CMU Trends

Trends: Top five streaming challenges

By | Published on Friday 9 February 2018

Digital Challenges

It’s been a while since we’ve put the spotlight on challenges in the streaming sector. CMU Insights presented a new speed briefing on that very topic at the Output conference in Belfast this week. Based on that, here is a CMU Trends overview of the top five streaming challenges.

Streaming is fast becoming the key revenue stream for the recorded music industry. While vinyl and public performance revenues are also increasing, it is the monies paid into the record industry by the streaming platforms – chiefly the paid-for premium streaming platforms – that are booming. And it’s the streaming boom that has taken the recorded music market back into growth.

All of which means the record industry is now hugely reliant on the streaming sector, and that reliance only increases as each month goes by. Meanwhile, the streaming sector is dominated by a very small number of major players.

While it is true that, in the CD era, in most countries a couple of big retail chains often dominated the market, there was still a healthy indie retail sector alongside all that, and the dominant players differed from country to country. In streaming you have a small number of key operators worldwide. In premium streaming really that’s two: Spotify and Apple Music.

Meanwhile, although the streaming sector is paying ever increasing chunks of money into the music industry, the streaming services themselves are all loss making. In most cases they are still making considerable losses each month.

This is partly due to aggressive global growth strategies which are expensive to implement. Some of the streaming firms are also still basically tech start-ups, which tend to over-hire and over-spend as part of their “we’re taking over the world” narrative. Of course, the vast majority of any one streaming firm’s revenues are immediately paid over to the record companies, music publishers and collecting societies in royalties.

That the streaming firms are all loss-making today is not in itself a problem, given it’s still relatively early days for the sector. Obviously these companies need to go into profit at some point in the not too distant future.

Under the current business model, streaming is a scale game. The model only works if a service can reach a massive userbase of paying subscribers. How many subscribers a service needs is hard to calculate, given the value of any one subscriber varies depending on their package and country. However, it is likely hundreds of millions.

At current growth rates, only Spotify and Apple, and possibly some of the Asian services, seem likely to ever reach that kind of scale. Amazon could also catch up with its rivals by pushing its music services through its Echo devices. Google could be another significant player if it could get the paid-for version of YouTube properly off the ground, but that adventure has been slow going to date.

Either way, everyone in the music community needs enough services to become profitable in the coming years. As to date it is premium subscriptions that bring in the real money, that means persuading more people to pay to stream music.

As it currently stands, many more people use the free streaming services like YouTube, SoundCloud and Spotify Free – and in the US personalised radio set-ups Pandora and iHeart Radio – than the paid-for services. What can the streaming sector and the music industry do to persuade more consumers to start paying?

This challenge is partly about marketing, but it is also partly about product. While for proper music fans £120 a year for on-demand access to tens of millions of tracks is a very good deal, for more mainstream consumers it still seems like a lot of money to spend on recorded music.

Although many streaming services offer various discount offers and packages, few are offering alternative subscription products with a fixed price point around £2 or £5 a month. The big question is what would those lower price products look like. They’d need to be better than the free services but sufficiently inferior to the £10 a month product that their launch didn’t result in too many existing subscribers downgrading.

Some services have experimented with a mid-price product in the past, but with mixed success. At the moment Amazon is probably doing the most work in this space, with a cheaper version of its streaming service locked to the Echo device. Though it’s not yet clear whether that is bringing in a new kind of consumer into the subscription streaming domain.

Certainly there remains much still to be done to convert more free streamers into paying subscribers, so to ensure that the streaming sector at large is sufficiently lucrative for the services to profit as well as the labels and publishers.

Another long-running debate in the streaming domain is how the money that does come in – whether through subscriptions or advertising – is shared between the various stakeholders. So that’s labels, artists, publishers, songwriters and the digital services themselves.

There are a multitude of variables, but approximately 50-60% of streaming revenues currently gets assigned to recording rights, with that money then shared between artists and labels, subject to each artist’s label deal. 10-15% is then allocated to the song rights, which is shared between songwriters and publishers, again according to each writer’s publishing deal. The streaming services are ultimately aiming to keep at least 30% of their revenues, even if the advances and minimum guarantees they make to the music companies means that hasn’t always happened in the past.

