Pandora and Spotify Rake in the Money and Then Send It Off in Royalties | Hacker News Reader

Pandora and Spotify Rake in the Money and Then Send It Off in Royalties

mediadecoder.blogs.nytimes.com

63 pointsjamesbritt44 comments

As someone who was entrenched in the music startup world for a while, I've concluded that the only way to save the music industry is for the major labels to die or become obsolete and for new, innovation-friendly content producers to emerge in their place. We need for music what Netflix is trying to do for movies/tv (see Lillyhammer, new Arrested Development season).

It's that broken.

I would be very excited for Spotify to start signing artists directly, without the major label middleman. It could let Spotify turn a profit on those artists while simultaneously paying out more to the people making the music.

As an insider, pvnick, do you think Spotify could ever pull that off without burning the bridges of its current label deals?

They could, but only for a short while with small artists until the labels start seeing them as a competitor rather than something to be exploited. Once the labels start to feel threatened you can be 100% certain they will take their ball and go home. That and probably litigate against Spotify.

Spotify already lets unsigned artists add their music through music aggregators like cdbaby: http://www.spotify.com/us/work-with-us/labels-and-artists/ar...

I suppose the music aggregators are a modern day take on record labels.

Not really, a label does much more than get an artists music in a store. Distributing the content is probably the easiest thing for artists to do on their own. Marketing, touring and merchandise are more complication and labels are still the best solution.

Well, that's why I said "take" on it. These companies are actually doing quite a bit that a traditional label would do: they store the media (the digital version of manufacturing it), distribute it, and market it. I don't think a traditional label is always the best solution, especially for groups that will never be big enough to justify the huge upfront costs a label puts in.

These aggregators are really for the tail end of the spectrum: the 90% of bands who represent 1% of music listening time and don't have much hope of getting signed.

Assuming Spotify signs artists (or Apple for that matter), will they be willing to upfront costs against touring, recording, production? How would they structure recoupment? Apple could structure a better deal because they can cover mechanical royalties through download purchases. Spotify would be streaming only. The economics would be very, very tight.

It'd be hard for them to do a 360 deal to get revenue from the money making aspect of music (sponsorships and live), unless they also staffed up artist development (touring) and sponsorships/partnerships/biz dev.

Its not as easy as just "signing an artist"

If it was, we'd have already been disrupted by the indies.

I realize it's a complicated question, and that Spotify (or Apple, or any other company we love) couldn't just jump straight in and be an instant success. And while Apple certainly has the cash to cover upfront costs, staffing up, etc, Spotify probably doesn't, at least at large scale.

Are there cases where it would work, though? Bands that stumble upon internet fame are still the exception, but they exist, and it seems like they benefit much less from the visibility and other perks that traditional labels offer. Could a band like OK Go (back in their early days of YouTube success) be better off going directly through a distributor like Spotify, getting less up front, and getting a bigger revenue share? I know a couple of years ago they jumped from EMI (http://okgo.net/2010/03/10/onwards-and-upwards/). Maybe they could have done so earlier?

OK Go would still have to register with a publisher and a PRO if they wanted to see any residuals at all. If they just wanted to bypass music and be a "video" band they'd still have to manage the music bed in some fashion, even if through Tunecore or someone like that.

These "the labels must die" discussions get tedious because not many know what they do. I quit being at a label, but not because I think it should die, just because it was anyhow.

It's important to give some credit to the role major labels play in the industry. It might not be the best theoretical system, but practical limitations mean this is something of a second best solution, it is feasible, and a world without a major label oligopoly might not be as rosy as imagined.

Majors might appear as obstacles in the latter stages of the distribution chain, sure, but earlier on they play a key role in ensuring the masses - that's not necessarily you or I but fans of popular music - get the very best. That's the best in talent, from song-writing to singing to producing to touring. For that, an institutional arrangement promising immense returns to those at the top is a decent incentive structure for distilling what gets to us. And even if you look further down the spectrum at the indie side of things, you might notice it mimics what the oligopolies do.

You hear about Bieber as a product of YouTube and yes, streaming was key to his success. But without Scooter Braun's contacts on the industry side of things, the conversations those facilitated behind the scenes, would Bieber have become the Bieber 'we' have come to know and love?

In the end, the music listener's quality of life has improved. For artists, it's tough out there but that's nothing new. The circumstances have changed but fame and money are still on the table for those willing to put skin in the game and lose 99 times out of 100. For those more concerned with the love of it all, they can rest assured their message is getting out to more people than ever (if it's worthwhile). It may not be the best conceivable scenario, but I don't see it doing music much harm longer term. If anything, expect more killer less filler.

