Lowery posted a royalties statement showing he was paid $16.89 in songwriter royalties from Pandora after Cracker’s hit 90s song “Low” was streamed 1 million times on Pandora
David Lowery of Cracker - Photo: Jason Thrasher
Why did the industry tank?
As noted above, the whole music industry is shrinking:
But before we get into the recent shrinkage, we can’t talk about the music industry without talking about Napster. In 2002, then-president of the RIAA Hilary Rosen said, without equivocation, that “Napster hurt record sales.” On the surface, she might be right. Between 1999 and 2001, when Napster was operating, the revenue generated by the music industry dipped from $14.6 billion to $13.7 billion:
But let’s look more closely at the data. During that interval, revenue from non-single CD sales actually rose slightly, from $12.8 billion to $12.9 billion. It was the singles (and cassette tapes) that took the biggest hits. Before high-speed Internet became the standard in American households, it might take your average Napster user hours (or days!) to download one song. Twitter investor Chris Sacca, who used to work at a record store, told us at a recent PandoMonthly event that the Napster days were actually pretty good for CD sales. A person would download one song, fall in love with it, and then head to the record store to buy the CD rather than spend the better part of a week downloading it.
Napster wasn’t the only factor at play. According to Business Week, labels put out 20 percent fewer new releases in 2001 than in 1999, and 14 percent fewer releases in 2002. Meanwhile, as the industry’s inventory shrank, its prices increased faster than the rate of inflation. Cultural forces were also at work. By 2003, the “boy band bubble,” which drove the massive successes of the Backstreet Boys and ‘N Sync, popped.
Did Napster hurt the music industry? Yes, but only indirectly, despite the recording industry’s claims, and in a far more disruptive way. It inspired Steve Jobs to create iTunes.
iTunes and the shift to singles:
In a Rolling Stone article celebrating iTunes’ 10th anniversary, Steve Knopper writes, “Steve Jobs, Apple's founder and chief executive, saw Napster, MP3s and the Internet a different way. By late 2002, he believed music fans clearly wanted to download songs they liked in an affordable and easy way rather than driving to Tower or Best Buy or some indie record store to buy them on $15-to-$18 CDs. But during this period, the record industry had no affordable, easy and legal option allowing this to happen. Jobs saw opportunity.”
Jobs fought music executives hard on pricing. But in the end, the industry caved, desperate to convince a new generation raised on Napster to start paying for music, even if it was on Apple’s terms. But by ceding pricing, the record companies lost control of their product. Now albums were back down to an affordable $9.99. Singles were $0.99. On top of that, virtually any song was available as a “single,” not just the tracks chosen by the record label. Gone were the days of dropping $15 on one album for only a couple songs you liked. Just as newspapers became unbundled around the same time, with the expensive foreign bureaus no longer subsidized by the cheap, popular gossip pages, the album was similarly disrupted. An artist’s 8-minute instrumental Krautrock song was no longer subsidized by the bubblegum pop hit on Side A.
The data supports this consumer shift: Since 2004, when the RIAA began calculating digital sales, digitally-downloaded singles have outsold albums in terms of both revenue and units sold.
How do artists get paid from iTunes?
With iTunes, Apple implemented its own revenue-sharing model: Apple would get 30 percent upfront, which is actually a smaller cut than the 42 percent that went to retail stores and distributors under the compact disc model. Meanwhile, the songwriter gets $0.09 per song, while the payment to the performing artist is negotiated between the label and artist (15-to-20 percent is still an industry standard).
How come label execs hate iTunes so much?
Because after iTunes, no one would pay $17 for an album ever again. Not only that, the emphasis on singles over albums hurt record labels’ bottom line. While the impact of Napster on CD sales was negligible, each year since iTunes premiered the industry has been stuck in a freefall, with sales revenue from albums and singles, both digital and non-digital, dropping from $11.2 billion in 2003 to $5.4 billion in 2012.
But iTunes isn’t the only thing causing record sales to plummet. What about other types of piracy?
We all know there are still pirates in the post-Napster world: a whopping 250 million of them who reportedly use BitTorrent clients each month. That said, it’s difficult to calculate how much piracy has affected music sales. Not surprisingly, the International Federation of the Phonographic Industry (IFPI) and the RIAA say it’s had an enormous effect. For example, the IFPI says that after cracking down on peer-to-peer piracy in France, the country’s iTunes sales rose 22.5% for singles and 25% for digital albums. But Europe’s Institute for
Prospective Technological Studies
isn’t convinced. The group researched the behavior of 16,000 listeners across five countries and concluded that “
digital music piracy does not displace legal music purchases in digital format,"
and “there is unlikely to be much harm done on digital music revenues." By and large, the respondents said the music they pirated would have gone unpurchased had they not stole it. Others argue that piracy leads to legitimate purchases like concert tickets.
