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streaming's big debate

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Hey! Yesterday was my daughter’s first birthday. She is walking everywhere now, which means we have something new to childproof every day! Good times. This past year has flown by.

Before we get to today’s memo, let’s talk about MrBeast moving on from Beast Burgers. It’s another example of where celebrity/influencer/creator-led businesses can struggle. Creators can amplify a good company, but their influence can’t amplify any company and make it good. Plus, prepared food is a challenging game for anyone. I shared similar thoughts on these challenges in my breakdown of Beyonce’s Ivy Park split with Adidas.

​This week’s podcast is about music streaming’s big debate: what’s the fairest way to split the pie? The major record labels want their music to be valued more than the amateurs, bots, and “whale music.” Meanwhile, streaming services want to treat everyone the same. How did we get here? Is there a more straightforward solution?

To break it all down, Lucas Shaw joins me from Bloomberg News. Here are a few highlights from our episode.

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what's the best way to split the pie?

These debates aren’t new. Music’s streaming payout model has been a polarizing topic for years. But when subscriber growth took off in 2017 – 2021, everybody ate. Debating the best payout model felt like more of an academic exercise back then. The arguments for switching sounded like the people who make the case for the U.S. to adopt the metric system. It makes more sense than the current model, but we’re hundreds of years in now.

But now the pandemic boom is over. Streaming’s paid user growth has slowed, especially in the most lucrative markets. Two of the three major labels, Universal Music Group and Warner Music Group, have gone public recently, but their stock prices are down 16% and 11% since their initial offerings. New investors like Bill Ackman and longtime owners like Len Blavatnik want to maximize their interests. The pressure is on to squeeze more money out of the pie.

The streaming services have their own priorities, though. Spotify, Apple Music, and Amazon Music pay nearly 70% of revenue from recorded music back to the rights holders. So any audio tracks that cost less to stream—like podcasts or functional music—it’s in their best interest to monetize that instead. So as those tracks increase and revenue growth decrease, the DSPs feel pressure to make the economics work on their side.

Some streaming services are willing to experiment with labels on a better model. This year, UMG has announced partnerships with Deezer, SoundCloud, and Tidal. Nothing has come of it publicly yet, but I’m not surprised. Those streaming services are more focused on emerging, developing, independent artists. They focus less on the majors’ big goals, like maximizing The Beatles’ back catalog or Taylor Swift’s re-recordings.

It’s a classic case of misaligned incentives across the value chain. The challenges are structural. This tension is a feature, not a bug.

​Listen to our episode here or read below for more insights.

what the record labels want

The “right payout model” has several layers to it. Let’s break each of them down.

Distribution: How best to split revenue (both ad-supported and paid user).

The current b pools all revenue together in one big pot, then splits it with all rights holders based on how many streams each song they own gets. It’s easy, predictable, and often benefits the top artists (to an extent). This is what Spotify, Apple Music, and Amazon use.

But pro rata is more challenging for artists with smaller, more passionate, and differentiated fanbases. Those artists would benefit from maximizing revenue directly from their unique fans.

That’s one of the benefits of the user-centric model. It allocates revenue on a per-user basis, then distributes that to each rights holder respectively. SoundCloud and Tidal have adopted these models because it helps their target artists earn more from streaming.

Duration: should longer songs generate more revenue?

The current model counts a stream once it has been played for 30 seconds. So a 31-second meditation track counts the same as hip-hop’s first big single, the 14-minute medley, “Rapper’s Delight.”

Again, this model is quick and efficient. But it’s too democratized for some people. In my recent pod episode with Spotify’s Will Page, he proposed an idea where songs over 4 or 5 minutes would get a multiplier for each additional minute played.

User intent: should the artist you start a listening session with count more than an algorithmic play?

WMG’s CEO Robert Kyncl has spoken about this publicly. He also pushed a similar idea at YouTube as their chief business officer. This approach rewards artists who brought you into the streaming service. It’s a similar mentality to how supermarkets stock shelves and negotiate with suppliers based on their brands’ influence on consumers.

With each of these changes, the underlying goal is to separate the cream of the crop. In 2022, 42% of audio tracks (67.1 million) had less than ten streams. Meanwhile, less than 0.2% of audio tracks (327,000) had more than 1 million streams. Those songs drive the business, and the majors own most of them. They want them to count more than the amateurs, fraudulent tracks, and often discussed “whale music.”

would growing the pie solve it all?

Since these issues were less of a concern when growth was strong, should the industry focus more on that instead?

Yes, but how to grow the pie is a whole separate debate!

The major record labels have pushed on the DSPs to raise prices. As Lucas and others have called out, the price of everything else worldwide has increased except music streaming. If music streaming charged $15 monthly in all established markets, it would fundamentally change the industry.

There are other ways to grow the pie beyond price increases, though. Streaming services have better data than anyone on listener consumption patterns. They can identify the superfans before listeners even realize they’re superfans. They flex that data to us every year with Spotify Wrapped.

But what if that data helped offer a personalized fan experience? That could be listening sessions for unreleased tracks, feedback on an album, and more.

I’ve heard from several sources that the largest DSPs are reluctant to add any feature that takes users away from actively streaming revenue-generating audio on the platform. But that myopic focus may miss the bigger opportunity.

the best path forward

It’s hard to escape the competing incentives between the DSPs and the major labels. To be honest, the majors should have launched their own music streaming service to control these issues. Video streaming has shown that that’s the only way for IP owners to control distribution. But that ship has sailed. Even if one of the majors acquires a music streaming service, they would still be years behind.

From a payout model perspective, I would push for the user-centric approach if we were starting from scratch.

I like focusing less on “streams” and more on “users.” If I only log into Spotify once a month and only listen to Miguel’s “Sure Thing,” then that song’s various rights holders deserve my revenue.

Moving the conversation from stream to user also focuses on the end user, which is always a win. Maximizing streams can make the user experience feel more transactional.

Butwe’re not starting from scratch. We’re over a decade in with the current model. I predict that the pro rata model will continue to remain the dominant option for most services. Despite the benefits, the switching costs are too high. And since the major labels don’t necessarily have the leverage to pose a viable alternative.

This is true for many things. Whether it’s the U.S. moving to the metric system, shifting to one time zone, or the more efficient Dvorak keyboard layout, the better approach doesn’t necessarily win. There needs to be more at stake.

Listen in the rest of the episode with Lucas Shaw. We go in more depth on:

– how streaming services can monetize fandom
– impact of Universal and Warner going public
– Bloomberg’s upcoming Screentime Conference​

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money moves

• MTV, Napster, and embracing disruption​
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• do music videos still matter?​

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