And for fans of live music, it's never been better. The prices might be higher but so is the standard, the choice, the accessibility.

For Spotify, the road ahead is somewhat hazy and needs to be navigated as such. A few years of loss making activity make sense if it keeps growing, keeps hammering out deals, and creates the bulk of its value a number of years down the line.

Too subtle, I think. People will miss your pervasive irony.

Unfortunately piracy has the exact opposite effect--it strengthens major music labels by preferentially harming more responsible or smaller labels.

Major label A&R looks for young bands that it can sign to 360 deals and promote like crazy to teenagers. (For those not aware, a 360 deal means the label gets a cut of every revenue source: album sales, concert receipts, sync licenses, etc.)

Smaller labels do not have the capital to operate that way, or (in many cases) choose not to operate that way out of a greater sense of responsibility to the artist. As a result they are more dependent on their cut of album sales--which have declined tremendously under the pressure of piracy.

Depending more on album sales for revenue is stupid and will keep you very small. Albums are now merchandise, akin to shirts, posters and stickers. You don't get rich off them. If you cater to the fans you'll make some money as they like to collect things and support their band. But compared to other merchandise, albums are probably one of the least valuable.

Labels need to realize they are promotional agencies primarily and take a cut, like acting agencies. You promote them and help them get gigs. You get a cut of the profits in return.

The problem is that there's already a promotional agency which takes a cut - the tour promoter! [0]

That industry is slowly converging to a state of brokenness near that of album-selling record labels, as Live Nation (themselves a Clear Channel spinoff) were allowed to merge with Ticketmaster in 2010 to form a unified ticketing, venue booking, and promotion cabal.

0: http://en.wikipedia.org/wiki/Tour_promoter

That's not a problem. That is just another player. There are tons of people taking a bite of the pie when it comes to actors. Yet they continue to make a living and so do their agents.

OK, I was waiting for a moment to dig up budget sheets.

As of 2010, these are the line items on a budget to release a major label record. The same (minus a few things) applies to indies.

PROMOTION:

Indie promo (paying someone to promote to radio)

Tip sheets (newsletter advertising)

Radio promo contests (those win-it-before-you-can-buy-it and fly-aways)

Radio marketing (ads)

^ the above breaks down by format. Formats are:

Alternative, Active/AOR/Rock, College, AAA, Specialty Format (ie, Urban).

--------------

MISC PROMOTION:

Radio shows (including artist travel, accommodations, etc)

Promotion CD's

Tip sheet design and prep

--------------

SALES:

Advertisement placements (ie, circulars, endcaps)

Retail Marketing

Outside retail marketing

Retail merch admats

--------------

ADVERTISING:

Radio

Online

Outdoor/sniping

Circulars

Prep and art production

--------------

STREET MARKETING

Merch

Promotions

Outside street team

Samplers

--------------

MISC MARKETING:

Advances, DJ advances

Remixes

General merch (ie, those funky things artists do to promote records)

--------------

PUBLICITY

Indie publicists (if the artist doesn't use the staff)

TV appearances (travel, etc)

Photo shoots

Press travel

Tour logistics (aka Artist Development)

Prints, bios, misc (copywriters, etc)

--------------

VIDEO:

Video production

Live footage, EPK cuts

VIDEO PROMOTION:

Video indies

Video promotions

Video duplication

--------------

TOURING:

Tour support

Tour marketing

Promo tours (including setup, crew, backline, travel)

Ticket buys (from the venues, these aren't free!)

--------------

ONLINE

Marketing

Website tech cost

Website design

Other tech (Facebook, widgets, games, Lee Martin)

--------------

PACKAGING

Art

Production

--------------

INTERNATIONAL MARKETING

Tour support

Promo tour

Publicity

Production

Misc

--------------

* Some of these aren't done. Some are much more expensive than others. Anyhow, a lot to be said about this but that's worthy of a blog post.

Also this has likely changed a bit recently.

How effective is marketing in these days? I get all my music recommendations from friends.

Then you're a rarity.

Marketing is important, even more so than before in my opinion. Look at artists like One Direction, a group of talented boys but nothing special... then look at the hysteria that surrounds them, Justin Bieber is another good example.

The song "Call Me Maybe" is a perfect example. That song was released almost one year ago, but how many people had heard of it? Maybe a few thousand. Then Carly Rae Jepsen signs to the label ran by Justin Biebers manager earlier this year... now it has over 220,000,000 youtube views and almost everyone that pays attention to popular culture can recite the lyrics.

