The music industry is still screwed: Why Spotify, Amazon and iTunes can't save musical artists

Pandora, Spotify and Beats aren't making a profit. If they never do, your favorite band will need a day job

Published June 20, 2014 11:44AM (EDT)

    (<a href=''>SimmiSimons</a> via <a href=''>iStock</a>/Salon)
(SimmiSimons via iStock/Salon)

What if the future of streaming music is a bust?

On June 9, a musician named Michael St. James tapped into a deep vein of insecurity shared by all artists challenged by the ongoing digital transformation of society. He wrote an article posing the question: What if it just doesn't work out? What if, ultimately, there isn't enough money for artists to make a living? As it is, the streaming companies who've risen to prominence in recent years -- Pandora, Spotify, Beats -- aren't making a profit. And what happens if they never make a profit?

The question's timing was, in one sense, odd. There's never been more hype about streaming than right now. More hours of music are being streamed than ever before, and more people are paying monthly subscriptions to streaming services than ever before. (Spotify alone claims 10 million paid subscribers.) New entrants to the business are rushing in. Three days after St James' lament, Amazon added a streaming music component to its Amazon Prime package of goodies. On June 18, Google confirmed it is launching a new paid streaming service, and T-Mobile announced that it would allow unlimited music streaming in all of its data plans. And way back on May 28, Apple announced it was buying Beats by Dre, a deal that many observers assume was all about getting control of Beats Music, yet another streaming service.

For some industry veterans, streaming is the long-awaited solution to the woes of an industry that Napster and the Internet broke. For one thing, it's so consumer friendly that music piracy has become a non-issue. Marc Geiger, a prominent agent and veteran of several music-related start-ups, told a digital music biz conference in February that in less than a decade there could be 500 million -- or even a billion! -- people signed up for streaming services worldwide, paying fees that averaged 12 bucks a month and steadily go up over time. ("The history of subscriptions says that they start cheap and they go up -- always," said Geiger, somewhat ominously. "Once they have the subscription needle in the arm, it's very hard for it to come out."

Total global revenue in such a scenario, said Geiger, would be $72 billion at the low end, downright dwarfing the high of $38 billion a year that the music industry made at its peak in 1999.  That's right -- better times than ever are supposedly around the corner.

If Geiger's correct, there would certainly be a lot more money to spread around the music industry, perhaps even enough to keep everyone -- songwriters, artists, tech start-ups and labels -- fat and happy. But there are some significant problems with Geiger's thesis, not the least of which is it assumes that the average music consumer will be happy to pay double or triple what he or she was paying at the peak of the physical album era. That  seems questionable.

Evangelism for the future also doesn't speak very coherently to the current moment, a free-for-all of arm-twisting, litigation and desperation. Even more to the point, when the music industry was doing great, artists were still routinely getting screwed by the labels. More money doesn't necessarily change that dynamic, if the distribution remains skewed.

In one of the great ironies of the digital revolution, the closer you look at the music business after all these years of disruption and contraction, the more obvious it appears that the companies currently in the best position are the record labels -- the very same companies that first ignored and then furiously resisted the digital earthquake. Songwriters are making a fraction of what they used to make, artists have to land massive hits to see significant income, and the streaming companies themselves aren't making a profit -- but the labels earn serious cash from licensing their catalogs to Pandora and Spotify and Amazon and Beats. In fact, in many cases, the labels are part owners of the very companies they are licensing those catalogs to. Nice work if you can get it!

But that's not necessarily good news for the little guy, the artist who is struggling to make ends meet. Even for those canny enough to have embraced YouTube and figure out how to sell their songs on iTunes while touring 365 days a year, some artists report that it's gotten harder to make a living as streaming has started to boom.  As revenue from paid downloads falls, streaming is not picking up the slack.

So Michael St. James asks a good question. And no one really knows the answer. A hundred or so years ago, technological advances made it possible to make a living from recording one's creative output. Today, technology seems to be taking it away.

But that doesn't mean that there isn't any hope at all. For some battle-scarred veterans of the last decade of upheaval, the answer turns out to be more technology, not less. Jack Conte, one-half of the band Pomplamoose, is the founder and CEO of the artist-focused crowd-funding start-up Patreon. He is convinced that given the right tools, people will directly support the artists they love. Music won't go away, because we need it. We want it. We have to have it. So if streaming doesn't solve the financial quandary so many artists find themselves in, we, the people, are going to have to do it ourselves, as patrons and communities.

