The case for a post-royalties music industry

I wrote this article originally for Water & Music in October 2021 after clarifying some of my thinking through discussion with the fantastic community there. Cherie has very kindly allowed me to repost to this Substack as it is foundational to a lot of the writing I have been doing since. If you enjoy it then you should seriously consider joining Water & Music as a subscriber.

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Introduction

One could argue that royalties are the bedrock of today’s recorded-music industry, and one of the primary means by which music creators are paid for use of their work. Financially, music royalties are also rapidly becoming a hot asset class for institutional and amateur investors alike — from the rise of dedicated royalty funds like Hipgnosis, to next-gen equity crowdfunding platforms like 3LAU’s Royal that give fans a share in their favorite artists’ streaming income. Many of the most urgent, if also most challenging, tech innovations in the music business are about improving royalty payments to artists in some way — whether by speeding them up (Paperchain), closing their key data gaps (Blòkur) or making their distribution more transparent and equitable (a key goal of many music/crypto projects today).

But for all their hype, royalties are also an inherently old-fashioned concept. The idea that an artist can release music, and then sit back and live off the paycheck ad infinitum, is grounded in a pre-digital industry.

Our world has changed significantly over the past 20 years, and will continue to do so in the future at an even faster pace. Our lives are more constantly connected socially and culturally; with that comes not only far greater competition in practically every aspect of our existence, but also increased expectations around access and availability. Consumers now expect to access products that were previously bought and sold in the analog marketplace as part of an all-you-can-eat service. Music, as ever the canary in the coal mine, has been impacted by these mechanics as brilliantly and brutally as could be imagined. Commentators often point to the growth of online piracy and P2P file-sharing at the turn of the 21st century as the point at which everything changed, and that is hard to argue against when looking at the numbers.

In the aggregate, music streaming data and income have cut a path towards recovery and growth. Three years ago, streaming outpaced unit sales for the first time in terms of the value that it contributed to the music industry, marking a boom period for investment in rights holders and DSPs and indicating an allegedly bright future for everyone involved.

Yet, even as the core mediums of consumption have evolved significantly in the digital age, the music industry still bases its payment mechanisms on a familiar, old-school concept: When a unit of music is “sold,” or a play on the radio is registered, a creator earns a share of the revenue generated as part of a licensing deal.

In the world of downloads, this model kind of worked. For one, there was an actual sale. And radio governance is usually managed on a country-by-country basis, so can be facilitated through national bodies. But streaming as the primary means of music consumption has created a whole new set of challenges. Not only is the question of whether a stream should count as a “sale” still hotly debated (for both chart and licensing reasons), but the scale and reach of streaming also pushes the mechanism for licensing and distributing royalties to a different level, with a far greater number of data points to capture, catalog and execute upon.

Plus, the UK Intellectual Property Office (IPO) recently suggested in a report that only 0.4% of artists generate enough money from streams to make a sustainable living off of music — and this percentage was calculated using a generous assumption of a $0.01 average per-stream royalty rate. Combined with the lower relative value coming into the streaming ecosystem (via lower average revenue per user) and the exponentially growing number of mouths to feed, the value that an average artist gets from streaming royalties is only going to decrease from its already low point today.

Anyone who cares about the future of artist sustainability and empowerment should view this moment as an opportunity for a step change in our very definition of what a musician is, and how they monetize and value their work.

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Our dominant royalty payment models are incompatible with internet culture

To be sure, it is essential to make sure that music creators are paid properly in our current system. However, I believe that the current financial mechanism behind royalty payments is archaic, and contributes to depressed development and innovation in our industry.

At the core of a royalty payment model is the notion of rights being represented for every single instance of a play, which requires some mechanism to match the number of plays that have occurred on a platform to the rights holders that control the underlying copyrights. Thus, there is an implicit assumption that every play that occurs is identified and attributed prior to the payment event, so that the right parties can be paid. This assumption is more realistic in an economy driven by products and unit sales, where the state of attribution is fixed (i.e. all rights holders are identified and credited, and relevant rights gained) prior to release.

