The Elusive Obelus: Streaming’s Problem With Denominators

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”

Ernest Hemingway, The Sun Also Rises.

No matter how much people would like to deflect it, the unvarnished per stream rate is an ever diminishing income stream.  Given the number of calculations involved for both sound recording and song, it is likely that the total end-to-end cost of rendering the accountings for the streams costs more than the royalty earned on that stream by any one royalty participant.  Solving this problem is the difference between a short-term stock-fueled sugar high and a long-term return of shareholder value for all concerned.  So now what?

If you’re someone who receives or calculates streaming royalties, you’re already familiar with the  problem of the ever-decreasing per-stream rate.  The Trichordist’s definitive “Streaming Price Bible” for 2018 confirms this trend yet again, but simple math explains the problem of the revenue share allocation.

Remember that the way streaming royalties are calculated in voluntary agreements (aka “direct deals”) revolves around a simple formula (Formula A):

(Payable Revenue ÷ Total Service Streams) x Your Streams = Per Stream Rate

Which may also be expressed as Formula B:

Payable Revenue x (Your Streams ÷ Total Service Streams) = Your share of revenue

(Formula A and B are also known as “the big pool” in the user-centric or Ethical Pool models.)

Here’s the trick–it’s in the correlation of the rate of increase over time of the numerator and the denominator.  If you focus on any single calculation you won’t see the problem.  You have to calculate the rate of change over time.  Simply put, if the numerator in either Formula A or Formula B increases at a lower rate than the denominator, then the quotient, or the result of the division, will always decline as long as those conditions are met.  That’s why the Streaming Price Bible shows a declining per-stream rate–a contrarian fact among the hoorah from streaming boosters that sticks in the craw.

Services make these accounting calculations monthly for the most part, and they are calculated a bit differently depending on the service.  This is why the Streaming Price Bible has different rates for different services, rates that vary depending on the terms of the contract and also the amount of “Payable Revenue” that the service attributes to the particular sound recordings.

The quotient will also vary depending on the copyright owner’s deal.  If you add downside protection elements such as contractual per stream or per subscriber minimums, then you can cushion the decline.

This is also true of non-recoupable payments (such as direct payments that are deemed to be recoupable but not returnable, or “breakage”).  Nonrecoupable payments are just another form of nominal royalty payable to the copyright owner, and increase the overall payout.  And of course, the biggest nonrecoupable payment is stock which sometimes pays off as we saw with Spotify.  These payments may or may not be shared with the artist.  (See the WIN Fair Digital Deals Pledge.)

So each of the elements of both Formula A and Formula B are a function of other calculations. We’re not going to dive into those other elements too deeply in this post–but we will note that there are some different elements to the formulas depending on the bargaining power of the rights owner, in this case the owner of sound recordings.

So how is it that the per-stream rate declines over time in the Streaming Price Bible?

Putting the Demon in the Denominator

Back to Formula B, you’ll note that the function “Your Streams ÷ Total Service Streams” looks a lot like a market share allocation.  In fact, if the relevant market is limited to the service calculating the revenue share allocation, it is a market share allocation of service revenue by another name.  When you consider that the customary method of calculating streaming royalties across all services is a similar version of Formula B, it may as well be an allocation of the total market on a market share basis.

Note that this is very different from setting a wholesale price for your goods that implies a retail price.  A wholesale price is a function of what you think a consumer would or should pay.  When a service agrees to a minimum per stream or per subscriber rate, they are essentially accepting a price term that behaves like a wholesale price.

For most artists and indie labels, the price is set by your market share of the subscription fees or ad rates that the service thinks the market will bear based on the service’s business goalsnot based on your pricing decision.

Why is this important?  A cynic might say it’s because Internet companies are in the free lunch crowd–they would give everything away for free since their inflated salaries and sky-high rents are paid by venture capitalists who don’t understand a thing about breaking artists and investing in talent.  You know, the kind of people who would give Daniel Ek a million dollar bonus when he hadn’t met his performance targets, stiffed songwriters for years and gotten the company embroiled in multimillion dollar lawsuits.  But had met the only performance target that mattered which was to put some cosmetics on that porker and push it out the door into a public stock offering.  (SPOT F-1 at p. 133: “In February 2018, our board of directors determined to pay Mr. Ek the full $1,000,000 bonus based on the Company’s 2017 performance though certain performance goals were not achieved…”)

But long-term, it’s important because one way that royalties will rise is if the service can only acquire its only product at a higher price.  Or not.  The other way that royalties will rise is if services are required to pay a per-stream rate that is higher than the revenue share rate.  How that increase is passed to the consumer is up to them.  Maybe a move from World Trade Center to Poughkeepsie would help.

