On the fight for fair fees in digital streaming

By Erin Griffith , written on March 18, 2013

From The News Desk

Last week at SXSW, I moderated a panel on fees for digital music streaming startups featuring a variety of stakeholders. I promised a recap; here it is.

In one corner is a music industry that's lost two thirds of its value in the last ten years. In the other, a crop of digital streaming companies aiming to change the way people consume music. In the middle are the artists and the government.

As Patrick Reynolds of Triton Digital, Julia Betley of RCA Records, Patrick Laird of the band Break of Reality, and Chris Harrison of Pandora Media debated the finer points of royalties legislation on last week's panel, one thing stuck out to me: Lost in the debate altogether is the fan.

What the industry seems to ignore is that the modern consumer wants to consume media when and where they want. Forget whether that's a reasonable expectation or whether its economically viable -- it is what's happening. Media companies from Netflix and Spotify to the New York Times and Andrew Sullivan have proven we are willing to pay for access to media we like, increasingly so. Now the challenge is to give consumers what they want while allowing artists and the media companies to thrive -- or at least survive -- doing it.

That's difficult because, as we can't stop saying, "analog dollars are digital pennies." Consumers know that a domain name doesn't cost as much to build as a printed magazine, so we don't like to pay the same price for digital content. (The exception to that is the Wall Street Journal, which charges just $4 extra to deliver 30 print editions to your door on top of your $22 monthly digital subscription.) Likewise we know a digital file should not be as expensive as a packaged CD, so we pay less, or simply buy the single.

By contrast, print media has accepted its future as a smaller business. There are fewer jobs for writers, and the remaining ones require you to write 20 soul-sucking versions of "Lady Gaga Pantsless in Paris" per day. It's depressing to think about. But innovative businesses from Buzzfeed to the Atlantic are finding new ways to monetize and support journalism. They are making plenty of mistakes along the way, but at least they're forging ahead with new ideas instead of lamenting the salad days of $4 a word.

This is what the music industry is grappling with. Digital album sales will not produce the same margins CDs did. And CDs are not coming back; no one is operating under that delusion. But the supposed future of music -- digital streaming -- is struggling, and it all goes back to royalties. The two leaders in digital streaming, Spotify and Pandora, pay so much in royalties that they have not managed to turn a profit, despite their respective $3 billion and $2.3 billion valuations. Pandora pays more than 60 percent of its revenue out in royalties. Spotify's percentage is even higher, equating to $500 million in 2012.

Currently Pandora is leading a legislative charge to lower the fees it pays through a third party called SoundExchange. The rates, set by the government, are up for re-evaluation in 2015. Earlier this year Pandora and an unlikely partner, traditional radio player Clear Channel, threw their support behind the Internet Radio Fairness Act (IRFA) to try to lower the fees they pay. That didn't go so well -- a coalition of 125 artists including Billy Joel and Missy Elliott spoke out against the act, and Congress opted not to vote on it in this session. The act is "in hibernation."

So to summarize: Digital streaming is the future, but the companies ushering us into this future are being crippled by costs. In my preview of the panel, I noted that the labels have not adapted their business models to this new digital reality. They think streaming sites, which pay 60 to 70 percent of their revenue to artists, aren't paying enough, but their deals with artists are less benevolent.

When asked if breakdown of record labels' contracts with artists had changed over the years, RCA's Betley declined to discuss any details or even general trends. The gist of her argument against lower fees for streaming companies was that this is hurting artists. Further, Pandora agreed to these fees. If Pandora can't build a profitable business around the fixed costs it agreed to, then that's not the labels' problem. (I'm paraphrasing.) Beyond that, the fees have already been lowered once. She emphasized that her company is not anti-streaming or anti-innovation -- 60 percent of album sales at RCA are now digital.

In other words, the labels like the idea of streaming, but they don't want to concede any revenue in order to keep it alive.

Pandora's Harrison argued that it is not fair that digital streaming sites carry such a heavy burden when traditional radio pays nothing for its music, and satellite radio's fees are just 9 percent of revenue. No one on the panel disagreed with him. So the answer is to raise fees for traditional radio. Except, wait, Clear Channel is too leveraged to pay more. Clear Channel has worked out a bit of a plea bargain where it pays a tiny fee for radio streams with some small labels in exchange for lowered digital streaming royalties on its digital outlet, iHeartRadio. None of the three majors have bitten yet. So the answer is to raise fees for Sirius, which appears to be healthy. And Pandora and Spotify can continue to waffle along unprofitably.

To me, the most interesting perspective came from the musician on the panel. Patrick Laird from the cello rock band Break of Reality has frequently been trotted out by Pandora as an example of the good they're bringing to the music industry. I was expecting some well-rehearsed pro-Pandora talking points, but his point of view was actually authentic. His band makes at least $16,000 a year from Pandora streaming fees. That's impressive, but not how the musical act makes a living. Break of Reality pays its rent with the tours and iTunes sales that Pandora has facilitated. When Pandora launched in Canada, Break of Reality was able to reach new fans and plan a tour there. Sales on iTunes shot up in that region. Same for Australia and New Zealand, he said. A cello rock band had no chance of airplay on traditional radio, but thanks to Pandora, the band's four members can make a living as musicians, without a record label.

When I asked if Break of Reality was an anomaly, like Amanda Palmer's famous $1.2 million Kickstarter campaign, he said yes and no. Pandora worked for Break of Reality, because the band is outside the mainstream, but has a unique value proposition and a demand. Digital streaming will not be a savior for all or even most bands.

Laird was also clear in distinguishing digital radio a la Pandora and on-demand streaming like Spotify. Spotify and its brethren offer access instead of ownership; Pandora offers access that leads to ownership. Spotify gives what consumers what they want and will pay for -- everything, everywhere, anytime. Six million people are paying Spotify $120 a year for that kind of access, more than they've ever paid for music before. The problem is that that money is distributed among so many artists that it is not meaningful to any one of them.

Spotify's Daniel Ek said at SXSW that he wanted to increase music consumption overall, which would lead to more artists getting paid for more streams. That's why the company's payments to artists grew to $500 million last year year, versus $500 million in its first four years of existence. Pandora has gone in the opposite direction, recently lowering the cap on its mobile streaming because it can't fill the growing inventory with ads fast enough.

There are studies that show that streaming services have led to a decrease in music piracy. Even if those are accurate, the streaming services will never make up 100 percent of the revenue that artists and labels lost when music went digital. Despite an enlightening debate, we're nowhere closer to figuring out what is fair for streaming fees. We just know that we, the demanding modern day consumers who are willing to occasionally pay for media, would like these services to stick around.

[Illustration by Hallie Bateman]