However, as the internet has sped up communication among all of us, so has the speed at which we create, distribute, consume, and engage. The current situation of the music industry is that the processes that document and deliver music to the marketplace are working in a linear waterfall fashion, whereas creation and consumption are becoming increasingly parallel and flexible. Friction appears where these two drivers meet.

While this media supply/demand friction brought about by the internet is of course not unique to the music industry, the relationships between parties involved in shipping the unit of sale and those that need to be paid are especially fraught in music. As an example, prior to the current “digital age,” a record label would be required to seek permission from all the required rights holders before cutting and distributing CDs, aided by the time lag that occurs when developing a physical product. Even in digital music marketplaces today, a whole chain of events still must occur prior to a piece of music being released “properly”: All contributors identified and noted, splits assigned, rights cleared, identifiers attained, licensing deals signed and so on. Each of these processes relies on another process in the chain — and often on a wide network of third parties — to complete.

But as many working artists today will tell you, the creative process tends to work far more quickly than this. Artists can, and increasingly want to, get their work out to fans as soon as possible. So, the chain outlined above often gets broken with the release going out before everything is in place, essentially driving an exercise of attempting to catch the horse after it has bolted into a field. (Case in point: Several major hip-hop/rap albums don’t get their samples cleared until weeks or even months after their official release, leading to accounting nightmares for publishers.)

Another useful lens on this challenge is the role of DRM (digital rights management) and upload filters on the internet. In a music context, DRM involves checking that the user has the permission to listen to the music that they are about to play, while upload filters are a way of ensuring that the track that is put on a platform has the relevant rights clearance and has been attributed to the right parties. Both have been controversial topics over the past 15 years, but are essential for a usage-based, play-to-pay system to work. 

To a degree, the development of paid subscription platforms has alleviated the burden from users; rather than requiring that users run invasive software on their machines, rights management and usage tracking is wrapped up into the platform itself, where the fact that the track is there means that the fan is allowed to listen to it. However, the emergence of UGC (user generated content) on platforms like TikTok, Snapchat and Facebook hints towards the issues that still persist — especially when thinking through potential “micro-licensing” strategies that could put the burden of having a license to play or share a track back on the user, for example the complicated state that music on Twitch is in currently. 

Increasingly, we are seeing that the internet generates and propagates a different set of values from the pre-internet era. In a more connected and instantaneous world, the memetic value of content and culture is more pronounced. Artists can generate multiple layers of benefits — not all purely financial — through embracing this more open, accessible and connected behavior: The opportunity to build and join niche communities, to develop deeper connections with people whom they would never have been able to reach previously, to collaborate with parties around the world, to learn about the industry at a greater level.

Restricting and retrofitting this new paradigm of music usage and engagement to an old-school royalty mechanism creates artificial scarcity, building and maintaining a walled garden around music content that stunts the industry’s topline growth.

Limiting who can listen to music based on making them pay the equivalent of an entry fee defines a subset of the potential audience that it could reach. Sure, there are freemium mechanisms to extend that audience, but the financial cogs beneath that tend to not benefit the creator or platform, and generally include features intended to serve a worse experience for the user, such as shuffle only, limited skips, and advertising between tracks. When I worked at PRS, the adage of “driving people to first class by ripping the roof off third class” was often used to reference the industry’s strategy of pushing listeners into paid subscriptions practically by force. But, to continue that analogy a bit further, you do so at risk of losing a whole set of customers all together, and lead those in third class to find work arounds (such as ad blockers and piracy, to come full-circle).

In reality, media is not scarce on the internet. It is a living, breathing thing that gets stronger the more it is shared and appreciated. And so, if the main mechanic to pay our industry on the internet is through paid subscriptions on licenced platforms, at the cost of limiting its reach to potential audiences, then we risk growth in both overall industry innovation and the number of engaged music fans.

