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Music Streaming… does the business model really stack up?

Updated: Sep 19, 2021

Local original artists have become streaming’s bitch… but who’s got streaming by the balls?

Let’s be frank here — the major global streaming services are not really in the driver’s seat, are they? In reality, the music industry is (still) dominated by major record companies, and the viability of streaming services is largely dependent on the terms of their negotiations with these companies. Just like the lowly artists themselves — they have to pay to play.

This situation favours neither the sustainability of the streaming services themselves, nor the huge numbers of independent artists attempting to benefit from the systems, as the lion’s share of revenue and recognition goes back to the artists represented by those major labels.

Dastardly deals with the Big Three.

Global streaming services have struck costly deals with the major record companies whereby they pay millions of dollars in licencing for access to a record company’s catalogue of music. These agreements also require the streaming services to pay a small amount of money every time a song is streamed. This money is shared between the record companies and their stable of artists in proportions specified by the recording contracts those artists have signed — the streaming services do not influence how record companies and artists divide this money. This model favours record companies, as the large upfront access fees they earn do not have to be shared with artists.

The three major music labels (Sony BMG, Universal and Warner) made $6.93 billion combined from streaming in 2018, or more than $19 million in daily streaming revenue. Broken down further, the trio of labels generate nearly $800,000 per hour from music streaming services alone. Per hour. Let that sink in. How much did you make from streaming last year? Yeah, me neither…

These labels then take as much as 80% of streaming earnings as part of traditional record deals. More popular artists, with enough leverage to negotiate a more favourable royalty split are still likely to share no more than 50% of their own music revenue. The labels, in essence, get two, very large, bites of the cherry.

So, the single, biggest cost for most major, global streaming players is the royalty fees paid to major music labels and their ‘signed’ artists, and while Spotify boasts that 70% of revenues go back to rights holders as royalties; who holds those rights is the real issue. Spoiler — it’s not independent musicians or labels.

Spotify takes a hybrid approach to music streaming by using both a free, ad-supported version and a subscription-based premium version. These two products generally make up almost the entirety of its revenue stream, with advertising making up around 10% while subscription fees account for almost 90%.

Current statistics show that Spotify’s subscriber base continues to grow. As at April 2019, more than 100 million users worldwide were paying for Spotify Premium, but the company had 217 million monthly active users worldwide. That’s right — less than half of the company’s users are paying for the service. Paying subscribers are subsidising the free consumption of music by over 100 million people, a gap that widened compared to 2018 figures.

It reportedly takes up to 12 months for Spotify to break even after a free user becomes a paying subscriber (if they ever do). In essence they use the free subscription as a loss leader — a very costly customer acquisition plan with a small revenue from advertising offset. But this doesn’t take into account the value of the music itself, or the creative labour on which this ‘free service’ builds its foundation. In fact — it really doesn’t give a damn.

So what about our PROs — can’t they help?

It seems that many performers and businesses don’t really understand the function of their own Performer’s Rights Organisations (PROs). Most businesses and organisations use music in some way and APRA AMCOS (and other PROs) licence these businesses and organisations to use that music. They collect those licence fees and distribute them as royalties. Sounds good right?

While these PROs act in the best interests of musicians within the limits of their capacity to do so, it is unclear exactly how much of the money collected by APRA AMCOS (and others) stays in Australia and New Zealand, as much of it is paid in the first instance to the local offices of multinational music publishers. They might represent a mix of local and offshore songwriters and might pay each creator a different share of royalties depending on their deal (those pesky labels — at it again).

APRA AMCOS states that 60% of licence fees collected are paid to local songwriters, composers and music publishers. But it also acknowledges that this figure includes payments to local publishers for international works (i.e. the local publishers would then on-pay a portion of that revenue to another publisher overseas).

It’s also important to note that PROs are currently limited in their ability to obtain real-time play data from the businesses they licence and the publishers to whom they distribute royalties; as the tracking of this information is fragmented and complex. Instead they distribute royalties to proxy sources such as radio, streaming services and music recognition technology. Bottom line though, they are neither promoters, nor are they a union.

Ultimately, the amount of licence fees distributed overseas is determined by the amount of overseas music consumed in Australia, which is what we need to change.

While directly influencing the volume of Australian music consumed in Australia is not within the licencing agencies’ remit — it is The Pack Australia’s sole purpose. We intend to ensure that real-time play data is communicated directly to our PROs, so that every artist who gets played, gets paid, and so that royalties are going directly back into the Australian music industry and not being funnelled offshore to the major labels, who are, as noted, already benefit from streaming revenues in a very significant manner.

Can The Pack Australia really do it better?

We understand that music streaming is here to stay — so instead of swimming against the tide, we’re using streaming technology, but building a very different business model from the current players in the market. We’re creating a ‘community’ model, where our artists are valued content creators, users and beneficiaries — not an exploitable commodity or economic product. We’re streaming… with a social conscience.

The Pack Australia is, for that reason, deliberately discriminatory. In essence The Pack will only work with local, original artists and independent labels — to provide them with a launchpad from which to kick off their careers. This is not a space for already successful Australian or International artists, because although we’d love for them to be advocates for The Pack, we know that, once an artist is signed to a major label, they are already well-placed to access the distribution and marketing channels, and administrative support they need to find performance opportunities, tours and to generate music sales. In short — if you’re famous, you don’t need us!

The Pack intends to build a music streaming platform which will enable any Australian business that plays recorded music on their premises (including retail, entertainment, hospitality / food and beverage, commercial enterprise or other), to stream local (only), original music directly to their location.

As an industry focussed social enterprise, The Pack will do something no other music streaming service has done — which is to forge interactive, mutually beneficial connections between local businesses, local listeners and local musicians, with the support of local government, in order to save our local music industry.

This will mean that in local businesses, local artists are profiled. It will mean that within local government areas, local artists are collecting (and spending) local money. It will mean real, convertible exposure, real, active data and real, local community connections.

With no labels to hold The Pack to ransom, and no ‘free services’ to support, The Pack has only its operational costs and overheads to manage and can scale realistically and viably by expansion into new territories. While variable costs are still a factor, our costs will not rise at a rate that outstrips our revenue. Our membership base and variable costs will remain proportionate. And with each expansion into new territory, The Pack brings with it the all of the social and cultural benefits that underpin its purpose.

This means that the social impact commitment that The Pack makes to its beneficiaries — local, original musicians — will not be reliant on long term debt equity or finance but on a revenue positive, sustainable business model which, while not a global giant, will become a local hero.

We’re looking for real opportunities to provide a locally viable counterpoint to a system that has, perhaps inadvertently, created an invisible inequity in the music industry… and with the support of our industry — we know we can turn this ship around.

Want to know more about The Pack Australia? Jump on to our website and download our White Paper here!

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