The debate continues as to whether it is fair that the recording rights routinely get four to five times more of the digital pie than the song rights. Over the last few years we have seen a slight repositioning of that particular split. Each time the streaming services’ deals with the music industry have come up for renewal, some music publishers have pushed their rates up a few per cent, and the labels have concurrently agreed to bring their rates down a few per cent. Though the record industry is still seeing significantly more of the digital dollar than the songwriters and publishers.

Some would argue that there is now a crisis in the songwriter community because of the small royalties writers receive from the streaming services. Though there are a number of issues in that domain over and above how the digital dollar is allocated between the two copyrights. That includes inefficiencies, inaccuracies and delays in the way song royalties are processed and paid, and adjusting to a model where royalties come in over a much longer period of time.

Further repositioning of the recording right and song right split might help address some of the issues in the songwriting community. But the labels – having already given up a few per cent of streaming revenue – are likely to fight any further major re-slicing of the digital pie, arguing that they are still the primary risk taker when new music is put out. Plus we could see the key streaming services seek to increase their share of revenue as their power at the negotiating table increases with each new round of licensing deals.

There is also another separate debate regarding how streaming income is shared. That debate centres on the proposal that the streaming sector should adopt a ‘user-centric’ royalty distribution system, rather than the current ‘service-centric’ approach.

Under the current model, each month a streaming service looks at what percentage of total streams came from any one label, publisher or society’s catalogue, and then allocates that percentage of its total revenues to that rights owner. It then shares that allocated revenue with said rights owner based on whatever revenue share agreement has been reached (subject to any concurrent minimum guarantee commitments).

So – if 25% of a service’s streams in one country were of Universal Music owned recordings, the service would allocate 25% of its revenues in that country to Universal. If it then had a 55/45 revenue share split deal with Universal Music, it would pay the major 55% of the money allocated to the record company’s catalogue.

However, under a user-centric approach, each individual user’s subscription would be divided by the number of streams that user had played that month, and the relevant rights owner would then be paid their share of that bespoke per-stream amount for each play. So the rights owners would earn a lot more from plays by people who only use a streaming service a few times a month, and a lot less from plays by people who are constantly streaming music.

Deezer in particular has been promoting this alternative approach and is trying to persuade the record companies to run an experiment with it, possibly in one territory. The total amount of money coming into the music industry would be the same, but some artists and labels would do better under the user-centric approach, and some artists and labels would do worse.

Some reckon the superstar artist would be the main losers, while middle-level artists would do better, and that fact is a solid argument for shifting over to this alternative royalty distribution system. We will see if that happens.

The long talked about one-stop, global, publicly-accessible database of music rights information remains elusive, even though there are various issues in the streaming domain that a good database would go a long way to fixing.

To recap, the issue here is that there isn’t a single database that tells the world what song is contained in what recording, who performs on that recording, who owns the recording rights, who wrote the song, and who controls the song rights.

This has caused particular issues when it comes to songwriters and publishers getting paid. A streaming service assumes that whichever label or distributor uploads a track controls the copyright, so should be paid everytime that track is played. The label often doesn’t tell the service what specific song is contained within the recording, who wrote it or who published it. The label would argue it frequently doesn’t know.

Because there is no database where a digital service can access this information based on the ISRC code that is attached to each record, the streaming service doesn’t know who to pay song royalties to. For that reason, in most countries the streaming platforms outsource that work to the collecting societies, which provide the digital firm with a blanket licence, and then take responsibility for working out who needs to be paid based on monthly reports of every track streamed on any one platform.

The big exception here, of course, is the US, where on the mechanical royalties side there is no collecting society to offer a blanket licence and work out who needs to be paid. So in America the streaming service must work that out for themselves or pay an agency to do it for them. This process has not gone well and lots of writers and publishers haven’t received their mechanical royalties, resulting in a flurry of multi-million dollar copyright infringement lawsuits.

