Streaming – a view from the other side (updated)

looks nice to meThe New York Times has an ‘Opinionator’ series asking ‘Is Streaming Good for Musicians?‘ It’s a narrow question, since in any dispassionate analysis ‘Is Streaming Good for People Who Listen to Music?’ would also factor into the evaluation of this technology. That said, let me try to broaden the debate a little bit.

As a thought experiment, imagine a very, very large musicians’ co-op, one that was able to deliver songs digitally to listeners, without separate companies called ‘record labels’, without ‘distributors’, without ‘Spotify’ or ‘Pandora’. Also suppose that this co-op has worked out a way to share any revenues amongst its members (we will sort out this question later on). How should the co-op sell songs to customers? Should customers have the ability to sign on for free, but pay per every song or album download? Or should customers pay a monthly fee to listen to all the music they want? Or should there be something in between, some combination of sign-up fee and price per download, with the understanding that the more listeners are asked to pay per song or album, the less they will be willing to pay to sign up?

The picture I have just drawn is known in economics (and to my Arts Administration students!) as the two-part pricing problem, also called (by the late economist Walter Oi) the ‘Disneyland dilemma‘: what do you charge people to enter the fairgrounds, and what do you charge per ride? The solution is (1) first solve the problem of pricing ‘rides’, to which the answer is charge per ride whatever is the marginal cost to you of supplying the customer with a ride, and (2) charge general admission according to the price that maximizes revenues (assuming there is no cost to you of letting an extra person into the fairgrounds), given the ride price you have set (remember, what people are willing to pay to get in depends on what price you charge for rides). If the cost to you of putting one more person on a ride is zero, then let rides be free, and charge the admission price that maximizes revenues given that rides are free (which is, in fact, what Disneyland does).

What is the logic? Suppose it doesn’t cost you anything to put someone on a ride, but you charge $2 per ride anyway. Then whatever customers you get go home from the fair once diminishing returns have set in, and they are no longer willing to pay as much as $2 for one more ride. But they might be willing to pay something, even if not $2. If you had a lower ride price, they would stay around and enjoy a few more rides. And you could capture how much they benefit from this in your admission fee. Charging too high a price for rides leaves money on the table – lower the ride price and increase the admission fee.

Now let’s leave Disneyland and return to digital recordings of music. Here, a customer listening to a song over the internet is like a ‘ride’, and the cost to our musicians’ co-op in delivering this song to the customer is virtually zero. The Disneyland solution suggests that individual songs would be free, but with a subscription fee to sign in.

From that perspective, streaming services for music make a lot more sense – and not just for listeners, for the production side too! – than the iTunes model. Indeed, research (see this article from 2009 in The Economist) found that, at the time, the Apple model would be better for both the firm and consumers with an ‘admission fee’ and a much lower price per individual song (The numbers will have changed by then, but the economic logic remains).

So … there is something to be said for a pricing model that looks like streaming over a pricing model based on per album or per song, with no sign-up fee. And this is true for both listeners and for the production side of the market.

So why all the fuss over Spotify? Because of course we don’t have a musicians’ co-op that writes and records songs and aggregates them and delivers the package to consumers: we have songwriters and performers and labels and distribution companies, each of whom wants a better share of what customers are willing to pay for music. Fair enough: this was true in the days of radio and LP records too. And I would expect this to evolve – this is all very new after all, and in any new system there are bound to be conflicts over who gets paid what (the history of the arts and media has many, many stories like the current dispute over Spotify).

But in many cases a ‘streaming’ type of payment system is what has worked, albeit alongside (expensive) systems for single purchases – think of newspaper and journal subscriptions for example, which for most producers sell all-you-can-read subscriptions rather than selling everything by the article.

And that’s what I think is wrong with so much that has been written lately about Spotify (which has replaced Amazon this month as the big-business bad guy in the arts). It’s not really ‘streaming’ that is the issue – as I have tried to show above, there is a lot to be said for it. The dispute is about one firm and how revenues are divided, but that is too limited a view.

UPDATED: Good post from Joshua Gans on whether we get better outcomes with only a few big labels negotiating with streaming services, or many independent labels and artists each pursuing their own deal, including the ability to remove all content from the service, a la TS.

