BUSINESS OF MUSIC
LECTURE – WEEK 10
Last Week
• We considered contracts in the music industry.
• Hopefully this led you to an understanding that the music industry
is no different to any other industry – participants need clarity and
certainty in their dealings.
• This is where the law of contracts comes in.
• We also recognised that the most important element in any
contractual situation is “bargaining power” and so the most
powerful thing any side to a negotiation can do is improve their
bargaining position prior to the negotiation commencing!
This Week
§ We will look at the changing face of the recording and publishing
industries and the broader music industry
§ We’ll look at some very different financial models that have
evolved and we question whether they are sustainable.
§ We’ll consider what new directions are being signposted and
what may exist on and over the horizon.
§ Yep, its “face the future week”
Retail Sales Income
§ To look at the future you need to understand the past.
§ We have already discussed that the traditional income streams were
built around the sales of records.
§ Record sales would generate income for a number of participants in
the recorded music industry:
• Music Retailers – a retail margin from the sale
• Distributor – a wholesale margin for services
• Record Label – the wholesale price
• Artists – Royalty based on contract
• Manufacturer – fixed payment for services
• Music Publisher – mechanical royalty – set by statutory rate
• Songwriter – a royalty based on contract
Licensing Income
§ A further form of income was generated when the recording was
used by a third party – requiring the permission of the rights owners
§ Licensing of Recorded Music would generate income for a smaller
number of participants in the recorded music industry:
§ Record Label – a fee negotiated for master recording use
§ Artists – Royalty based on contract
§ Music Publisher – a fee negotiated for use of the composition
§ Songwriter – a royalty based on contract
Retail v Licensing
§ Clearly Licensing Income is a more attractive financial model than
retail income.
§ With licensing income there is no cost of manufacturing, no cost of
distribution and no retail margin.
§ Retail obviously is a about a high number of transactions with a
low margin for each, whereas licensing revenue is about a small
number or often a single transaction which generate a very high
marginal return.
§ Not surprisingly in an environment of contracting retail income all
participants started looking more towards licensing revenue.
Retail v Licensing
§ Obviously though the recordings and songs that tended to attract
the most interest from a licensing perspective tended to be those
that already enjoyed a degree of popularity or success.
§ Accordingly there was still a great need to try and establish “hit
songs” as they were more likely to generate licensing revenue.
§ But equally, there was a desire to try and generate revenue for
alternative pieces of music – non-hits – that still had value in areas
such as film, television and advertising.
§ Labels and publishers certainly became more pro-active in
seeking out licensing opportunities.
Licensing & Streaming
§ Streaming is simply another form of licensing.
§ It is based on the rights owner of the recording giving permission
for someone to use the recording for a specific purpose.
§ But instead of that purpose being for use in an advert or a film, in
the case of streaming the purpose is to host the recording on a
platform/server and make it available for a single listen.
§ But instead of paying a large fee for that permission as the
producer of that advert or film would do, the streaming platform
pays an extremely low fee for that use (justifiably!)
§ So the problem should be obvious – streaming has become the
ultimate in extremely low margin licensing and requires a massive
number of “licenses” to be taken to generate a viable amount of
revenue.
Licensing & Streaming
§ The obvious result of that is – the only rights holders that are able to
generate large and sustainable revenues are those who control a
massive amount of rights – ie very, big record companies.
§ So when an artist complains about not being able to live on the
revenue generated by a million streams, consider that the tracks
owned by major record companies are probably generating
around a million streams a day!
§ In that perspective, a million isn’t actually a large number!
§ Perspective? Too much perspective, right?
Licensing & Streaming
§ The advent of downloads didn’t change that position.
§ A download was still a sale, albeit one that did not require
manufacturing, a physical distributor or a retailer than needed a
sizeable margin to cover a bricks and mortar operation.
§ For this reason download sales were more attractive to most
participants than physical sales.
Future of Streaming
§ Goldman Sachs recently predicated that over 1.2 billion people will be
paying for music streaming by 2030 – an optimistic forecast that, from a
lot of angles, makes sense.
§ So what happens if [overall] streaming subscription growth now doesn’t
meet the bright hope analysts have at Goldman Sachs and elsewhere?
What if these numbers start to get downgraded as the years tick on?
What happens if Gen Z, who are currently obsessed with TikTok, don’t
value an all-you-can-eat streaming service menu like Spotify?
§ And what happens if streaming services are able to put up their
monthly subscription prices without causing people to take give up their
subscriptions (remembering that a streaming subscription is clearly a
luxury and not a neccessity).
Future of Streaming
§ Spotify‘s share price on the New York Stock Exchange was USD $241.25 Feb
20. 2024 hitting an all-time low at USD $94.44 in 2021.
