 2013, p. 51).
In the music publishing segment streaming revenue is also the driver of the growth of digital revenue. “The increase in digital revenue reflected continued growth in digital downloads of $7 million and streaming and subscription services of $10 million [in the nine month period ending June 30, 2013]“ (Quarterly Report for the 3rd quarter 2013, p. 56).
These figures highligh the increasing relevance of streaming and subcription revenue for Warner Music Group. Nevertheless it just accounts for 13% of the total recorded music revenue, if we assume a 30% share of streaming in the digital revenue.
The licensing policy of the record companies
The ongoing negotiations for Apple’s iTunes Radio shed light into the labels’ licensing policy. As the Wall Street Journal reported Apple will pay the major labels 0.13 cents per stream as well as 15% of net advertising revenue in the first year of iTunes Radio’s operations. In the second year the rate per stream will increase to 0.14 cents plus 19% of ad revenue. However, Apple has only to pay for songs that are listened to longer than 20 seconds. In addition, it won’t have to pay royalties for songs that are already in the listeners’ iTunes libraries.
The iTunes Radio’s rate is therefore slightly higher than Pandora’s pureplay rate of 0.12 cents for 2013, which will be increased to 0.13 in the next year. Pandora, however, pays its licensing fees not directly to copyright holders but to digital collecting society SoundExchange. SoundExchange channels 50% of the royalties collected from non-interactive Satellite radios, Internet radios and webcasters such as Pandora, Sirius XM and iHeartRadio to rights owners, 45% to featured artists and 5% to non-featured artists and session musicians. According to the annual report of 2012 SoundExchange distributed US$ 459.7m (of US$ 507.3m total royalty revenue). Half of the royalties – US$ 229.9m – is paid to 28,000 rights owners (mostly record labels) – an average of US$ 8,209 per rights owner. If we consider that 20% of the right owners receive 80% of the royalties, a successful label gets an average of US$ 32,836 and a less successful one US$ 2,052 annually from SoundExchange.
In contrast to non-interactive webcasters, inter-active streaming services such as Spotify, Deezer and rdio pay an essentially higher royalty rate to the owners of the master recording. According to a New York Times article Spotify pays 0.5 to 0.7 cent a stream (or $5,000 to $7,000 per million plays) for its subscription service and 90% less for its Freemium model to the labels.
Thus, Universal Music Group’s sub-label Start Track would earn US$ 115,000 from the 19.2m streams of the current summer hit “Blurred Lines” by Robin Thicke featuring T.I. and Pharrell in the US during, which were reported by Spotify for the 17 weeks period from April to August 2013 if all streams are made by subscribers.[1] Universal Music, however, has to share the royalty income with the artists. If we consider a 50% share at best for the artists, the label earns a net revenue of US$ 57,500 for nearly 20m plays on Spotify. However, the real revenue is very likely lower since most of the streams are made by Freemium users.
Phil Hardy (2013: 138) calculates a 36% record label’s profit margin for a CD and a 12% margin for a single download. For a CD sold at a retail price of US$ 15 the label receives US$ 4 per copy. If the CD goes gold (500,000 copies) the record company earns US$ 2m. The album’s titles therefore have to be downloaded approximately 17m times (12 cents per download) and be streamed 666m times by subscribers on Spotify U.S. and similar inter-active services (0.3 cents per stream) per year to equal the label’s net profit from a gold-CD.
Figure 1: Number of units sold for a U.S. gold and platinum certification
This rough calculation highlights that a label’s business model cannot be based on revenue from music streaming alone. A share in the ad revenue as negotiated by the major companies with Apple’s iTunes Radio is a very important complementary income source. The role model could be YouTube which offers a share in the ad revenue. In the before mentioned Guardian article indie sources say that 40% of YouTube ad revenue goes to the owner of the recording (usually the record label). The label gets another 20% if it can claim ownership of the video. 30% of the ad revenue goes to YouTube/Google and the songwriters and publishers have to share the remaining 10% between them.
The major music companies’ streaming business model, however, is not just based on royalties from licensing their music catalogues, but also on guarantees and upfront payments by the streaming platforms. The amounts paid are undisclosed but in larger markets such as France, Germany, UK and the US it can be suspected that payments in double-digit millions are usual, which need not to be shared with the artists.
