You listen to it as your go-to form of entertainment in the car (unless your dad happens to be the resident DJ); it’s there to get you through a particularly grueling gym session; you may be listening to it right now as a form of motivation or procrastination and the odd song might even pop up in your head during an exam. That’s right, it is music, and it is everywhere.
And yet, the way in which we listen to it has changed drastically, from radio waves to Tidal waves, from 8-track to millions of tracks, reams of tape to streams on Spotify. Not only has this phenomenal process of creative destruction revolutionised the way we consume music, but also has a substantial effect on the supply side. We will attempt to investigate just what impact this has had on record labels, artists and the wider economy.
But first, let us brush over the history of music consumption. Thanks to Thomas Edison in 1877, the phonograph was invented, which allowed for music to be recorded and played back for the first time ever. This laid the foundations for musical mass production, which really took root with the flat-disc records in the 1900s, becoming the well-known vinyl record albums; surprisingly, they have stood the test of time to this day. Then came the radio, creating a platform for mass distribution and advertising and the development of popular music can be attributed to this. With TV, the music industry was able to add another string to the marketing bow, with music videos adding a fresh dimension to the music-listening experience.
Then, the age of musical portability began with the cassette tape, most notably the 8-track in the 1960s which rivalled the vinyl record for popularity. The Walkman allowed for even greater portability. After this was the digitisation of music with the CD, effectively the LP’s replacement as it had a much greater capacity, smaller size and superior audio quality, becoming the dominant form of consumption.
Digitisation continued with mp3 computer files, and after the slight debacle which was free peer-to-peer music sharing à la Napster, one device would change the game forever: the iPod, which dwarfed the capacity of everything that came before. The iPod and its various iterations became so popular that they became status symbols and fashion accessories as much as music devices, with the now iconic white earphones being ever-present and a scapegoat for a supposed lack of social interaction in public. iTunes helped bring music directly to the consumers and giving them unparalleled choice and flexibility to buy albums or individual songs.
YouTube has been an immensely popular method of music consumption, as it is free for users (with those five or, heaven forbid, thirty seconds of irritating adverts) and they are able to get the full experience of audios, lyric videos, music videos, dance videos, covers, remixes… all at the click of button.
However, the real music medium on the rise is streaming. The likes of Spotify, Tidal and Apple Music create even more freedom for consumers. With a monthly subscription, consumers are exposed to millions of songs free of adverts which they can download and listen to anywhere. Intuitively this would increase the quantity of consumption: if you went to a party and you either had to pay per drink or pay a fee upfront then drink for free afterwards, you would almost certainly have the incentive to drink more with the latter.
Music streaming is turning out to be the fastest-growing revenue source: in 2015 there were 68 million people with a paid music subscription, compared to 8 million in 2010, with global revenue rising by 45% to $2.9 billion, set to overtake downloads as the main digital revenue stream.
So, how has this change in consumption habits, particularly streaming, affected how the different components of the music industry earn their income?
Let us first consider the six stages to the traditional business model. Artists make music and perform live, post videos or send recordings to scouts in the hope that they get signed by a record deal. Once a deal is signed, the label provides a whole host of services like finance for music production, creative nurturing, marketing, merchandising and organisation of tours. Next comes the manufacturing, distribution and retailing of CDs and LPs and finally consumption.
Thanks to the immense economies of scale and years of vertical integration, record companies control most of the rights to the artists’ material in this model and thus earn the highest share of income. Let us now break down the income distribution from the sale of a physical album. According to the agent Jonathan Shalit, around 30% goes to the label, 20% is VAT and only 15% goes to the artists (songwriters and performers). About 17% goes to the retailer and the rest goes to manufacturers, distributors and copyright administrators. Even though at first glance the 15% sounds quite a measly amount, their cut is actually a lot better than even the likes of Pink Floyd and The Beatles, whose early deals earned them 5% and 2% respectively.
Other sources of income for artists include live performances, which could be concerts, festivals or performance royalties for each radio play (which the labels also earn). They can also earn income through merchandising, endorsements or featuring in another artist’s song. If they are particularly astute, can own their own record labels or launch their own successful business ventures, like Jay Z’s Tidal or Dr Dre’s Beats. However, in order to navigate the ever more complex minefield that is the music industry, recording artists have to have a large entourage to support them, like managers, promoters, music agents and producers, all of which take a portion of the artists’ earnings.