§ Spotify‘s largest shareholder, co-founder and CEO Daniel Ek, sold 250,000
shares of the company’s stock on February 7 for USD $57.5 million.
§ The development comes as the streaming giant posted strong financials
for the fourth quarter of 2023.
§ Ek, known for not taking an annual salary from Spotify, held 31.93 million
ordinary shares, representing 16.5% of the company, by the end of 2022.
This translates to over $7.80 billion at SPOT’s current share price.
§ Notably, Ek also holds voting rights for 16.63 million shares ultimately owned
by Tencent Holdings, according to the company’s 2022 annual report.
Future of Streaming
§ Spotify posted robust earnings in the final quarter of 2023. Its monthly
active users surged 23% year over year to 602 million, exceeding the
company’s target by 1 million.
§ The number of its subscribers grew 15% YOY to 236 million, also higher by
1 million versus the company’s prediction.
§ Daniel Ek recently said, “And as we look ahead to the end of the year,
you'll also see that we're forecasting to hit another big milestone,
reaching more than 600 million monthly active users at the end of the
year, and this puts us well on our way to reaching more than 1 billion
global users by 2030”
Music Business Companies Pivot
§ Another impact of the swing to digital was that business in the
business of physical distribution had to the basis of their model – a
fee for (essentially) freight, logistics and sales services .
§ Many distributors started to offer digital distribution services.
§ But logically the actual services required for digital distribution
were different to those required for physical distribution.
§ One was a warehousing and logistics business and the other was a
technology business that essentially operated in a non-physical
world.
Distribution
§ Not surprisingly some distributors made the transition to digital
distribution well and others were less effective.
§ Another business model arose – effectively a business with its roots
in the technology industry rather than the music industry – the
business of digital aggregation.
§ This is a different business model again – under these models the
rights holder (artist or label) simply pay a fee for a service – a low
fee, again based in a high turnover model.
§ These are businesses such as Tunecore, CD Baby, Ditto etc.
§ There are now numerous businesses offering digital distribution
services.
Evolution
§ So while there was evolutions being forced upon the industry a
number of key parameters remained.
§ Copyright still supported both songs and sound recordings – the
rights of reproduction and performance still existed.
§ Artists were still basing their model in sales.
§ Labels and publishers still valued third party licensing revenues.
§ Artists (an their managers) began placing increasing importance
on other revenue streams such as touring, merchandise,
sponsorship& endorsement
Evolution
§ Adam Jankie – ex Mushroom Group
§ “Things are moving at such a fast pace now that it’s all
about innovation, and coming up with creative ways to
expose content – music, pictures, imagery, anything
that’s associated with the artist. It’s about exploitation of
content, not just exploitation of music directly anymore.
It’s all about, ‘what’s the next thing?’.”
• It’s interesting to look at that statement in the context
of the rise of NFT’s in 2022 and 2023
Web3
§ NFT’s were (are?) only a small part of the overall connection of Web3
with music.
§ Web3 is not just a new form of technology, it is a philosophy that seeks
to decentralise the web and cut out the middleman in many areas,
including music.
§ With Web3, artists can have greater control over their tracks and the
revenue they generate, while fans can interact more directly and
transparently with them – although few have really mastered the art of
doing that!
§ The possibilities offered by Web3 within the industry are enormous.
§ The use of technologies such as blockchain and smart contracts allow
for more efficient and transparent management of royalties and
revenue distribution.
Web3
§ Take this view from the founder of a company called Mixtape
Social. Mixtape is a web3 application because it taps into the
concept of the creator economy and leverages the functionality
of blockchain – via a crypto token called Mixtape Token – to
allow fans to compensate artists they follow. The tokens can also
be used to unlock exclusive content.
§ “This community-based music listening app is based on the
principle that music is often about more than the beats, notes,
chords, and samples a track is composed of. By allowing users to
tag their favorite tunes with memories and stories about what
makes them so important, the aim is to restore the sense of
ownership or personal connection with songs, which often feels
lacking in the age of streaming”.
Web3
• As we have seen music is an industry where middlemen have
traditionally been a necessity to fill the gaps needed to get music from
artists to audience.
• In the old days, these were the record companies, and today it's
streaming services. Both of them take a sixzeable cut, leading to less
money for the artists.
• So of we look at the capability within the Web 3 of making secure
payments we can see that it has the potential to have a big impact on
what we call “connecting the creators of music with the consumers of
music” – and also monetising that connection!!