Marketing is everything. Sure it's not always traditional marketing -- billboards, tv spots -- but using existing artists too. Carly Rae Jepsen is famous because of Justin Biebers marketing power.

How pervasive is Lady Gaga and Justin Beiber and Foster the People, Gotye, Fun., etc, etc.

In summary: very.

If it wasn't for marketing, your friends would not have likely heard of them in order to recommend them to you. Marketing is more than just MTV and radio. That viral YouTube link you sent out was most likely started by someone in the music industry. That indie band? You know of them because someone marketed them.

I wonder how much of that combined $380m ended up in the artist's hands and wasn't consumed in industry "fees".

That would be very interesting. Is this simply not a viable model without raising prices (in the case of Spotify) or are record execs really the fat-cats that we all think they are and would they be able to save themselves by simply being less greedy and taking out a smaller cut.

Its arguable that today's IP law => more weath for intermediaries than Artists.

e.g. a book:

Retail: $10 $-5 publisher $-2 printing costs $-1 marketing =$2

So, in ths example, assume a 10% amazon click through = 1 or 1 over the profit 2 of the original artist. Ratio of distribution cost to artist benefit = 4 to 1.

If a charity was run like this[1], it would probably be a crime.

Given the file/size quality needs for music (vs books), there is no justification for huge payouts to a long-chain of multi-lelevel marketers / middlemen.

------

Edit: relevance

[1] A net payout at 20% of donations receipts for a non-profit, is generally considered dubious.

When have businessmen not been wealthier than artists? And when have artists not been more popular than businessmen?

Looking back, ok but what about going forward? Tech is obviating the economic "function" of legacy music biz. The only thing proping them up is gov't monopoly rights. At some stage (of remediable innefficiency), it makes more sense to have an "art tax" and pay the artists directly. why should society pay functionaly usesless intermediaries 80 cents on the dollar? to duplicate files and send them over the intenet? Cmon. If an alternative (irs) can do this via taxes and NP foundations for 20 cents overhead, without reducing the artist production incentive? There dies the public policy argument supporting "recording" industry. It goes without saying that artists make all their money performing live and through sales of T-shirts. This would continue...Society is better off...No? Whats not to love. Spotify and soundcloud and you-tube et al could still have a role (they pre-suppose the existence of product in any event).

I agree that copyright and especially patent law is ridiculous these days and that the government propping up the music industry is wrong.

But my wider point was that the reason they capture so much value is because they're businessmen, that's what they do. It's not that society chose to pay them 80% or whatever, it's that they figured out how to make that money. If we kick out the foundations, the major labels, dinosaurs that they are, will crash and burn, but this won't lead to artists reaping the rewards, it will lead to new businessmen who spring up to figure out how to extract value from the new status quo.

All of this is to say that I don't think it's effective to measure what percentage artists end up as a proxy for the quality of the law. There are just too many ways to game that, and you know who's going to come out on top. Rather I think the original principles of copyrights need to be revisitied, and we consider only the maximum benefit to society, with the simple goal of having a richer culture. The question of "incentive" to create is especially slippery since it can never be tested, and the full-time lobbyists are all on the big content side. But the real problem is that the law is woefully out of date with regard to the ease of copying bits, and the value of a remix culture.

Plenty of artists have removed their music from Spotify because they pay next to nothing.

Depends on their streaming royalty rate. The death of mechanical as a revenue model is not going to be pretty for anyone.

Some history, for those not in the know:

http://www.techdirt.com/articles/20110707/03264014993/riaa-a...

http://www.techdirt.com/articles/20100712/23482610186.shtml

http://www.salon.com/technology/feature/2000/06/14/love/prin...

Spoiler: bands get about 20% of what the label gets. Your album can sell 1 million copies and your band might still owe the label $500,000. Labels take 10-20% off the top for breakage fees. Breakage. As in vinyl records that broke during shipping.

Yes, but that's for the recording/release/marketing/tours side. Royalties continue to be paid long after the production costs are covered. I imagine they should go 100% to the artist, but wouldn't be surprised if they don't.

"With artists and labels hit hard by declining sales over the last decade, it’s hard to argue for lower royalty rates."

It isn't really. Changing times sometimes call for drastic measures. What you were able to charge in one medium might not be the same as you are able to charge for a new medium.

It might not be fun for the people who were at the top of the heap before the paradigm shift, but that just means they should have made preparations for that shift when it was easiest for them to do so.

As bandwidth increases and hosting gets cheaper, someone is going to create a nonroyality paying music (and eventually video) streaming site with the ability to select any song. And it won't even have to be hosted from countries that don't reliably enforce copyright, as the number of cloud providers and hosting resellers increase it will become easy to rent new servers to repopulate their CDN faster than they can be shut down by the government/RIAA.