There’s a high probability that the respondents underreported their bad behavior: No one likes to fess up to perceived wrongdoing. And with the huge number of people using torrent clients, it’s hard to imagine modern-day piracy having no impact. But to say it’s the only, or even the primary factor causing the music industry’s woes, is disingenuous.
(Note: I’m talking exclusively about music piracy. Movie and software piracy are completely different beasts.)
...What about Pandora?
Despite record labels’ long history of shortchanging artists, and despite monumental cultural shifts in the way we purchase and consume music, two companies receive the lion’s share of blame for the industry’s woes: Spotify and Pandora.
(Before going any further, we should note that while people like to lump Spotify and Pandora together, they are completely different types of services with different legal responsibilities when it comes to royalties. Spotify, MOG, Deezer, and Rhapsody are “streaming music services.” Users search for a song and listen to it on-demand. They negotiate licensing deals with record labels and pay royalties accordingly. Pandora, on the other hand, is a
“webcaster.” Although users have some control over what bands or genres they hear, users cannot listen to specific songs on-demand. Because of this distinction, Pandora is treated more like a radio station, and therefore the royalty rates it pays are set by the government.)
The artist diatribes against Spotify and Pandora are legion, but one of the most recent high-profile examples came from David Lowery, the lead singer of Cracker and Camper Van Beethoven. Lowery posted a royalties statement showing he was paid $16.89 in songwriter royalties from Pandora after Cracker’s hit 90s song “Low” was streamed 1 million times on Pandora (the actual royalty payment was around $42, but Lowery shared it with his bandmates).
What? This is an outrage! How did Pandora get away with this?
First off, remember that there are two kinds of royalties: songwriter royalties and performance royalties, a point that often
gets lost when comparing royalty rates across different services and formats. The $42 was Pandora’s cut for songwriters.
Meanwhile, terrestrial radio stations pay no performance royalties because it’s considered “publicity” to the artist and the label. In fact, labels often pay the radio station, not vice-versa (how do you think Limp Bizkit became big?) As Pandora CEO Tim Westergren wrote in a blogpost, “If major market FM stations paid the same rates as Pandora, based on audience, some would be paying thousands of dollars for every song they played.”
On the other hand, radio stations do pay songwriter royalties. Lowery says he received around $1,300 from radio last year for “Low.” In other words, comparing royalties from terrestrial radio to Pandora is like comparing apples to oranges, or Kurt Cobain to the Jonas Brothers. Terrestrial radio pays songwriters more and its rates are not mandated by the government. Pandora pays performers more and its rates are mandated by the government. One play on Pandora counts as one person listening. One terrestrial radio play could reach millions at a time. It’s a shame that the new models prioritize the performer over the songwriter (that’s why Adam Lambert left RCA. His label wanted him to make an all-covers album.) But it’s a lot easier to get on Pandora than to get on FM radio without major label assistance. Even 2013’s out-of-nowhere success story Macklemore needed a leg up. “You really cannot get a radio hit at this point without major label backing,” Billboard’s Gary Trust told NPR.
Unlike Pandora, Spotify’s performance royalty rates are not mandated by the government because it isn’t a radio station -- users listen to what they want, when they want it. Instead they pay out royalties and licensing fees based on pre-arranged agreements with record labels (Spotify would not comment on the details of these). To make matters more confusing, Spotify pays artists in proportion to their popularity on the service, claiming “We will pay out approximately 2 percent of our gross royalties for an artist whose music represents approximately 2 percent of what our users stream.” Therefore it’s difficult to say exactly how much an artist makes off Spotify, although we do have some anecdotal evidence. Lowery says Spotify pays about .6 of a penny per play, and estimates from a recent New York Times article came out to be about the same. But that’s only for paid-tier customers. Streams from non-paid customers, the article notes, pay out 90 percent less. And as always, the record companies take a cut.
Here’s where we stand with iTunes, Pandora and Spotify royalties (because the numbers are dependent on individual contracts and licensing deals, these are estimations):
Per track, iTunes pays $0.105 in performance royalties (15 percent of what the record label keeps) and $0.09 in songwriter royalties, totalling $0.19 per download.
