Arguments to Support Streaming Business

I’ve been hearing "Streaming income is still small" sentence quite frequently lately, in my circles and on the web. From the now notorious pulling of Taylor Swift’s catalog from Spotify, the defense of streaming income from Spotify’s own Daniel Ek, and so on, streaming seems to be the savior of the music industry, or its downfall, depending on who you talk to. Indeed, from an industry perspective, music streaming’s controversy is probably on par with the days of Napster.

I recently attended an event by Kolaborasi Ide discussing ideas on how to develop the music industry further (at least in Indonesia), and the featured speaker there, Robin Malau, basically set forth three basic concepts: a creative space for musicians modeled on the Roundhouse in the UK, music streaming, and music festivals. One of the gripes from a label representative that happened to be there was that “Internet network conditions would only be optimal for music streaming by 2020” and “streaming currently does not provide much income”.

I then came accross this article where basically the CEO of Deezer said that “musicians should be patient”. More interestingly (as always most sites) is the comment section, where one person goes to say:

THERE IS NO “…huge potential market.” Global limit of all inclusive streaming, with or without Apple/Beats team, is at $20B in 2025! Inflation adjusted 1999 CDs are worth today $60B.

I am not sure where the “global limit” comes from, as I can’t yet find any other article referring to this. Here are my issues with the statement that “streaming doesn’t pay”:

Still in infancy

first of all, the service we know as ‘music streaming’ is still in relative infancy. Various business models are being tried out, the majority of them being ‘fully paid streaming’ and ‘freemium streaming’. So even the business model is being tested out on a global scale.

It's now 2015, not 1999

I don’t think it’s fair to compare the amount of income the industry receives from CDs (as quoted above, at $60B adjusted for inflation) to a so-called “global limit” of $20B. CD as a music product enjoyed a virtual monopoly as it only competed with inferior (cassette) or niche (vinyl) products, and the $60B number would also closely mirror the actual value of music consumption at that time.

It is now 2015. We have smartphones that play digital files of music, and can run programs the way computers could in 1999. It is a very different market as there will not be a dominant music delivery system as the CD was in 1999. Music consumption now also includes merchandise, live events, and so on — and when you factor in the industry values of those industries and total it up with music downloads, music streaming and the remainder of physical music products, I dare say it is the same as $60B, if not more.

Small fraction can be a big number if consumed by millions

Yes, it seems like streaming pays fractions of cents when compared to when music income came from CD sales or even music downloads. But should we ignore things that make us less money per unit? I learned from the premium SMS business, less is more — a profit of $0.005 cents per unit sales still translates to a large dollar number when you can deliver it to millions of people.

Recorded music industry may not be a good type of business

The recorded music industry itself is in flux — if it were any other type of business, they would try to find a way to monetize through different channels and adapt to the market, instead of complaining about piracy, while at the same time complaining about the lack of large revenue coming in from new and growing services. As far as I know, the good type of businesses grow step by step, instead of reaching sudden stellar revenues which are more than likely unsustainable.

No quick money fix

If recording companies (and/or artists) are looking for a quick money fix, they’re probably in the wrong business. The same logic applies, actually, to developing artists: sure, you can throw money at an artist’s marketing and promotion efforts to make sure they become popular overnight, but I guarantee that investing a lot of money in front is nothing you can sustain over time. Even the P&Ls of albums put a limit on marketing spend. Wouldn’t it be better to build and establish a strong fanbase for longer lifetime sales? Same thing applies for services.

Streaming services need to scale further

Is there actually any potential loss for recording companies and/or artists? Piracy problems aside, streaming is simply one way to distribute music. It won’t “kill” downloads, as that will still have a market. And Spotify’s freemium model has allegedly decreased the amount of piracy in its home country, which we can only assume might happen in other countries once internet penetration globally reaches the same levels as Sweden. Streaming services simply need to scale further to provide comparable returns for recording companies and musicians.

Stop expecting money only from recording

I think companies and artists that expect to make money only from a recording is naive, at best. Even a sister industry, the movie industry, can show that diversifying the product offering — based on one output — can provide a variety of revenue channels. Movie studios make money from cinema tickets, DVDs/Blu-rays, internet services like Netflix, and broadcast rights from TV or cable TV stations. And this is only from the movie itself, not including possible merchandise lines, books, comics, and so on. At best, technology has provided a multitude of ways musicians can make money, directly or indirectly from a sound recording — why bitch about streaming? Why bitch about piracy, even?

Revisit contract terms

Another issue is the fact that Spotify (et al) pay out 70% of revenues to labels, yet artists are complaining about small payouts. Now wait, what are your terms in your contracts with the recording companies? Something is amiss. Something that may be explained by this recent leak, where from my perspective, I think Spotify bended over backwards to accommodate terms from Sony — the deal about free ad space that Sony can resell is especially laughable.

Piracy means people is looking for easier method to access music

If we were to turn back time and do something to never introduce streaming services of any sort to the public, would download services eventually reach the peak of $60B as CDs did back in 1999? I don’t think so. Many people will still pirate songs off the internet. This is the particular habit that streaming touched on — converting pirates into legal music consumers, by providing an easier method to access music. Chasing after evil, pirating moms and teenagers like the RIAA did a few years ago can only do so much, because people who pirate songs, software or movies are not out to destroy the world, but they just want easier, reasonably-priced access to the content that they want. There are hardcore pirates though, which I think would actually be the minority once comprehensive, distributed proper services are the norm.

Music startups and recording companies are playing different game

To be fair, Spotify, as a tech startup, basically gets money from VCs, and are playing a wholly different game altogether. Investments in Spotify will increase the equity value over time until at some point they IPO, where most likely the shareholders — recording companies among them — will cash out. Recording companies will get cash that is not attributed to royalty payments to artists, the Spotify shareholders will get money, and we will be left with a music service that may or may not be sustainable in the long run. It depends on the scale they can manage to get before they decide to IPO.

Recording companies and artists need to start supporting new businesses and services that try to build more alternative revenue streams for the industry. It is these sparks of innovation that need to be tapped and cultivated, as the innovation is definitely not coming from within the industry. I won’t expect it to either, as the music industry should concentrate on their core competencies, which is making, marketing and distributing music. This includes creating clear rules of engagement for creating a music-based business, transparency for all parties, and proper legal protection for all parties involved.

Let’s stop complaining, and start building.

– This article has been republished with editing and permission from Ario Tamat. Original source is from Medium.

Ario is a co-founder of Ohdio, an Indonesian music streaming service. He worked in the digital music industry in Indonesia from 2003 to 2010, and recently worked in the movie and TV industry in Vietnam. Keep up with him on Twitter at @barijoe or his blog at http://barijoe.wordpress.com.