UPDATED (November 11): And more from Joshua Gans – another very interesting piece. An excerpt:

Bought music is a durable good. But, importantly, for the past decade (and it has really only been a decade) it has traversed the S-curve for market adoption of digitised music. What I mean by that is that digital music took a while to take off. Then with the iPod and especially with the iPhone/Android, music players grew to ubiquity. More recently, however, the growth in those devices — at least in the US — has tapered off. Bought music is a complementary good to this change. If I were to imagine a potted model whereby people get a new device and with it buy lots of their favourite music to go on it, during the rapid adoption phase we will see even faster growth in the complementary product (bought music) then when that tapers off there will be areduction in music bought. I am sure streaming services have had an effect but I would really like to see a careful study that established this as I think the usual technology adoption path is likely to be the bigger effect.

In other words, let’s not overestimate the effects of music streaming; paid downloads were bound to taper off regardless.

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  1. Michael, I respectfully submit that like many music consumers, you don’t seem to grasp the actual production costs of documenting musical performances of live musicians playing together. I’m not talking about garage band in your bed room here. Consider what a live orchestral recording or a live large jazz ensemble recording costs to “produce”….. it can be hundreds of thousands of dollars! Therefore merely touching upon these production expenses as if they are even remotely comparable to the traditional distribution costs, which the digital revolution has dramatically reduced, really misses the heart of the issue that most indie artists are complaining about. When it comes to the raw deal we are getting from streaming services like Pandora (who was recently awarded a rate of 1.85 percent by judge Cote in the Pandora v ASCAP rate court decision) and Spotify who just got no less than Quincy Jones to shill for them, bogusly claiming they pass on 70% of their revenues to the artists whose work they stream) what most of us want is a fair percentage of any and all revenues generated by the use of our work. That includes all revenue streams .. such as advertising and subscription fees…… not just dwindling click through sales.

    What is good for the consumer cannot be the primary concern in the digital age any more than the benefit accrued to the majority of the pre-civil war american population could possibly justify the horrors of slavery ….. if you’ll forgive my use of such an extreme example. And since virtually every musician I know is also an avid consumer of digital music (including via streaming), I honestly believe such musicians have a good sense of what a fair deal would look (and sound) like. If so many musicians are so upset by what is happening, that should be seen as an indication that the current system … as is and as proposed by those benefiting most from it, is seriously flawed and unfair. When we are invited to the negotiating table (which is now heavily dominated by big traditional media on one side versus big new media/internet, on the other side) perhaps an equitable solution will be achieved. I for one advocate what some of my colleagues are calling “Fair Trade Music”, echoing Louis Brandeis when he called for similar protection from the trusts and monopolies for independent small vendors and suppliers, one hundred years ago!

    • Thanks very much for your thoughtful comment. I will try to address them.

      First, I really do understand the production costs of making a high quality, complex recording, just as I understand the cost of producing a quality book, newspaper, television series or feature film. These are what economists refer to as ‘fixed costs’ – what it would cost to produce a single unit of the product. But the ‘marginal cost’, what it costs to distribute additional copies *once the first one has been made*, are very low, near zero in the digital world. Optimal pricing, from the supply-side of the market, is based upon marginal costs, and what consumers are willing to pay. The fixed costs are important for anyone actually making a decision as to whether making a recording is even worthwhile, but once they are in, and the recording has been produced, it is marginal costs and consumer demand that provide the inputs into how to set prices.

      Your next point is that streaming services give musicians a crummy deal. Whether they give a good deal or a crummy one, what I want to convey here is that this current situation, and dispute over how to share the revenues from streaming, does not *as such* make a streaming method of delivering music a bad one, which is likely why we see similar models (streaming rather than ‘by the each’) having developed in other media markets.

      • Michael, I agree with your point about digital distribution being virtually free…. that was what I was alluding to when I referenced how misleading it is to compare digital distribution costs to production costs….. something that routinely comes up in conversations with laymen/consumers that defend all the benefits the digital revolution has brought us. In the music business, production costs (i.e. the “fixed costs” of producing what used to be called the “master”) have always been far greater than distribution costs. And prior to the “viable” indie music phenomenon (though most of us in it wonder if it has or ever will be economically viable), distribution costs never were the responsibility of the artists, such duties and fees belonged to the record companies, distributors, consolidators and retailers. So why in an era when the distribution costs are virtually nil, do the content creators receive even less than in the analogue past? In reality it has nothing to do with the low cost of digital distribution!