• Using blockchains, cryptocurrencies, and smart contracts, this could
also mean a fairer deal for artists and more ways for fans to ensure their
money ends up in the pockets of those they want to support
New Models – Live Performance
• Ruth Barlow – Beggar’s Group
• “What we have to acknowledge now is that marketing, promotion and
sales have merged. They are all the same thing. There is no such thing as
promotion because promotion used to be directed towards getting a
sale, but now consumption of music is a sale”.
• These days the line between “live” and “recorded” is being blurred.
• Whereas once when an artist used to play live it would hopefully
encourage audiences to go and buy their album, now a live recording
viewed on You Tube was more likely to be seen as an alternative to
listening to that same artist’s recorded music streamed on Spotify.
• Effectively the streamed live performance was music consumption that
cannibalises the type of consumption that a record company actually
gets paid for.
New Models – Live Performance
§ [RUTH BARLOW]: “A couple of years ago we noticed that a lot of festivals were
wanting to record our artists. Not just Glastonbury and Coachella but a lot of
other festivals as well. I think it was triggered somewhat by You Tube saying to
festival promoters that they should set up their own channels and become
content providers. We started to get a lot more requests through for
permissions and we were being told it was part of the performance fee – the
artist has got to be recorded and live streamed.
§ “And we got to thinking – “Well, that’s not right.” - because the artists were
our exclusive recording artists and what the festivals wanted was a recording
license. After a lot of thought we decided that we would embrace that but
be smart about it. We were being told “Hey, its great promotion”, but this was
a time when streaming was really starting to become the way people
consumed music and so we asked what exactly was it promotion for? If the
consumer was listening to a live concert on You Tube that consumer wasn’t
then going to go “Now I’m going to listen to their album”. There are only 24
hours in a day.”
AI in Music
• The following are some extracts from a Forbes article on AI in the
Music Industry – there’s a lot to consider.
• “AI spans all aspects of the industry. From the way music is
created and produced to the way it is consumed and
experienced, AI-powered tools are helping musicians to write,
record, and mix music more efficiently and creatively. AI is also
being used to personalize the music listening experience for fans
and to discover new artists and genres.”
• AI-powered songwriting tools like Amper Music's Songwriter and
AIVA can help musicians generate new melodies, chord
progressions, and lyrics. AI-powered arrangement tools like
BandLab's Band-in-a-Box and Presonus' Notion can help
musicians create and refine the structure of their songs.
AI in Music
• AI-driven virtual instruments and synthesizers, typified by tools like
IBM's Watson Beat, are catalyzing sonic innovation. The ability to
replicate traditional instruments or generate entirely new sounds
is not just a game-changer; it's a democratization of music
production, giving rise to a new wave of artists with access to
cutting-edge tools previously reserved for the elite.
• Universal Music Group, the biggest music company in the world,
recently partnered with YouTube to launch the Music AI
Incubator with three fundamental AI music principles rooted in
their commitment to collaborate with the music industry
alongside bold and responsible innovation in the space.
AI in Music
• The live performance domain is not immune to the
transformative influence of AI. Virtual Reality (VR) and AI
technologies converge to create immersive concert
experiences. Artists like Travis Scott have pioneered virtual
performances, leveraging AI to create hyper-realistic avatars
and interactive environments that transcend physical limitations,
reaching global audiences in unprecedented ways.
• In physical venues, AI-driven technologies are enhancing the fan
experience in real time. Smart cameras analyze crowd reactions,
dynamically adjusting lighting, visuals, and even setlists. This level
of customization ensures each concert is a unique spectacle,
catering to the preferences of a diverse audience.
AI in Music
• One challenge is that AI-generated music can be
indistinguishable from human-created music. This raises questions
about copyright and ownership. So-called deep fakes are real. A
deep fake in the context of music refers to the use of advanced
technology, such as AI, to create realistic and often deceptive
audio content. It can include voice synthesis, instrumental
replication, and even song-writing imitation.
• Detractors of AI in music also argue that it falls short of effectively
capturing the emotional depth and authentic creativity that
characterizes truly compelling music. They contend, for example,
that AI music generators are confined to the realm of existing
musical data. As such, they lack the human connection and
artistic intuition that breathes new and innovative life into music.
AI in Music
• The impact of AI in the music industry is not a mere trend, it is a
building, transformative wave. The business opportunities are
vast, from revolutionizing composition and production to
optimizing distribution. AI is also making it simpler, easier, and
more cost-effective to create and produce music as well as to
improve and personalize the fan experience.
• The collective value lies in a balanced approach—leveraging
technology while also addressing ethical considerations and
challenges. The music industry is poised for a fast fusion of human
creativity and AI, promising a future where technology and
artistry create music while innovation presents many
opportunities for the music industry to grow and evolve.