However, to enable creators to be professionals, there is of course a requirement for the generation of financial value alongside this emerging paradigm. This I believe is one of the key challenges that will make or break how the next 10 years of the music industry evolves. Can we develop a brand-new financial mechanism for music creators that works with the core mechanics of the internet, rather than against it?

A note on DSP licensing deals

The commercial agreement between a rights holder and a DSP is dictated through a license. For a DSP to be “fully licensed,” it must have licenses in place to cover all rights and exploitations for all music on its platform. This can easily run into hundreds of licenses to negotiate and maintain — no mean feat for any DSP, let alone those who are entering the market for the first time. The reason for this requirement is that the global rights picture is extremely fragmented; for each song in existence, there are multiple different kinds of rights to be covered, with different parties representing them around the world, and the division of labor of rights management varying widely from one territory to another.

The result is a complex, obscured licensing marketplace that arguably hinders growth in our industry. There is an argument to be made that these mechanisms are important to defend the value of music; however, they are at the cost of innovation. 

As an example, Netflix has emerged as one of the largest investors in original content in the video streaming age, and as a result has become a significant client for songwriters and publishers. However, Netflix’s business is implicitly global, which makes rights management for compositions in the content that it commissions rather tricky to manage. The common solution is to offer songwriters a “buyout” of their rights, i.e. pay the songwriter for a commission upfront which then waives any future right to royalty revenue. However, in the example of European writers, who are usually signed up to a European PRO, they have signed an exclusive assignment of rights with their society, which means that the PRO has to license their rights and they can’t do a buyout. This creates friction; either European writers give up a potential lucrative income stream, or they do the deal and ignore the PRO.

Licenses are generally designed and calculated based on precedent, i.e. taking an example of what has happened before and fitting that to the service in question. Bringing a new functionality or business model can lead to months, even years, of negotiations — costs that burgeoning, innovative companies struggle to shoulder — because the parties are relying on previous decisions as a foundation on which to base their argument.

And with all of this, the creator, whose art is being negotiated over, is often completely unaware of what is going on. It is basically impossible for a music creator to be fully abreast of exactly who is representing them for every single exploitation instance of their work in every single territory — let alone have a say in what kinds of restrictions their representatives are imposing on this exploitation.

One answer that has been put forward here is to devolve responsibility further to the creator, and to build a system where each can represent themselves. However, I fear that this will lead to even greater fragmentation of licensing for DSPs, and will erode market power for creators by diminishing collective licensing.

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For emerging creators, streaming is turning into a zero-sum game

Aside from the cultural considerations above, the dominant streaming ecosystem today is also becoming bleaker for emerging music creators.

As a reminder, the vast majority of music streaming services today use a pro rata rather than user-centric model to pay out royalties to rights holders. For instance, Spotify takes all of its subscription and ad revenue every month, allocates roughly 70% of that to a royalty pool and divides that pool among all the music rights holders on its platform based on relative share of plays. This means that the vast majority of a user’s subscription revenue ends up going to major labels.

We are now in a situation where the numerator (streaming revenue) is lagging far behind the denominator (number of music rights holders) in this royalty equation.

Let’s think through some rough numbers to illustrate this. Earlier this year, Spotify CEO Daniel Ek posited that the platform could host 50 million creators by 2025 — nearly 5x the number of active music artists and podcast shows on the platform today (8 million artists + 2.2 million podcast shows), which is already more than double what it was in 2018. Decreasing overall barriers to audio creation, and widening the definition of what it means to be a “creator” in the first place, will be pivotal in this acceleration of participation that Spotify is anticipating.

In 2020, Spotify’s total revenue was around $8 billion, roughly 70% of which went to paying royalties to music rights holders. That equates to an average of around $700 in Spotify royalties per creator in 2020 — with the following asterisks:

• Music consumption demonstrates an extreme version of the power law, so in reality that 70%-of-$8-billion royalty pie is strongly weighted towards the top 1%, and even the top 0.1%. And this is also assuming a total efficiency in distributing those royalties to artists, when really there is often a significant amount taken out before it finds its way into an artist’s pocket (e.g. through label contracts).

