Economics of music streaming review
The state51 Music Group is an integrated group of established businesses combining technology and creativity with deep music knowledge and experience. It operates across the globe with offices in London, New York, Budapest, Belgrade, Burgas, Vilnius, Bogota, and Da Nang.
We have been pioneers in digital music since 1991, having foreseen the impact of new technology on the way music is made, experienced, and monetised. We built the first independent digital music b2b2c platform, and have played a leading role since in the development of industry standards. We made the first deliveries by an independent music company to iTunes in 2003. Today we have partnerships with a large number of artists, and we manage a diverse catalogue of music.
As an integral part of our business we invest in artists’ careers, in the production of new music, and in high quality experiences around music.
We are responding to this call for evidence as we are concerned that decisions might be taken based on a false choice between the economic well being of artists and of music companies. Music companies are investors alongside artists in the development of new approaches to making recorded music. This is a very high risk activity, and other sources of funding at the early stages of this process are self-evidently not available on competitive terms.
Q: What are the dominant business models of platforms that offer music streaming as a service?
We expect that this question will be fully covered by other respondents, and is hopefully factual enough not to be controversial.
Q: Have new features associated with streaming platforms, such as algorithmic curation of music or company playlists, influenced consumer habits, tastes, etc?
With streaming, the selection of music a population hears in a given week has become much more diverse than in the pre-streaming age. Consumers have fewer opportunities to become familiar with recordings, and have less need to acquire in order to re-experience what they like. This has removed the need to make a spending decision, as there is no direct economic cost associated with choice in music.
It is arguable that the consumer experience of music has therefore become much more personal and less shared, with the result that a national chart and genre tribalism has become irrelevant for most. Consumers still want to hear music that is popular, and still look for niches, especially with their peers, but speed of discovery and ubiquity has accelerated the progress of new music to the top of the charts, and this probably makes the emergence of new styles or surprise hits close to impossible.
The platform charts have also been disassociated from any model that could be understood by consumers, as the platforms include such concepts as ‘velocity’ to decide what is at the top. None of the main platforms use the ‘official’ music industry chart as reference point - each has become a closed system reflecting only consumption on-platform.
Platforms more recently have moved away from the notion of ‘consumers as curators’, preferring to regain effective control of the music discovery process through their own algorithmic and curated playlists. Through their artist tools platforms are also now intervening to influence the style of music being made. It’s not clear where this might take the industry; one model would suggest that music could become much more ‘average’, with less room in the market for radical innovation or subcultures.
Q: What has been the economic impact and long-term implications of streaming on the music industry, including for artists, record labels, record shops, etc?
Some of the more obvious impacts and implications of the emergence of streaming as the dominant revenue source for recorded music are the huge increase in access to market for artists, and the disappearance of the mass market in physical music products.
The resurgence of vinyl shows that there is a demand for high priced premium music products, but it is likely that vinyl buyers are also music subscribers, so these products are no longer seen as ‘sound carriers’. The role of the record shop has changed accordingly, with mass retail being replaced by more interesting and curated retailers.
At The state51 Conspiracy we have invested in the capability to produce super-premium music related products in the state51 Atelier, a space for bringing product design and traditional craft skills to music.
The more open market for artists has meant there are many more people actively releasing music and getting paid for it than probably at any time in history. This presents its own challenges, as an artist starting today is competing now for the attention of the public with the entire history of recorded music.
Consumer platforms are likely to see the supply of music and artists into the future as effectively infinite, and adjust their strategies accordingly. There is for instance no reason to offer to pay artists when so many demonstrate that their motivation is sharing rather than money. It is possible that record labels will resume their traditional role of finding and developing talent
Q: How can the Government protect the industry from knock-on effects, such as increased piracy of music? Does the UK need an equivalent of the Copyright Directive?
We do not consider more significant intervention to be necessary to protect the music industry from increased piracy, beyond helping UK rights owners defend their rights against infringement without risk. The marketplace is coming forward with robust identification of the music itself and the parties with economic interests in it. The Government could intervene to support commercialisation in some cases, but ‘picking winners’ in the digital music industry has proven to be beyond the capability of existing agencies.
Q: Do alternative business models exist? How can policy favour more equitable business models?
It is far from clear that current models are generally inequitable, with today’s musicians being able to create new recordings at very low cost, and pay either a low fixed cost (around £20) or a low percentage (from 9% to 20% with our company) to place them in the market and collect royalties. Artists today have better access to the market, and other services such as marketing and promotion, than at any time in history.
Legacy artists who receive 10%-20% of the royalties rather than 80-90% have benefited from investment by record companies often in the hundreds of thousands of pounds. Their contracts should not be retrospectively undermined by Government, as this would signal a very high risk to today’s investors in artists and their careers.
As patterns of success start to emerge it will become much clearer where expertise and skills are creating value, and we expect the market to reward value creation fairly through negotiated deals between artist and music companies. For instance, at The state51 Conspiracy we offer a significant investment package in our creative services and distribution, worth between £5,000 and £20,000, to artists in the early stage of their careers, or who are reshaping their careers for the digital world. If we cannot see a way to get a return on this investment we will have to withdraw the offer for developing artists.
With consumer platforms becoming more complex and requiring a larger and deeper set of skills to navigate it is likely that success will demand more investment and larger teams, which indicates a role for music companies as investors and as loci of expertise. This could develop into a two sided market model with supply side music platforms offering finance and capability to artists, and market ready music to consumer platforms. It could also develop into a studio model, where music companies hire musicians and create and manage portfolios of assets (which is more like the K-Pop business model).