        Whether the fixed costs are factored in or not is almost irrelevant in an era where folks would be “streaming” since at best those folks will be “subscribing” to the service and many will listen for free in return for being exposed to more advertising. What the content creators want is a fair share of any and all revenue generated by the streaming of our work. That makes the model much closer to broadcast models than any retail model.

        For much of the recent past these streaming companies have been perpetrating a fraud based on a model that a fair market could not and would not support. This model has as much to do with hedge fund investments and insider deals where big record companies are given stock in exchange for granting lower play rates as it does with what the consumer will actually pay for access to content. What many who know this business will tell you, is that no one really knows what the market will bear because artificially low subscription fees have been created and sustained on the backs of the content creators. I won’t address the craziness of how dreams of fame have motivated many to give away the fruits of their labor, or how doing so drives the “market price” down, making this business model viable for the time being, yet unsustainable for the long term.

        What I will say is that this is not a level playing field. Yet the few organizations that can legally defend composer’s rights (PROs like BMI & ASCAP) are under attack by streaming companies like Spotify and Pandora. Despite the fact that the consent decree agreement(s) (in ASCAP’s case dating from 1941 and BMI’s from 1971) require the PROs to grant anyone requesting one, a license for every work by every artist they represent, something the PROs must do in advance of “negotiating” the rate that will be paid for the right to use these works, the PROs are relentlessly attacked on every front by streaming companies, with scurrilous charges of being monopolies (the very use of the plural and the fact that only the U.S. has three competing PROs, demonstrates how ludicrous this all is!)

        Streaming, in and of itself is not bad, nor do I believe it is inherently good…. it is merely a technology. And as such, how it is employed will determine whether it has a positive or negative effect on our culture. If streaming so dominates consumer consumption of music that it virtually replaces all other methods (as many predict and/or fear), then even the models for division of revenue that terrestrial radio reluctantly agreed to the last time there was such a fight, will not create revenue streams sufficient to support being a “professional” musician, for anyone! And most of the streaming companies are balking at even paying those low rates for uses that generate the advertising revenue and subscription fees that sustain them. Because of their status as fledgling companies, these companies were initially granted special lower rates. These same companies now want to extend the special rates the PROs granted them well beyond their expiration and despite their profitability.

        Independent economic studies have clearly shown that the music these companies stream constitutes 80 to 90 % of their “value”, so why do they complain about sharing less than 2% of the profits generated by work they do not own and did nothing to create?

        The two prime issues content creators have with the streaming companies, currently dominating this industry, are not problems inherent in the technology of streaming, they are complaints about the business practices these companies employ. Our complaints concern: (1) how such companies are exploiting us as they disproportionately profit from our work, while doing nothing to aid in the development of the very lifeblood of their own industry, and (2) the hypocrisy of giving lip service to encouraging individual artists to negotiate separate “deals” as they do everything they can to undermine entities like the PROs, even as they enter into deals that “legally” exploit loopholes to the detriment of the musicians (like the Merlin deal Pandora entered into that cuts SoundScan payments by 50% or their purchase of a terrestrial radio station in Rapid City S.D. to avoid paying performer royalties), and doing so knowing full well that due to anomalies in the labor laws, artists can not band together outside of trade organizations or guilds (like the PROs) to legally fight such unfair practices. Individual content creators can, of course, remove their works, as Taylor Swift did with Spotify, but if she joined together with any other artists that have similar “issues” (especially on another record label) you’d see the lawyers representing Spotify hit them with labor violation charges!

        All of which brings me back to my basic point: while it is our choice to create and record our work, and even to go into debt to do so, if anyone profits from the use our work, we, the creators of that content, deserve a fair share of any profits our work generates! Louis Brandeis advocated what he called “Resale Price Maintenance:” to check “predatory competition by mass retailers, who cut prices to entice consumers into their stores”. As I’m sure you know, this dates back to the origins of our antitrust laws. Somehow in all of our infatuation with the “new digital paradigm” we’ve lost sight of the true value of the labor and those who create the “product” . And that problem effects even more than content creators! Quoting our 16th president:

        “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”

        Abraham Lincoln

        And none of this even addresses the value of the data these companies are collecting!

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