• Major streaming services like Spotify have seen growth plateau in their most established, valuable markets. In other, less proven markets (especially in Asia and Africa), DSPs are embracing a mixture of approaches that prioritize user growth over revenue growth, such as lower subscription fees, discounted family plans and telco bundling. The net result of this has been a 40% decline in Spotify’s average revenue per user (ARPU) over the last five years.

Again looking at rough numbers, the music copyright sector is currently worth about $35 billion today ($23 billion for recording and $12 billion for publishing). For the sector to scale in line with Spotify’s expected creator growth, it will have to be worth at least $175 billion by 2025 to deliver the same value on a per-creator basis that we have now. Digital music currently accounts for around 65% of recorded-music revenue and 25% of publishing revenue; assuming that these shares of revenue will increase over time, we can conservatively estimate that the digital music sector needs to be worth at least $115 billion by 2025 to deliver the same value on a per-creator basis.

Moreover, per multiple reports, a growing share of streaming consumption is going to back catalog, rather than new music. Juxtaposed with the dynamics previously mentioned — like an exponentially growing creator base and revenue that is growing at a far slower relative rate — this means that the value shared across new-entrant creators in today’s pro rata music streaming ecosystem becomes an ever-decreasing, zero-sum game¹.

Taking the position of a rights holder executive into consideration on this point, the reasonable business logic within this market might be to focus on more evergreen back-catalog rights and underinvest in new artists, at the detriment to the industry as a whole. (In fact, some of today’s top industry executives, like BMG’s Hartwig Masuch, have openly supported this shift.)

It’s for these reasons that I struggle to understand why so much focus is placed on campaigns seeking to change the division of funds generated from streaming, when there are arguably even bigger systemic issues at play. Of course, there are problems with how royalties are paid out currently, and solutions like user-centric payments do ensure that the artist payouts correlate more with consumption habits. But I worry that the hyper-focus on how to divide the resource available blinds us from two greater problems:

• Music streaming just isn’t generating enough value for the music industry at the top line, and

• The current music streaming structure overly rewards back catalog and heritage acts at the cost of new entrants.

If we are going to “grow the pie” of music streaming, then how can we do so while simultaneously encouraging and developing the next generation of music creators? 

Increasing the subscription price is a band-aid solution

One initial solution to increase music streaming’s topline revenue might be simply to raise the price of Spotify’s Premium subscription — which is probably one of the only products that has stayed at the exact same price point for consumers (9.99/month in the US and EU) for the past 10 years, despite general inflation.

This possibility is definitely on Spotify’s mind, as they are a public company with a duty to their shareholders to deliver as much value as possible to them; in fact, the company is currently testing price increases for Family Plans in select markets. However, as with any business, price increases must be balanced against potential market share loss. Spotify is a standalone company competing against loss-leading business units within the machines of big-tech conglomerates like Apple, Amazon and Google. So, the incentive is logically not there for Spotify to be the only service to push up their price, at the risk of losing their market-leading position and overall competitive advantage.

Music rights holders can (and do) compensate for this stagnation by increasing their “minima” in licensing negotiations (a minima is a fixed rate per play/stream/download, whereby the platform pays the licensor the greater of the minima or a percent revenue split in their royalty payouts). But this is an iterative change offset by the growth in other areas like discounted family plans, and the impact on the average creator is minimal.

Another alternative solution could be through better price-matching to fans’ willingness to pay. By tailoring price points of services and products to more specific consumer segments, creators could earn more money overall compared to the current model of a one-size-fits-all subscription or freemium solution.

A potentially interesting exercise on this front is to model what a better-priced streaming offering could look like in terms of its as-yet unrealized value. I have done a very basic version here, using some (literal) back-of-the-napkin math, but it is meant purely as a pointer rather than anything to base decisions on.