Whatever happens, all parties need to be able to rely on fair contracts which can be easily enforced. It is a stable regulatory environment, along with low cost access to justice, that will deliver more equitable business models.
We follow these specific responses with general comments on the topic.
Music can be a captivating artistic spectacle, made by artists in highly creative environments. But the industry which is supposed to support and reward creators depends on the same economic forces as any other.
Since 2014 the global music industry has seen overdue growth, reaching total revenues last seen in the early to mid 2000s (ref: IFPI Global Music Report). This is driven by rapid growth in streaming revenue. Streaming represents a significant change in how music is monetised, with consequences for all participants through the supply chain. It is right for policy makers to consider this impact, including how changes to the distribution of revenue might affect creators and the environment in which they work.
It is important that policy makers address and are supported in understanding the underlying economic factors shaping these changes and the impact on creators. This requires the input of those with significant economic and statistical expertise. It is only by bringing in such expertise that policy makers can successfully apply values such as fairness in their policy making. Otherwise the danger of unintended consequences, which may jeopardise the underlying policy aims, is significant.
There are instructive initiatives in other industries in which there is a perhaps a clearer and longer standing recognition of the role of economic analysis. This sometimes results in initiatives such as ‘Observatories’ like the European Market Observatory for Fisheries and Aquatorial Products (https://www.eumofa.eu/) or the European construction sector observatory (https://ec.europa.eu/growth/sectors/construction/observatory_en). An observatory initiative has also been used to look into the economic questions Covid-19 poses (https://www.coronavirusandtheeconomy.com/about-us). These tend to be collaborative endeavours, with a varying mix of government, industry, economists and in some cases funding bodies.
We believe there is a need for policy makers such as this committee to support the improvement of statistical and economic evidence used in music industry policy making. There is little in the way of support for policy makers looking for independent, statistically robust economic research and insights about the economics of the music industry specifically. To date there have been few if any entities or initiatives for music similar to the above-mentioned observatories. We suggest this is something that policy makers can support and encourage, but which ultimately needs to be driven by the industry itself.
This is one reason we have worked with the economist Daniel Antal and his team, in particular on the Central European Music Industry Report 2020 (https://ceereport2020.ceemid.eu/index.html). Economists such as Daniel Antal produce data about the music industry that is consistent with international statistical standards and adhere to rigorous data ethics principles, seeking external validation through data and code repositories for underlying data and methodologies.
DCMS has an active statistics team and work plan, producing robust, high quality and relevant statistics during a time of new and fast-emerging analytical demands. (https://www.gov.uk/government/publications/statistical-work-plans/dcms-statistics-workplan-202021) This team is well placed to examine how their work can help address the specific questions arising from new economic models in the music industry such as those asked in this inquiry.
Further, as part of that work, there is an opportunity for policy makers to set out the standards required of evidence submitted in answer to these questions. This would require and help to develop useful coordination between the industry, Department statistical teams and policy makers.
For example, there has been a focus on user-centric streaming. For policy makers to consider an intervention on the issue, there is an important role for expert statistical and economic analysis to answer some fundamental empirical questions, such as which creators specifically would win and lose under such a model? Would it be spread evenly, or would newer or smaller artists win or lose? What impact might that have on the investment decisions made by record labels and other music companies?
We believe the music industry can do more to produce statistics that contribute to a body of robust data. The industry is as intensely competitive as any other. This means that progress would likely come from coordination around standards and expectations rather than requiring the pooling of sensitive data.
Trade bodies have an important role to play, in particular in consolidating and coordinating research, ensuring that initiatives support commonly understood industry requirements, and that results are consistent with standards.
A related recommendation is to use economic expertise and sectoral expertise to map the industry and the flows of investment, revenue, and creativity.
We hope that the inquiry avoids falling foul of some well-rehearsed false choices. In particular, we have seen a temptation to dwell on a false choice between the financial wellbeing of artists, and that of the companies they interact with for the monetisation of music on which they feature. In fact the two are deeply intertwined. It is critical that we sustain an industry capable of supporting artists to create world beating art.
For example, we produced a short response to some ongoing research into creators’ earnings for the Intellectual Property Office focused on the definition of creator, making the simple point that producers are creators too. (Producers as Creators, The state51 Conspiracy https://docs.google.com/document/d/1-k41vJxHue31nQaa6kuOaRqLNj_qfqr89_q8LKedtg0/edit#heading=h.vdm61nb8f5c2)
We also highlighted how the investment by record labels and other music companies can be both financial and creative, and that recognising this role is significant in considering how healthy and sustainable the industry is.
Digital music consumption is now both dominated by a small number of very influential platforms such as Spotify and Amazon, and marked by a proliferation of channels through which music can be experienced and monetised. This means creators and music companies are faced with two problems: of understanding and dealing with the highly influential dominant platforms, and managing the rules of success across a huge number of different relationships and channels.
This is a challenge for creators who need time and space to work creatively, and whose expertise is principally the creation of art and not data analysis, economics or public affairs.
It is also true to say that where artists do find ways of connecting with audiences, platforms open up fantastic opportunities for success and remuneration. This means that those who successfully navigate these difficult issues will likely reap the most significant rewards.
We suggest that the strength of music companies is therefore crucial, alongside the skill of trade associations, in the development of the analytical capability and relationships necessary to understand this complex environment.