The Streaming Price Bible is based on revenue for an indie label that did not have the massive hits we see on Spotify.  In this sense, it is the unvarnished reality of streaming without the negotiated downside protection goodies, unrecoupable or nonreturnable payments, and of course shares of stock.  While some may say the Bible lacks hits, that’s kind of the point–hits mask a thousand sins.  Ask any label accountant.

Will Consumption Eat Your Free Lunch?

Let’s say again: The simple explanation for the longitudinal decline of streaming royalties measured by the Streaming Price Bible is that the rate of change across accounting periods in the “Payable Revenue” must be greater than the rate of change in the total number of streams in order for the per-stream rate to increase–otherwise the per-stream rate will always decrease.  Another way to think of it is that revenue has to increase faster than consumption, or consumption will eat your lunch.

What if you left the formula the same and just increased the revenue being allocated?  Services will probably resist that move.  After all, when artists complain about their per-stream rate, the services often answer that the problem is not with them, it is with the artist’s labels because the services pay hundreds of millions to the labels.

We don’t really have much meaningful control over what goes in the monthly payable revenue number (i.e., the mathematical “dividend” or numerator).  What kinds of revenue should be included?  Here are a few:

–all advertising revenue from all sources
–e-commerce transactions
–bounties or referral fees, including  recoupable or non-refundable guarantees
–sponsorships
–subscription income
–traffic or tariff charges paid by telcos
–revenue from the sale of data

Services will typically deduct “small off the tops” which would include
–VAT or sales tax
–ad commissions paid to unaffiliated third parties (usually subject to a cap)

Indie labels and independent artists may not have the leverage to negotiate some of these revenue elements such as revenue from the sale of data for starters.  Other elements of the revenue calculation for indie labels and artists will also likely not include the downside protections, subscriber target top up fees and the like.

And of course the biggest difference is that indie labels (at least not in the Merlin group who may) typically do not get nonreturnable advances,  nonrecoupable payments, or stock.

Is That All There Is?

Why should we care about all this?  There is a story that is told of negotiations to settle a lawsuit against a well-known pirate site.  One of the venture capitalists backing the pirates told one of the label negotiators that he could make them all richer through an IPO than any settlement they’d ever be able to negotiate.

The label executive asked, lets’ say we did that, but then what happens?  You say we should adapt, but you’re still destroying the industry ecosystem so that there’s nothing left to adapt to.  The most we could make from an IPO would cover our turnover for a year at best.  And we would be dependent on your success, not our artists’ success.

Then what?

 

 

 

 

 

Five Reasons Why Apple Could Succeed as a Music Publisher

Music Business Worldwide reports in a fairly detailed article that Apple is launching a music publishing division–crucially based in both London and the US run by Elena Segal (recently of my old alma mater, Mitchell Silberberg).  This doesn’t necessarily mean that Apple will be competing with publishers to acquire catalogs or for songwriter talent just yet, but that is something worth thinking about.

Personally, I don’t see a catalog buy in Apple’s future.  They don’t need the money or the headache–Apple is in the Benjamin business not the Lincoln business.  If Apple moves into publishing my bet is that it will be strategic and not tactical.

But I could see a world in which Apple leveraged their creative staff and audio recording toolshed to attract developing writers.  Even a $1 million investment in a stable of developing songwriters could go a long way.

Here’s five reasons why Apple has a strategic advantage over almost everyone in getting into the creative side of the business:

1.  History:  Largely due to Steve Jobs’ genius, Apple has always attracted musicians and artists to the company’s products.  When I attended the “Hell Has Frozen Over” launch of iTunes for Windows, even a blind man could see how much the artists who Facetimed with Steve on stage really enjoyed the guy.  Remember that iTunes for Windows launched with a whole bunch of exclusive tracks from top artists–all of whom were happy to participate.  How much happier would they be to actually include Apple in their creative careers?