My initial analysis shows that if we enabled music fans to pay more for streaming in a way that reflects how they genuinely value the product, the total potential value gained for digital music could increase from $35 billion to $130 billion. Interestingly, the majority of this growth will come not from the top 1% spenders or “whales” (to borrow a term from the gaming industry), but rather from non-whales who simply have more flexibility to pay up to double the current subscription price.

These projections might seem like a positive sign, at least when benchmarked against my earlier claim that the digital music sector needs to be worth $115 billion by 2025 to deliver the same average value to creators as it is today. But the calculation method I used to arrive at these figures is an inherent overestimation, due to roughly shape matching the curve (i.e. fitting shapes to the curve and calculating the area within them). And simply making pricing higher or more dynamic to fandom doesn’t address the inherent flaws we discussed earlier. You could have a more expensive streaming ecosystem that technically funnels more money to rights holders, but still suffers from an extreme power-law dynamic that creates a zero-sum game for emerging artists, and still creates prohibitive friction in the context of internet culture.

Spotify still faces strong shareholder pressure to continue its growth. Their recent moves, and announcements at the Stream On event this year, indicate that the platform has a vision for growing into an “audio network” rather than a pure-play music streaming platform. Part of this is continued expansion into other audio forms (e.g. podcasts), part of it is deeper monetization of users (i.e. creators and listeners) and part of it is continued growth into lower-ARPU regions. All in all, the net end result for creators is unlikely to be higher royalties.

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Proposal: we move past royalties as an industry

To summarize the argument so far:

• The rate of streaming revenue growth is not catching up to the number of new creators coming into the music industry. A significant percentage of royalties are also paid out to heritage rights, which can inhibit the investment in and development of new-entrants. This creates a zero-sum game environment for the next generation of music creators.

• While the market structure of rights and licensing is necessary for a functional financial system built on royalties, it also produces unnecessary constraints against the propagation of art. Restricting the usage of music online to fit old-school, bureaucratic royalty mechanisms creates a walled garden around music content that stunts the industry’s growth.

The intent for writing this piece is in part to try and shine some light on issues that feel underappreciated in current discourse around our industry, but also to kickstart a conversation around what a different system could look like. Such a conversation may be awkward for some incumbent music companies as it involves a refocus on the way that the value of music is realized and propagated — possibly even detached from the underlying IP itself.

If royalties are making increasingly less sense for the next generation of creators, what other options are there to enable a completely new paradigm of music valuation and monetization? How would a creator build value in this new system across different stages of their career? What tools, services and sources of finance would they tap into? How would this impact the stakeholders whose entire bottom lines today rely on the concept of royalties, like labels, publishers and PROs? And how does a “post-royalty” mindset for artists impact the relationship that said artists have with these stakeholders?

The challenges detailed in this piece are complex and ingrained, and therefore there is unlikely to be one singular solution. More likely, multiple different approaches will emerge that each utilize a diverse range of strategies and technologies — and this may be precisely the point.

The key in unlocking a post-royalties music industry likely lies in music creators building their own financial systems with their fans and communities. Under this model, the very definition of “value” in music begins to mean different things to different artists, and becomes a product of the specific environment that they create with their communities and the kinds of behaviors they incentivize.

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The music/crypto paradox

The idea of artists setting the terms of their own financial systems starts to sound a lot like the way that many burgeoning music communities are using blockchain protocols, and systems around them such as DAOs, to collectively govern their own growth and have community members share in their upside. And so, we can’t talk about a post-royalties music industry without at least addressing crypto.

Overall, the vision of crypto is to build new financial rails for the future through decentralized, P2P processes and systems, without the requirement of a centralized authority. In this regard, crypto seems aligned with many of the core ideas discussed throughout this piece, and many artists and entrepreneurs have recently proposed crypto as an alternative solution for sustainable music monetization.