Pandora pays $0.0011 per play in performance royalties, of which approximately 45 percent goes to the artist, resulting in $0.000495 per play. The songwriter royalties are harder to estimate, but if we go by Lowery’s statement, it’s $42.25 for 1 million plays, or $0.000042 per play, resulting in a total of $0.000537 per play. A song would have to be streamed about 350 times to catch up to iTunes 19 cent per download rate.
Spotify’s negotiations are more opaque and variable so we’ll have to go with the best estimates we have. For paid listeners, the average is about $0.006 per stream. Let’s say half of that goes to the artist (that’s how Lowery says his contract works), which would amount to $0.003 per play. But only 6 million of its 24 million users pay for the service. For streams from non-paying users, the rate is estimated to be only one-tenth of that, or $0.0003 per play, which is actually worse than Pandora’s rate. That’d be over 600 plays to catch up to iTunes.
That’s why artists like Thom Yorke have removed their music from the platform. Yorke tweeted, "Make no mistake new artists you discover on #Spotify will no[t] get paid. Meanwhile shareholders will shortly [be] rolling in it. Simples."
Naturally, Graham James, Head of US Communications for Spotify, sees things differently. Spotify doesn’t displace sales, he says. It helps drive them: “If you look at the biggest albums of the past ten months: Mumford
and Sons, Justin Timberlake, Daft Punk, Kanye... The first weeks when those albums come out they have monster sales weeks, great digital downloads, and record-setting weeks on Spotify,” emphasizing that all three revenue sources lead to an artist’s ultimate financial success. James also claims the company is working more on discovery tools to give unsigned bands a chance they might not have without Spotify. The company previewed these features last week.
The tension between artists and streaming services like Spotify and Rhapsody will not be easy to reconcile. On one hand, the services provide artists and record labels with a valuable tool to deliver their music to listeners. And to anyone who thinks Spotify is greedily withholding royalties for the sake of profits, know that in 2012, Spotify doubled its revenue, and yet, due to licensing fees it pays record labels, the company still failed to turn a profit.
But on the other hand, it isn’t a musician’s responsibility or a record company’s responsibility to help Spotify make money. Even Spotify says it could be profitable if it focused less on growth. Maybe $9.99 a month is too low a fee for unlimited ad-free streaming on desktop and mobile. Maybe Spotify or one of its competitors can find more novel ways to monetize, like charging more for better sound quality, or offering advertising on branded radio shows. Or maybe it will take someone like Steve Jobs to invent a completely new model. Of course none of this helps artists right now.
What if more artists went independent?
That’s one way artists could potentially take home more in royalties, or at least have more leverage in negotiating royalty deals. Josh Antonuccio, a music business lecturer at Ohio University and co-owner/operator of 3 Elliott Studio in Athens, OH, says that’s where he sees the market trending. “Artists want to have more control,” citing acts like Macklemore who stayed independent even after he had become popular enough through touring and hustle to be signed to a major label. That’s not to say Macklemore didn’t get help from the majors. But instead of going all in on a record deal that covered all aspects of publishing, recording, marketing, and distribution, Macklemore hired Warner Music Group to help get his song on the radio and
“I want you to think about running, booking, maintaining a tour without email or a cell phone”
his album in stores. Taylor Swift has a similar arrangement. Although Universal handles her distribution, her songs and albums are released under her independent label, Big Machine. Even bands like Stone Temple Pilots that have been on a giant record label for two decades are going indie.
How has touring changed? Can’t bands make money that way?
Yes! Ticket sales and merchandise sold on tour can create a decent chunk of revenue for bands, at least when compared to receipts earned from album sales and song streams. Morrison says that touring was always his band’s biggest source of cash, even if they struggled to break even. That said, touring is expensive, and to make matters worse, artists may have to dip into touring revenues to pay back advances and other production costs to their label.
Lance Dashoff, who used to work for Ari Emanuel’s talent agency William Morris and now runs the concert startup Loudie, says the digital age has brought some unique challenges to live performers. “It's a bit over saturated,” he says. “There's just a significant amount of more people touring all of time.”
As a result, promoters are putting more of the risk on the shoulders of the bands, Dashoff says. “A lot of deals, even for mid-level artists, are going the way of the promoter or venue saying, ‘Let's see how many tickets you sell and you'll get a percentage of the gross.’” That’s a far cry, he says, from the days when a band could be guaranteed a $10,000 payout regardless of whether 500 people showed up or 10 people showed up.
Of course, there’s at least one aspect of touring that’s improved with technology: “I want you to think about running, booking, maintaining a tour without email or a cell phone,” Morrison says. “It makes me think of Christopher Columbus or Vasco da Gama. You disappear for months at a time.”