How Do Musicians Make Money? (Part 2/2)

by Ian Hellström (12 February 2017)

2016 was a good year for the music business: revenue from streaming and digital downloads exceeded that of physical sales for the first time in the history of the industry. On the one hand, companies such as Spotify and Apple have made digital music easily accessible and legal. On the other hand, each stream only pays artists fractions of a cent, which means that all but the most popular artists make very little money from streaming. Fair compensation for artists in a digital world is a recurring topic in media and industry. In this article I want to look at the ways professional musicians make money now.

In the previous post we looked at musicians from ancient times all the way up to the origins of the digital era with the invention of the compact disc. Although music publishing still raked in $2.2 billion in 2013, CD sales have declined steadily after 1999. Nine years later, artists only received $23.40 out of every $1,000 sold (< 3%). So, why did CD sales plummet after ‘99?

The Age of MP3

Napster, the peer-to-peer file sharing network that focussed heavily on music, went live in June 1999. By December of the same year the RIAA filed a lawsuit on behalf of BMG, EMI, Sony, Universal, and Warner about copyright infringement. Most people still accessed the internet via a dial-up modem, as domestic broadband did not appear until 2000. On such connections sharing music would not have been feasible without the development of MP3, which had been available since 1993.

In the same year that Napster appeared on the scene, the first internet radio, TuneTo.com was launched. It was acquired by Listen.com in 2001 and later renamed to Rhapsody, which acquired Napster in 2014. Pandora opened its digital doors in 2000 when they started their work on the Music Genome Project.

Internet radio, or non-interactive internet transmissions in the language of the Digital Performance Right in Source Recordings Act (DRPA) of 1995, only required stations to purchase a statutory licence. The same applied to satellite radio stations but not non-subscription broadcasters (i.e. terrestrial radio stations). That changed with the 1998 Digital Millennium Copyright Act (DMCA), except for terrestrial broadcasters, that is. This meant that internet and satellite radio stations were required to pay royalties to both performers and publishers. The DMCA also made intermediaries (‘safe harbours’), such as ISPs, not liable for any copyright violations that happened on their watch. This proviso was later adopted by the European Union in the Electronic Commerce Directive too.

There are many types of royalties. When talking about these it’s important to make a distinction between songwriters, who own the rights to a song’s lyrics and melody, and performers, who own the rights to a particular recording of it. The rights are typically assigned to a third party: copyrights to music publishers and master recordings to record labels. Performance Rights Organizations (PROs) collect songwriting royalties from public performances. Mechanical royalties apply when music is rendered mechanically (e.g. on disc or in a video game) or streamed on demand. How exactly money flows from fans to artists is ‘a tangled mess’.

In 2003 Apple’s iTunes started offering digital music. Apart from being the first legal digital-music store, iTunes allowed people to buy individual songs rather than entire albums. Between 14% and 17% of each download went to the artists, which was slightly higher than the rate for compact discs. Whereas Apple sold music with DRM, Amazon nabbed a chunk of their market share by offering DRM-free MP3s in 2007. Apple followed suit in 2009.

YouTube had entered the fray in 2005. It made DIY promotion an option for musicians and non-musicians alike. Google acquired YouTube in 2006 and launched Vevo three years later. The same arguments that radios and labels had had before were yet again fought but this time between Google and the record labels. Google claimed that the exposure would be sufficient, whereas the labels complained that they were being undervalued as purveyors of original content. What stayed the same tough was that artists were mainly ignored in these discussions.

Streaming went mainstream in 2008 thanks to Spotify. It allowed users to stream music on demand, whereas internet radios typically had a non-interactive programme. Although Taylor Swift’s tiff with Spotify about the meagre remuneration for artists has been all over the media, Charles Caldas (Merlin) noted earlier this year that ‘the cheque from YouTube is less than a tenth of the cheque that we bank from Spotify’, even though Spotify’s 100 million users are only a tenth of YouTube’s billion viewers.

Most music streaming services, including Amazon Prime Music (2014) and Apple Music (2015), deal directly with record labels who in turn pass on the royalties to their artists. SoundCloud (2007) is an exception in that it remunerates artists with the ads it shows before songs. Nevertheless, their subscription service, SoundCloud Go, which was launched in 2016, appears to require copyright holders to become premier partners to receive royalties. Beyond streaming, Deezer (2007) are exploring additional options: they have indicated that they will get into A&R for independent labels and unsigned artists.

Revenue from streaming is still a fraction of what it used to be in the glory days of the compact disc. More than half of it comes from free ad-supported services, including Pandora.

An interesting observation is that the experience of music appears to have become fleeting again. It went from a transient experience (i.e. live performance) to a permanent one, first in physical form (LPs and CDs) and later digitally. With streaming it’s become ephemeral again: songs are available on demand but they are available in the cloud, or rather provided by CDNs; music is not necessarily permanently stored on people’s own devices any longer.

Piracy

With the emergence of the internet as a music distribution medium during the late 1990s, piracy became rampant. What is perhaps not quite so well known is the fact that an entire industry centred around piracy has been around since the nineteenth century:

In 1881, for example, the Music Publishers Association in Britain ‘estimated that 90 percent of printed sheet music coming into England from America consisted of pirated reprints of English copyrights.’ David Bruenger, Making Money, Making Music (p. 39)

Important to understand is that music piracy has never been about audio quality and it has always been about access and convenience:

Record companies should stop worrying about security and start giving people what they really want: Music, anywhere, anytime. Jenelle Brown (2000)

After all, reproductions of original scores were rarely of the same quality, the audio of cassettes was never superior to that of vinyl records, and MP3s have never had higher resolution than compact discs. What reprints allowed was to reach a larger audience at a fraction of the cost. What cassettes enabled was a culture of mixtapes and private bootlegs. What MP3s did was provide songs anywhere in the world almost instantaneously. There is a niche audiophile market, but for the overwhelming majority of music fans convenience trumps quality.

An idea that goes back to at least 2003 and has popped back up from time to time is to have ISPs compensate for piracy. This of course means that consumers would end up paying a piracy tax on their internet connections.

A more creative approach to accept piracy was Radiohead’s 2007 release of their album In Rainbows. They used a pay-what-you-want model, where fans could pick what amount to pay, if anything at all.

More Than Music

So far, we have looked at various ways modern-day musicians can make money from their art: perform, sell, and license. There are, however, a few more options.

Merchandise is probably the most obvious one, but instant concert recordings or exclusive live streams can prove to be financially sound too. Crowdfunding for recordings, particularly for physical media, have become possible with platforms such as Kickstarter (2008) and Patreon (2013), which focusses exclusively on music. Note that crowdfunding is just a modern incarnation of the patronage model: instead of one rich patron paying for the exclusive rights to a performer’s creativity, many people from all over the world pay a small amount in return for the privilege of receiving a copy of the recording.

Some artists have used their image and personal brand to sell perfume and fashion. This has of course nothing to do with music and everything with name recognition and the power of celebrity status. Alternatively, Bono (U2) has invested in startups.

Instead of trying to predict the future, the music industry would do well to heed Amazon’s Jeff Bezos: focus on what will remain the same. People want to listen to music. Wherever, whenever.