Whether it’s the increasingly vocal war of words between Spotify and Apple, or the music industry’s full on attack against YouTube, much of the debate of late over streaming has been about the freemium versus premium challenge.
Paid for services bring in the vast majority of the money, but the ad-funded free-to-access platforms have way more users. While that is, perhaps, inevitable, the music industry needs to convert as many freebie streamers into paying subscribers as possible, and some worry that the freemium and premium set-ups are just too similar to assure enough conversions.
But that is not the only debate to be had on the future of streaming. Beyond growing the digital pie, there remains the tricky issue of how to slice it. How big a slice should different stakeholders receive?
The digital pie debate has several elements to it. We’ve discussed at length how streaming income is split between the two sets of music rights – recordings and songs – and how the former get a significantly larger allocation. And we’ve discussed how labels then share streaming income with their artists.
However, there is one other discussion to be had about the way streaming income is shared – this one focused not on how the stakeholders in any one track divvy up the money, but on how streaming monies in general are shared across the music industry. And it’s this discussion that has been brought to the fore by digital start-up SupaPass, which formally unveiled its service earlier this month.
While Spotify and Apple Music may differ on quite what a streaming service should be offering to users free of charge, the two services, and most audio streaming services, operate more or less the same business model. Their deals with the music rights owners – labels, publishers and collecting societies – are usually revenue share arrangements at heart.
At the end of each month, the streaming service works out how much money it made in the previous period, how many tracks were streamed over all, and what percentage of those streams were of recordings or songs from any one rights owner’s catalogue.
It then allocates the money it made between the different rights owners based on that percentage, and then splits that allocated money with said rights owner based on whatever deal they have done. So if 10% of all listening came from one label’s catalogue, 10% of all income is allocated to that label. If the label is on a 58% deal, it then gets 58% of that 10%.
There are various complications layered on top of that, of course. The streaming service likely does that calculation separately for each territory and each service type (premium, freemium, mobile bundle etc).
Most streaming services are also obliged to pay a minimum rate per stream, and if the revenue share arrangement pays out less than that minimum, the streaming platform makes up the difference. Which is why, although the streaming services in theory should get to keep 25-30% of their income overall, none do, which is why the streaming firms are all loss-making enterprises.
But, crucially, the business model is ultimately a revenue share arrangement, and the hope is that eventually the platforms will start to always pay out on a revenue share basis, either because the rev share payments will always out-perform the minimum guarantees, or because minima will eventually be cut from the deal, or both. Each streaming service then needs to work out how many paying users it needs overall in order to survive on 25-30% of the money.
PROBLEMS WITH THE STREAMING MODEL
Even if that business model ultimately works, the streaming sector becomes secure, and with it so does the record industry’s main growth revenue stream, there is arguably an inequity with that approach.
At the end of every month all the subscription money is basically put into one pot and shared out based on overall consumption share, with no acknowledgment of the consumption habits of individual users, some of whom will listen to lots of music and some of whom will listen to a little.
Which possibly skews against certain individual artists and labels.