This is changing, and quickly. The rise of streaming and even downloads before that are effectively making manufacturing and retailing redundant, distribution trivial and is doing away with the six stage model. Thanks to the presence of social media, YouTube and cheaper production techniques, even labels may not be necessary.
What does this mean for the labels and the artists? You would think that because of the rise of social media and other mediums for distributing music, like independent labels, aspiring artists have more creative control over their music and thus are able to earn a greater share of income. To an extent, that is true. Boyce Avenue, a three-piece rock band, is very much a product of the digital age. Through its covers of current popular songs, it has accumulated 9 million YouTube subscribers, 3 billion views across its 300 videos and has over 3 million Facebook followers. Thanks to their immense popularity, they have been able to release three studio albums, found their own record label and establish a solid touring foundation. There are many more unsigned or independent artists who establish themselves this way and through platforms like Soundcloud. Chance the Rapper, the recent winner of three Grammy awards including Best New Artist, has not signed with a major label, and is thus independent, after releasing three highly successful mixtapes. Even when signed with major labels, artists have more bargaining power and are able to negotiate more favourable terms thanks to their online following.
However, if artists decide to go independent or earn higher royalties, have to shoulder more of the production costs and have less access to promotion. Quite often these artists, due to the lack of economies of scale their labels can provide, have considerably less mainstream recognition and are less wealthy than a lot of their major-label counterparts.
The rise of music streaming services like Spotify are very beneficial for us consumers, but to artists who rely on them for revenue, good luck paying rent. According to a study by EY and SNEP suggested that, on average, artists only earn around 7% of streaming revenue, compared with labels with 46% of the share. Factoring out taxes, artists have 11% and songwriters and publishers have around 16%: the labels have a staggering 73% of the royalty payments. On Spotify, for every song that is streamed, on average there is a royalty payment of half a penny to the rights holders, which are the artists, writers and labels. This means that, to pay them the same as buying an album worth £10, you would have to listen to 2000 songs, or around 7000 minutes. And that’s factoring in the £10 per month subscription fee. With the free (with adverts) membership, it is even lower. This is allowed to happen because of the obscure and convoluted methods by which artists are paid and precisely why labels are able to adapt and stay ahead. No wonder the likes of Taylor Swift and Radiohead very publicly expressed their dismay at their lack of compensation for their creations; and these are already established, already very wealthy acts.
What does the future look like for the music industry? On the demand side, consumers will want even more convenience and instant gratification at a smaller cost, which can only mean music streaming will become the method of consumption, as opposed to just a method. This will signal change on the supply side: labels may be tightening their grip now, but there will be more artists willing and able to find success independently. More companies like Kobalt, which works with artists to maintain their own copyright and use data to capitalise on a much wider variety of revenue streams, are sure to appear and thrive. Consumers should be excited; artists should be vigilant; labels should be ready for a challenge.
Sources
http://www.nielsen.com/us/en/insights/news/2015/everyone-listens-to-music-but-how-we-listen-is-changing.html
http://www.makeuseof.com/tag/the-evolution-of-music-consumption-how-we-got-here/
https://musicindustryblog.wordpress.com/tag/artist-income/
http://www.bbc.co.uk/news/magazine-23840744
http://www.ifpi.org/facts-and-stats.php
https://musicbusinessresearch.wordpress.com/2015/07/18/music-streaming-revisited-the-problem-of-income-distribution/
https://betterworkingworld.ey.com/disruption/disrupter-series-music-factory
https://www.boundless.com/users/235420/textbooks/business-fundamentals/adding-products-and-services-13/adding-products-and-services-52/examples-of-business-models-from-the-music-industry-245-15548/
https://pulseradio.net/articles/2015/04/how-record-labels-really-make-their-money
https://www.thebalance.com/get-paid-in-your-music-career-2460878
http://www.theverge.com/2015/12/7/9861372/spotify-year-in-review-artist-payment-royalties