2.  Trust:  Apple has never been sued by songwriters or artists.  They give a straight count for iTunes.  Not to say they shouldn’t be audited, trust but verify, etc., but on balance most people trust their Apple statement not to be shady.  That is definitely not true for Spotify, or…ahem…others.  Plus, Apple doesn’t hand out stock to lower royalties for everyone.

3.  Fairness:  As an old Apple lawyer once said to me, we decide what’s fair and then we jam it down your throat.  Which sounds harsh, but remember that Apple Music’s long-time honcho Eddie Cue made a huge change in Apple Music’s launch strategy because Taylor Swift tweeted that she thought the free period was too long.  One tweet and that was that.

Eddie Cue

Contrast this exchange with billionaire Daniel Ek’s tone deaf mansplaining to the same Taylor Swift over windowing.

4.  Longevity:  In a time of ups and mostly downs in the music industry, Apple isn’t going anywhere.  There’s no fear that key executives are going to pump and dump their Apple stock on a get-rich-quick scheme that benefits everyone except the creators.  So the long term interests are aligned.

5.  Playlists:  You don’t get the impression that Apple is going to use the 21st century algorithmic equivalent of Top 40 to create a version of George Orwell’s versificator that bears about as much resemblance to a Ponzi scheme as it does to a listening experience.  Apple smartly engaged Zane Lowe & Co to keep the human element in a kind of global Radio One.  Artists don’t like to feel that they are simply part of the background music–who can get excited about being on the “Sleep” playlist?  It’s like asking artists if they’d like to sign to Muzak.

I personally find the idea of Apple in the creative side of publishing very attractive because it allows Apple to distinguish itself on values that many creators find compelling:  Transparency, integrity and trustworthiness.

Frankly, we could all do well to promote those values in our business instead of passing laws that try to make the indelible sleaze disappear.

How Accurate are Music Subscription Service Subscriber Numbers?

All of you who subscribe to the New York Times, fly Quantas, use any of a number of mobile carriers or who are in the 6th month of your third Spotify 30 day (or 90) free trial may be interested in this post.

According to Billboard in a story titled “Spotify Officially Hits 50 Million Paid Subscribers“, the “official” announcement came from a tweet:

I found this intriguing–how did we go from “Spotify Officially Hits 50 Million Paid Subscribers” in the headline to a tweet that doesn’t really say the same thing?  Maybe like this?

screenshot_20170224-140304

First, what makes a tweet “official”?  Much less “official” totals of “paid subscribers”?  Finding out may be like asking what makes ketchup “fancy”.

w27cz

Newspaper subscriptions have long been verified by a company specializing in verifying circulation.  Television has the Nielsen ratings, music has Soundscan, and so on.  None of these systems are perfect, but they make it harder to outright misrepresent success in a business where frequently the only people who really know how well they are doing are the people who would like you to believe they are doing well.  This is nothing new, it’s as old as moral hazard.

The quest for truth leads one to independent verification services.

spotify-clown-car
A clown car for 6 million streams

Reuters reported the same story with a more subdued headline: “Spotify Says It Reached 50 Million Subscribers“.  A little more factual, a little less Kool Aid.

This is important because I have yet to find anyplace that Spotify actually says the 50 million subscribers were “paid”.  The press leaped to that conclusion, but Spotify did not say that.

And neither does Apple, a company which is already public and has to be careful what they say about the money they are making or not making.  Yet somehow nobody transforms Eddie Cue’s statement that Apple has “well past 20 million subscribers” into an “official” statement implying a verified number of “paid” subs.

Actually–it may well be that there is a significant revenue difference between “paid subscribers” and “subscribers”.  As the Music Industry Blog wrote last year:

[T]here is a more important story here: Spotify’s accelerated growth in Q2 2016 was driven by widespread use of its $0.99 for 3 months promotional offer. Which itself comes on the back of similar offers having supercharged Spotify’s subscriber growth for the last 18 months or so. In short, 9.99 needs to stop being 9.99 in order to appeal to consumers.

As Spotify has been “dominant” in the music subscription business for a while now (and yes, I mean that in an antitrust sense of “dominant”), it seems that it’s high time for someone to independently audit the veracity of the number of their subscribers.

Or would the Securities and Exchange Commission like to rely on a tweet?