The end of the download: How streaming changes music patronage and the business

Every time he picks up a music magazine, Scott LeGere realizes how paramount music streaming is in his life

“I almost hate reading those magazines now because when I read a blurb about a record, I want to push the picture and hear it,” said LeGere, a professor of music at McNally Smith College. “It’s just a reminder that based on streaming’s convenience and immediacy, there’s really no putting the genie back in the bottle.”

As a music business professor and producer, LeGere says this month’s announcement that Apple plans to roll out its own streaming service marries the music industry’s future to streaming.

“It wasn’t that long ago that jumping in your car and going to a store was the most convenient way to find music. Now, it’s a Google search bar,” LeGere said. “That a company like Apple, that has the largest music store in the world, would cannibalize its own music sales tells you where the future is.”

Since Pandora was founded in 2000 and Spotify came to the U.S. in 2011, music streaming has quickly outpaced downloading as the primary way people listen to music.

In 2014, digital track and album download sales accounted for 113.2 million out of 227 million total sales, which included physical music like CDs and vinyl.

To give streaming a comparable sales model (even though songs and albums aren't sold via streaming), the industry created stream equivalent albums — or the number of streams it takes to match the $7.50 wholesale revenue of a CD or a downloaded album. It currently takes 1,500 streams to equal the wholesale value of a downloaded or physical album, and in 2014, stream equivalent albums accounted for 46.9 million in album "sales."

The stream equivalent album figure nearly doubled year over year, a significant detail when overall album sales — including CDs and vinyl — slid by 8 million in one year, from 235 million to 227 million.

When artists have to hope their songs get streamed more than 1,000 times to make the same money they once did on a 10-track album, it's easier to see why high-profile musicians like Taylor Swift and Jay-Z have pushed back against the streaming model. In their efforts, both Swift and Jay-Z aren't fighting against streaming per se, but against a model that pays artists and others in the music industry fractions of pennies per stream.

In March, Jay-Z launched Tidal, an independent streaming service owned by musicians in what the service hoped would "forever change the course of music history." So far, that course has been difficult for Tidal; since its launch, Tidal has lost two CEOs and as a strictly paid, $10-a-month service, it competes with free versions of streaming services and free websites like YouTube.

Swift, on the other hand, has had more success in dealing with the issue of streaming. An outspoken opponent of file sharing and streaming as undervaluing music in general, Swift has held her music from streaming services like Spotify. This summer, she threatened to withhold her mega-hit record "1989" from Apple's proposed streaming service. Apple, to its credit, agreed to pay artists on the new service per stream in response.

While steaming’s future in the music industry seems secure, industry players are wondering what the future will look like, and whether or not the innovation it brings can change the label-driven music industry for the better.

“(Streaming) is not about demand or the Internet being good or bad, it’s more about the value we put into it and how to foster what we get out of it to make sure some of it gets back to the creators," Future of Music Coalition CEO Casey Rae said.

New economics

For most of its history, the business model of the music industry has been pretty simple. The music label was the bank, arranging agreements with artists to finance and control production, distribution, royalties and other costs associated with making music. When iTunes entered the picture, Apple paid royalties to an artist or label per download.

But the current business model for streaming is wholly different. For starters, LeGere says, musicians no longer need a label’s help with every aspect of putting out an album.

“Why did artists sign with labels? You needed distribution,” LeGere said. “Now, you can do it from your bedroom.”

Rae says streaming also raises important questions about access to art as more and more music, movies, TV and other art is distributed online: Who gets to put a price tag on culture?

“If you’re paying more than $100 for an Internet connection and more for mobile plan, how much money does someone have for a streaming subscription?” Rae said. “There are bigger questions about the economics of cultural production that haven’t been resolved, and streaming is one of them.”

Calculating what streams are worth is also complicated at best and at worst, Rae says, it’s unfair.

“The actual way that streaming platforms distribute royalties doesn’t benefit artist or the fans,” Rae said. “If I went to Spotify and listened to one band and only their songs for a month, Katy Perry might still get my money.”

The monetary value of a stream likely varies between each streaming service. When Rolling Stone first tried to crunch the numbers in 2011, it told readers in a story update that the equations involved were “too ridiculously complicated to reproduce here.”