So wait nobody gets paid for anything? Where does the music come from?

grooveshark.com?

Pandora paid $149 million, or 54 percent of its revenue, for “content acquisition,” otherwise known as royalties.

What does Pandora do with the other $127 million plus?!? It's incredible to me that they can't operate a profitable company on that kind of cash flow. I'm genuinely curious - where does it go?

Still waiting for one of these or Mog or Apple or Rdio to sign artists themselves...

This is really a shame because these companies are making a shitload of money.

Pandora and Spotify may rake in the money, but they never actually created the content. It would be like me starting a business that resells Microsoft software and complaining that it's too difficult to make a profit because I have to pay Microsoft for the content.

I would be much more impressed if they signed their own artists and made a huge profit.

A popular and easy-to-use medium for finding and listening to music is a valid product, and they deserve to be paid for it. Spotify is useful enough to me that I'm happy to pay for it, and I listen to more music than I would without it.

I hope that labels make enough from these services that they allow them wide enough margins to stay in business.

Aww, you mean a CEO can't stay rich by giving away other people's creations for free? What a tragedy.

I don't think that's fair. These 2 companies have done more for music and promotion of music than anyone in the modern age - from an industry renown for collusion between the four majors (one falls into line and they all do etc). They have basically rescued a dying industry that essentially built its modern day business model on litigating everyone through RIAA and so on. That's not innovative - that's stupid and idiotic.

Instead, what you have now is two companies who are trying to save a dying industry through subscription and the music industry trying to milk every single penny out of them. The dichotomy that creates is that these companies aren't sustainable long term - they are hemorrhaging cash re-the article:

Spotify’s accounts for the last year, recently filed in Luxembourg, show that it lost $57 million in 2011, despite a big increase in revenue, to $236 million ... On top of that it had more than $30 million in salaries, and more than $30 million for various other expenses. That is how you lose $57 million on $236 million in revenue.

That's just sad. The only incentive these companies have is to be ultimately purchased by the recording industry who can then dictate pricing on their own terms - and that's bad for everyone because then they are going to push prices up insanely. In fact, if these were purchased by the recording industry - it might be the worst thing to happen to music because we are all again at the mercy of the industry. They will want to maximise pricing and I believe, given their history, they will maximize anti-competitive behavior by essentially price fixing competing services out the market. By staying out the USA for 2 years, it was evident Spotify pushed (to some degree) the music studios to capitulate on their pricing - they both gave a little because the industry was desperate for cash. It's obvious to anyone that's the only reason Spotify weren't in the USA sooner - it wasn't economically feasible because the model was already proven to be a hit in Europe.

I don't, for one second, believe that the Music studio's are paying this out to the artists. They are dumping this straight into the bank - the industry in that regard is now basically running on live shows and tshirts for artists to survive. So don't be so quick to judge "giving away for free" - because thats not what they are doing. They have produced amazing services in my mind - and there should be some reward for that by the industry in recognizing and enabling them to create sustainable businesses.

Not to mention that Spotify and Pandora are making it possible for young, poor people to be active music consumers without turning to piracy. When I was in high school, my options were to pay $15 an album, and thus only have access and exposure to a tiny music collection, or pirate music, hear a lot of great music, especially from smaller artists, and drag my friends to their concerts every time they were in town.

Now I'm in college and still broke, but I pony up the $10/month for Spotify, and I continually encourage my friends to do so as well. They've created an experience that's dramatically better than piracy (even with nice private trackers), pays out at least some to the artists along with the moneypile that goes to the labels, and enfranchises people like me. I've always listened to an extremely wide selection of music, and now that I can pay to do it, I'm very happy to.

And I still drag my friends to every good concert in town.

Exactly, I'm proud to pay my Spotify membership and I feel I get my money's worth... I'd probably pay more. I have now gone over 2 years without torrenting a single album (the exception being one quite-large Canadian band who happened to not be on Spotify at the time ... I'd already bought the album on vinyl so I didn't feel to bad about it).

Before Spotify my best effort at trying to be legal was to splash out every couple of months on some vinyl copies (nice to own... I still do this sometimes) of albums I'd already stolen via bittorent.

Spotify, is a music-lover's dream and it's how music distribution should work.

What? The whole point is that Spotify and Pandora are doing things legitimately via advertising or subscriptions and paying the appropriate royalties.

You can get very rich by giving away others' creations for free. Sites like the PirateBay are profitable and MegaUpload seemed to be doing very well for itself until it was questionably taken down.

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