In a recent post, I explored the changing mix of consumption channels and the rise of streaming and subscription expenditure. Now I want to look at how this affects the record labels and individual artists. There has been debate in recent years about subscription services, and in particular the way in which the artist is financially rewarded when compared to physical sales or download to own (DTO) sales. There is a key fundamental we need to understand, the royalty amount that an artist earns from subscription services is a result of the contract between an artist and their record label. To increase the royalty payments there are broadly three options:
- Negotiate a higher royalty rate between record label and artist. This is within the artist's control to an extent, however these rates are at risk of being squeezed as existing contracts were drawn up when subscription services were in their infancy and future contracts will be given greater scrutiny.
- Negotiate higher gross payment terms with Digital Service Providers (DSP). The terms between labels and DSPs get a lot of press coverage and with the exceptions of the really huge artists (e.g. Taylor Swift), artists require the bargaining power of their record labels to negotiate these. Tidal launched claiming they will be passing on a much greater amount to the record label which then filters through to the artist, however in my opinion, this looks to come directly from charging a higher monthly fee to its users.
- Generate more streams. Simply driving greater consumption levels will yield greater rewards to the artists. In the future I believe we will see significantly more artist innovation around personalising subscription services such as creating playlists, developing a greater online presence or choosing a single channel for a release (e.g. releasing via subscription services before making DTO or physical products available).
A bright future
I believe the future is bright for the streaming industry, and will ultimately be of great benefit to the artists based on the following:
- The growing levels of expenditure on streaming services are fantastic news for artists with significant back catalogue. These are artists with huge past hits who are seeing a significant second wave of income as fans update their music collections and consumption methods from physical to digital.
- Independent artists are experiencing growing popularity and exposure due to the ease of consumption of new music. In the industry, the fan base of independent artists is typically profiled as being predominantly made up of musicophiles who are more likely to be early adopters of new consumption channels. For the listener, there is significantly reduced risk in exploring new artists (now it is time & opportunity cost rather than actual expense) through subscription services than the risk that existed when ownership was the only option (aside radio).
- As per Deloitte's Media Consumer Survey, consumers spend on average £30 a year on physical and digital products combined. With all of the key subscription players charging £9.99, consumers are becoming tied into a minimum spend per year. The influence this has on total average spend will be interesting to watch as many artists try to avoid making their releases available on free tiers.
- The growing number of services means that DSPs are pushing hard to convert free users into paying users. The impact of this on record labels and their artists can only be beneficial.
Along with these positives though, there are still challenges that need to be faced.
- Could the increasing trend of exclusive deals between artists and DSPs mean consumers start holding premium accounts across platforms?
- Will the lack of a single service that holds a complete catalogue make it a greater challenge to convert a free user into a premium user?
- Just how much of an impact will cannibalisation of DTO sales by subscription sales be for the providers who offer both e.g. Apple and iTunes vs Apple Music?
- As streaming becomes the largest channel for consumption, future contracts between artists and labels will see major changes. Those who negotiated their royalty rates when streaming was in its infancy will benefit from generous deals which will be much tighter and under greater scrutiny in the future.
- For the labels themselves, restructuring the way they run their business is required to manage the transition from selling physical products (with the associated production/ manufacturing/ supply chain costs) to receiving what can almost be considered micro payments from DSPs.
The rise of subscription services is causing huge ripples within the industry but I believe that this will ultimately be of benefit to the artists as DSPs invest more and more money to drive consumption to their own platforms and music fans become more and more explorative within these platforms.
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