* * *

"It's a big conundrum," says Brian Zisk, the founder of SF MusicTech Summit, an annual conference held in San Francisco that tracks the evolution of digital music. "We are never going back to the days when people can sell tens or millions of CDs. So then the question is: How does the compensation happen."

The answer is a huge, insanely confusing mess. Even Kafka would throw up his hands at the labyrinth of rules governing how performers and writers get paid. Zisk ran though a few examples: When old-fashioned radio plays a song, the songwriters get a cut, but the performers get nothing. When Internet radio streams a song, the songwriters get a pittance, while performers get much more. Pandora, which doesn't allow on-demand listening, pays royalties according to a different regime than Spotify, which does allow on-demand selection.

Just to be able to play any songs at all, the streaming services must make huge upfront payments to license the rights to the catalogs of music owned by the three major record labels -- and there's absolutely no requirement that any of that cash go back to songwriters and artists. It heads straight to the bottom line.

It's an environment ripe for litigation and arm-twisting and paradox. Conglomerates like Sony have sub-labels and publishing company subsidiaries. So Sony, as a record label, on the one hand charges Pandora a huge amount for rights to its catalog; and then, as publisher, threatens to withdraw all its music from Pandora because it believes the royalty rates are too low.

Meanwhile, just following the convolutions of the years-in-the-making showdown between Pandora and the two organizations that represent the vast majority of songwriters and publishers, ASCAP and BMI, is worth a book of its own. Both sides have sued each other over the question of what should be a "fair market rate" for songwriter compensation for streamed songs. Pandora has won the majority of legal battles so far, but on June 6, the Justice Department announced that it was opening a review of the 75-year-old "consent decrees" that govern how songwriters get paid for the performance of their works. I talked to several industry insiders and none of them had a clue as to what the Justice Department would decide.

The songwriters have a fair reason to be angry at Pandora. Executives like founder Tim Westergren and former CEO Joe Kennedy have already cashed in on their IPO to the tunes of millions of dollars. In fact, Westergren may have made more money in 2013 by cashing in his stock options than Pandora paid to ASCAP in total for steaming royalties!

But at the same time, Pandora, as a business, isn't making enough of a profit to pay songwriters much more than they are already getting. You can't squeeze blood from a stone. There is much less money being made in the music business now than in 1999. Changing the laws to give higher royalty rates to songwriters will either drive the streaming companies into bankruptcy or force the record labels and performers to reduce their own cut.

Cue: More litigation!

The real winners, right now, are the labels. They are generating hundreds of millions of dollars in revenue just from licensing, with no need to pay for distribution or manufacturing. Spotify alone is reported to have paid $100 million to the three major labels to license their catalogs.

And guess what: 25 percent of Spotify is owned by the three major labels. That's a great business -- licensing your catalog to a company you own a big piece of. If Spotify goes public or gets sold off to some big cable company or Internet giant, the labels get another huge payday. And in many cases these upfront payments are tied to overall revenue -- so as the streaming piece grows, the licensing revenue surges.

So much for disruption!  The dinosaurs -- Sony, Universal and Warner -- are doing quite nicely, thank you.

Zisk told me that the best way to survive in such a climate is to work entirely outside of the label ecosystem. Artists need to control their own rights to their work, which enables them to take advantage of whatever new opportunities emerge. Everyone agrees that artists need to think of revenue from their recorded work as just one income stream out of many -- including live performances, merchandising, commercial endorsements. But Zisk's advice doesn't apply all that well to the retired songwriter watching the royalties form his 1970s-era classic rock chestnut evaporating.

Perhaps even more disturbing: When I asked him to point me to an artist who, by controlling his own rights, exemplified his thesis, he told me to contact Jack Conte, of Pomplamoose.  But when I talked to Conte, the answers got muddier.

On the surface, Pomplamoose look like a great example of a band that figured out how to thrive in the digital era. Conte and his partner Nataly Dawn embraced YouTube early. They figured out how to make viral, entertaining covers of popular hits, siphon off a hardcore of fans who would buy both their covers and original songs on YouTube, and even scored commercial gigs with bit outfits like Hyundai. So they were doing all right. Conte bought a house, and built two studios.