The rising tide of crypto is built across extreme hype cycles. The current cycle focuses largely on NFTs, which at least in concept appear aligned in goal with the heart of this piece: If content on the internet is omnipresent, then can we assign value to its soul?

Social tokens and DAOs are also emerging as an interesting solution space — especially assuming that future financial models for supporting the music industry will be driven by more efficient monetization of niche community engagement than is currently possible. For example, an existing artist or community could roll out a DAO that focuses on new music or is specific to a genre, rewards community A&R and builds out a support network, all built on its own financial ecosystem.

However, many music/crypto projects — especially those that involve fractionalized investment in streaming revenue, like Opulous and Royal — are ultimately still reliant on old-school royalty flows to generate value in their systems, and just happen to use decentralized mechanisms to re-package the backend of this decades-old process. If the key value proposition for your startup idea is to provide access to an artist’s royalty streams to a greater number of people, this may be enticing for fans, but is unlikely to affect the top line of the industry, at least in the medium to long term.

I would argue for crypto to be successful in disrupting the music industry, it needs to be focused at the more fundamental point of where, how, and why value could be generated, outside of the current dominant financial structures. Crypto as a whole also has some fundamental challenges to address, such as how financial valuation alone continues to dominate utility, leading many projects to be speculative land grabs while “whales” wait to seize growth. Scalability — not just in transaction volume, but also in distribution of value and control — will continue to be the key issue that crypto must overcome in order to drive more mass adoption, let alone integrate more effectively with an industry like music that moves at the speed of culture.

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Concluding thoughts

The music industry is robust and incredibly resistant to disruption and change. Market power is aggregated on both sides and rights provide a strong legal basis for control. Development is iterative and step change typically only comes through a shift in format or pressure from external forces. Usually, it’s very difficult to disrupt.

However, I believe that we are faced with an upcoming paradigm shift that will give us an opportunity to do so. The scale of new creators coming into the system, plus revenue that cannot scale at the same level under the current rules of the game, plus the growing weight of legacy copyright laws that ringfence value — all of this perpetuates a downward cycle for creators that will require fundamental change to break. This disruption will come from incoming creators who have never known the legacy industry and for whom it is irrelevant.

Fundamentally, with all of this, it’s important to understand what our goal is when designing for the future — identifying the key issues that we want to change, and the levers that we have available to do so; making sure that we don’t just replace and reform what we had before with something that is exactly the same; and ensuring that the future system we create is better than what preceded it.

1. Some more context on this argument: The length of copyright in music differs from country to country; generally, between 50 to 75 years after death. Until this point an artist, or their estate, will be paid out royalties for the use of their work.

The music industry has been in operation for 80–100 years, though really only started to look like it does now in the 1950s and 60s. This means that pretty much all popular music is currently still protected by copyright, and therefore is part of the royalty calculation.

There is a consistent and latent demand for “old,” familiar music, which generally persists through eras and generations of listeners. When at PRS in 2016, I attempted to categorize the top earning writers into “Evergreen” (writers that continuously maintained a position at the top bracket of earners) and “New entrants” and looked at earnings over the past 10 years. Roughly 75% of the top 500 writers could be categorised within the Evergreen grouping; conversely, around 25% would enter and drop out over the space of a three- to five-year span. Of course the songwriter and performer sides of the industry differ in that there is likely greater market concentration around a few prolific songwriters, but the overall impact can be seen through streaming numbers, where 66% of US listening goes to back catalog rather than new music.  

In a streaming environment, where there is essentially open competition for listener attention (notwithstanding the impact of playlists and recommendation algorithms), this means that a certain percentage of listener hours, and therefore royalties, will be dedicated to this relatively fixed Evergreen category of creator. As “catalog” music grows, so does this effect, a specific challenge faced by the charts. This is fair, of course, in a play-to-pay economy; the content that is getting listened to should be paid accordingly. However, it also means that a percentage of the value generated by the system will always be dedicated to this Evergreen grouping.