In addition, the majors have also a stake in streaming services. It is reported (Hardy 2013: 285) that the three recorded music majors own 18% of Spotify. Universal Music Group teamed up with Korean consumer electronics giant Samsung to launch the mobile music streaming service Kleek in several African countries in March 2013.[2] And Access Industries, the parent company of Warner Music Group, recently led a consortium to raise US$ 60m for the music subscription service Daisy operated by Beats Electronics[3] and invested US$ 130m for the French streaming operator Deezer in October 2012.[4] In the case of an initial public offering (IPO) a stake in a prospective stock exchange traded company can be a very profitable investment. Pandora co-founder and chief strategy officer Tim Westergren owned 3.6m shares worth US$ 57,6m when the company went public on June, 15, 2011.[5] He sold shares totalling US$ 19.7m between January 2012 and August 2013 according to NASDAQ insider trading information. Walden Venture Capital, which invested US$ 9m in Pandora in March 2004[6] owned 28.2m shares worth US$ 451,2m when the company went public in June 2011 and sold approximately 2.5m shares in 2012 for US$ 32.7m (NASDAQ trading information service).
An IPO by Spotify, thus, can be a very attractive for the stakeholders. If it is true that Spotify is currently valued at US$ 4,0bn[7], the 18% stake of Universal Music Group/EMI, Sony Music Entertainment and Warner Music Group would be worth US$ 720m.
Conclusion
To sum up, the figures unveiled by the record companies highlight that music streaming and subscription revenue is currently a growing but limited side-business accounting for roughly 10-15% of the total revenue. The music major’s streaming revenue model, however, does not only rely on the royalty income from music streaming services, but also on a share in ad revenue and in holding shares of promising streaming platforms. If these companies go public the initial shareholders will profit from the market capitalization. Despite remarkable growth rates streaming revenue cannot replace other income sources such as physical and other digital music sales. If physical sales further decrease and if the growth of download sales flattens in the near future, the record companies’ total revenue of record companies will shrink without an essential increase of streaming revenue and income from other sources such as licensing, management services and expanded rights deals (so called 360° deals). Therefore, streaming won’t be the main revenue stream for record companies, but an essential part of a revenue mix from several sources.
Sources<
Billboard.biz, “Deezer Raises $130 Million“, October 6, 2012 (retrieved August 26, 2013).
Billboard.biz, “Spotify Raising $100m for Expansion“, November 11, 2012 (retrieved August 26, 2013).
Billborad.biz, “Universal Launches Pan-African Mobile Streaming Service Kleek“, March 13, 2013 (retrieved August 29, 2013).
Billboard.biz, “Warner Music’s Blavatnik Leads $60 Million Funding of Beats’ Daisy Music Subscription Service“, June 3, 2013 (retrieved August 26, 2013).
Guardian, “How record labels are learning to make money from YouTube”, January 4, 2013 (retrieved August 23, 2013).
Hardy, Phil, 2013, Download! How the Internet Transformed the Record Business. London etc.: Omnibus Press.
Musicweek, “Streaming now earns more than downloads for third of EU indies”, May 16, 2013 (retrieved August 23, 2013).
New York Times, “How Pandora Slipped Past the Junkyard“, March 7, 2010 (retrieved August 26, 2013).
New York Times, “As Music Streaming Grows, Royalties Slow to a Trickle”, January 29, 2013 (retrieved August 26, 2013).
Pandora Media Inc., SEC-filing Form S-1, February 11, 2011 (retrieved August 26, 2013).
SoundExchange, Annual Report for 2012 (retrieved August 26, 2013).
Wall Street Journal, “Apple Spells Out iTunes Radio Terms”, June 26, 2013 (retrieved August 23, 2013).
Warner Music Group, Quarterly Report, period ended June 30, 2013 (retrieved August 28, 2013).
[1] The number of streams are retrieved from the Spotify Top-50 streaming chart (http://charts.spotify.com/). A royalty rate of 0.6 cents is considered for an US-stream of “Blurred Lines”.
[2] Billborad.biz, “Universal Launches Pan-African Mobile Streaming Service Kleek“, March 13, 2013 (retrieved August 29, 2013).
[3] Billboard.biz, “Warner Music’s Blavatnik Leads $60 Million Funding of Beats’ Daisy Music Subscription Service“, June 3, 2013 (retrieved August 26, 2013).
[4] Billboard.biz, “Deezer Raises $130 Million“, October 6, 2012 (retrieved August 26, 2013).
[5] Pandora Media Inc., SEC-filing Form S-1, February 11, 2011, p. 104.
[6] New York Times, “How Pandora Slipped Past the Junkyard“, March 7, 2010 (retrieved August 26, 2013).
[7] Billboard.biz, “Spotify Raising $100m for Expansion“, November 11, 2012 (retrieved August 26, 2013).
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