This is untenable for the streaming services, which would generally pay all the royalties due if only someone could tell them who to pay. Moves are now afoot Stateside to change copyright law, launch a collecting society, offer a blanket licence, and have that society take over the distribution of mechanical royalties. If that happens, the streaming services will be able to shift over in the US to a system more in line with everywhere else in the world.

That doesn’t necessarily mean the songwriters will get paid. Are the collecting societies up to the job of processing all the money? The good collecting societies have invested heavily in developing systems to handle this process, and in Europe work is being pooled by multiple societies into hubs like ICE and Armonia. Opinion is divided over just how well the music publishing sector and its collecting societies are managing the payment of streaming royalties.

If only there was a one-stop, global, publicly-accessible music rights database, the streaming services could take responsibility for making those payments themselves. There have been various efforts to build that database of course, and some are ongoing. Some reckon the streaming services should take responsibility for building said database. That seems an inefficient solution, in that it would be better to have one single database for the whole industry. Plus any database built by an individual streaming company isn’t going to be public domain.

There are tech companies and entrepreneurs out there who are probably better equipped to solve the music industry’s big data problem. Though they’d need access to those databases that already exist, none of which is complete, but which if merged together would be a good starting point. Most of those databases are owned by collecting societies which remain hesitant of sharing too much data, possibly out of fear that a good publicly-accessible music rights database will ultimately result in the societies having less power and a reduced role in the distribution of royalties.

The data problem remains a key issue for the industry to solve. It remains to be seen if any of the ongoing projects in this domain have any success.

The lack of transparency in the streaming domain remains another key issue, especially for artists, songwriters and their managers, who are often left in the dark about the deals between the streaming firms and the labels, publishers and collecting societies, and don’t necessarily have access to regular information about how their music is being streamed and their royalties being calculated.

This is why the UK’s Music Managers Forum put the spotlight on transparency in phase three of the CMU Insights-led ‘Dissecting The Digital Dollar’ project last year. That has resulted in the Transparency Index, a list of the 20 pieces of data and information that managers say they need to properly audit, understand and assess the streaming business.

Some of those 20 pieces of data are already being shared. Most are uncontroversial – in that labels would be happy to share the data – they just need to build systems that efficiently passes the information down the value chain. Some are controversial, in that some labels argue they can’t share specifics about their streaming deals with managers because of non-disclosure agreements in their contracts with the streaming services.

In the next phase of the ‘Digital Dollar’ project, the MMF is encouraging managers to review the labels and distributors they work with, and identify which of the 20 pieces of data and information are being shared. This survey will be used to champion the most transparent labels and distributors, and to guide and encourage others on the way they report to the artists they work with.

That in itself should help foster more transparency. Though law-makers are also monitoring this issue too. The draft European Copyright Directive includes an article calling on labels and publishes to be more transparent with artists and songwriters about how their music is being exploited.

This element of the directive has had much less attention than the safe harbour reforming article. Once the new EU copyright rules have gone through later this year, there will be an opportunity at a national level in each member state to push for new regulations to force the hand of labels and publishers where there is resistance to share important information with the artist and songwriter community.

And finally, we return to the challenge of sustained listening.

Streaming is a fundamentally different business to selling CDs and downloads. No longer is success about building hype around a new release and selling as many copies in the first few months. Now it is all about ensuring fans listen to a track again and again and again over a long period of time. If an artist can score repeat listening on a regular basis over a number of years, streaming can actually be much more lucrative than selling discs and MP3s around the launch of a new record.

The industry at large is still adapting to the new world where music marketing is no longer about a short period of high level hype with the key message “buy our record now”. Today music marketing is about encouraging fans to add tracks to their personal libraries, on playlists that they return to on a regular basis. And it’s about reminding fans from time to time about existing tracks, prompting another flurry of new listens.

Music marketers are rising to this challenge and new approaches and strategies are being employed. However, it’s early days and everyone is still on a learning curve. Meanwhile, even where artists and labels get it right, they still need to adjust to a business where money comes in regularly but in small amounts, rather than enjoying a big pay day shortly after release. And that’s another big learning curve too.

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