But Conte laughed outright in disbelief when I asked if Pomplamoose was able to get any money out of streaming. "Less than tens of dollars," he said. "Our Spotify stream is irrelevant."

Meanwhile iTunes sales are declining.

"We all see the writing on the wall," he said. "The idea of someone buying an à la carte song in 2020 -- that is a totally unrealistic prospect."

With the rise of streaming, he says, "the monetary value of a song has dropped to nothing."

"The big problem," says Conte, "is the tech industry is creating consumer-first companies. They're not creating creator-first companies. The purpose of these companies is to make the product as cheap as possible. And that's why creators are struggling so much to make a living."

So what happens when you see the writing on the wall, and you are an artist within shouting distance of Silicon Valley? In Conte's case, he decided to embrace the beast rather than litigate it. Twelve months ago, he founded a company dedicated to nurturing creators, called Patreon.

"Here's the way I see it," said Conte. "A hundred years ago, people figure out how to take art and put it on a physical thing. They figured out how to record light or music on a wax cylinder, and then we built huge industries on top of getting that physical media to consumers. With the Web, to get your art from creator to fan is an entirely free process, and essentially what's going to happen is that we are going back to a time when the physical thing didn't exist. In the past Michelangelo and Beethoven depended on patronage to make money. What's weird is actually selling your art for money. Except for that hundred-year blip, patronage is how it's always been and that it is how you are going to be. I honestly feel the crowd-funding revolution is the future of how artists are going to make money. People are going to step up to the plate."

Conte eats his own dog food, as Silicon Valley entrepreneurs love to say. He isn't taking a salary, but if you want, you can become a patron of Pomplamoose on Patreon. For example, you can agree to pledge a dollar to be paid to Pomplamoose every time they release a new video. Right now, Pomplamoose videos are making around $5,000 per release, and the band releases two or three a month.

In total, Conte says Patreon has distributed $2 million to 25,000 artists in one year. There's no going back, only going forward.

* * *

In 1906, the bandleader John Philips Sousa produced a remarkable document decrying "The Menace of Mechanical Music." Recorded music, he warned, would destroy the essential culture of music.

SWEEPING across the country with the speed of a transient fashion in slang or Panama hats, political war cries or popular novels, comes now the mechanical device to sing for us a song or play for us a piano, in substitute for human skill, intelligence, and soul... I foresee a marked deterioration in American music and musical taste, an interruption in the musical development of the country, and a host of other injuries to music in its artistic manifestations, by virtue – or rather by vice – of the multiplication of the various music-reproducing machines. When I add to this that I myself and every other popular composer are victims of a serious infringement on our clear moral rights in our own work, I but offer a second reason why the facts and conditions should be made clear to everyone, alike in the interest of musical art and of fair play.

It is tempting to file Sousa's lament away with every other naysayer who has ever sounded the warning trumpet against the advancement of technology, right next to Plato's warning that the invention of writing was a cultural disaster. Recorded music, after all, made it possible for generations of artists to cash in on their intellectual property without playing for pennies every night on the road or hawking T-shirts. But Sousa was also not all that wrong in some important aspects. It's no accident that the peak of piano manufacturing was a hundred years ago. Back in the day, we may well have been more active creators of music than passive consumers.

And now we live through another enormous transition. It's all happening again -- it's been happening for decades. And no matter what the Department of Justice decides on how songwriters get compensated, or how loudly we may scream at how artists are getting screwed, we are going to be just as successful in resisting the current era of upheaval as Sousa was in trying to stop the evil of machine-made music.

But $2 million in 12 months for Patreon artists is nothing to sneeze at. Clearly, as a society, we do want to support the creation of art and music. So we are faced with a terrific, inspiring challenge: finding ways to use technology to build connection and community even as the old world disintegrates around us. Michael St. James is right to worry about what will happen around the corner, but probably wrong to fret about music itself being doomed. Because we'll still need it to free our souls. And if people stop making it because they can't make a living from their streaming royalties, then we'll be forced to flock to places like Patreon, to keep music alive.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Amazon Itunes Michael St. James Music Music Business Pandora Patreon Record Labels Spotify Streaming Music