This spring, tech website The Verge published a leaked copy of Sony’s contract with Spotify, which revealed how complicated the pricing process can be.

In order for Spotify to provide songs from Sony’s catalog, the contract stipulates a few equations that come into play under different circumstances.

The first formula is a basic revenue sharing model, where Sony gets a cut of Spotify’s monthy gross revenue. The others are based on what’s called usage-based minimums and subscriber-based minimums (for Spotify’s subscription service). If either or both of the usage amounts for any given month exceed the revenue share, Sony gets that total instead.

All of this is just to determine how much Sony gets from Spotify — what the artists get is another issue entirely. How much an artist gets paid from streaming revenue depends on the royalty terms of the artist's individual record contract.

But even when artists do get revenue from streaming, it's likely not much. Definite numbers are hard to pin down, but Spotify initially revealed in 2013 that artists made fractions of pennies per song stream — around $.007.

As The Verge reported, the contract favors Sony, and the formulas in no way reflect Spotify’s value.

“Spotify has argued that … this is not a reliable yardstick for Spotify’s value to artists,” reporter Micah Singleton wrote. “This contract shows why.”

One reason it’s more difficult to calculate royalties on a streaming service is because of its close resemblance to radio, says Monmouth University music and theater professor Joe Rapolla.

“What artists see right now is the combination of sales going away and this new mechanism that doesn’t pay them as much. But it never was supposed to,” Rapolla said. “Terrestrial radio wouldn’t pay them much, either, but streaming gets a bad rap because the difference is that Spotify is on-demand, replacing the lost sales (because people listen to streaming more than they buy) and radio isn’t.”

While some contracts like the leaked Sony and Spotify agreement still favor major music labels financially, LeGere says that will likely change, especially with business powerhouses like Apple getting on board with streaming.

“The only way you get music labels on board is to not be a competitor,” LeGere said. “Yet.”

Different money, similar problems

While the business practices of streaming services are not clear, the debate over how much streaming benefits artists is a question better aimed at music labels, says professor Larisa Mann of the Steinhardt School of Culture at NYU.

Mann says so far, streaming services don’t have much control over how much they pay artists in part because they’re interested in obtaining song catalogs, meaning that it’s easier to negotiate with a label rather than individual artists. Currently, however much that an artist is paid in royalties each time a song is streamed depends largely on the musician’s contract with the label.

“Throughout the history of the music industry, contracts with artists (that favor the labels) have always been a problem, and the problem with streaming is very similar,” Mann said. “Like labels, there are not a lot of ways to hold streaming services accountable to artists.”

That’s where the issue is clouded for the public, LeGere said, because artists like, most notably, Taylor Swift, who refuse to allow their music on Spotify aren’t upset about streaming, but with how their record contract classifies streaming. Many contracts have clauses that stipulate that artists help pay for “infrastructure investment” whose charges could include investing in new technology like streaming.

LeGere says that labels used artist earnings to help pay for new technology and infrastructure development, for example, when CDs became more popular than cassettes and the industry had to transition to buying, shipping and selling CDs. In some cases, LeGere said, labels could use the same argument to take a piece of an artist's earnings for streaming, but the problem is that the music industry never had to pay for any software or hardware (like servers) involved in launching streaming services like Spotify.

“You’re billing this new technology back to the artists under the guise that the technology demanded new infrastructure on behalf of the label,” LeGere said. “It’s absurd. It clouds the issue.”

Mann says it’s a new example of an age-old problem in the music industry.

“Streaming services have been good at providing music listeners with access to a lot of music very easily,” Mann said. “But it seems that whoever has control of the catalogs doesn’t have the artists’ best interests at heart.”

As streaming continues to gain popularity, LeGere says it’s important to remember that while there are flaws in the current streaming system, it’s never been a better time to be a music lover.

“We might not be buying all of our music, but Coachella sold out in 44 minutes this year. More people can make and distribute music on their own — it’s fantastic,” LeGere said. “This is the Renaissance we’re walking into right now.”

Streaming isn't just a convenient way to get music for those with a high-speed Internet connection, it's poised to change the music industry as we know it — again.

Email: chjohnson@deseretnews.com

Twitter: ChandraMJohnson