Over the past several weeks, we have seen multiple articles on Nekst.biz about the transition occurring in the music industry, its impact on sales, and the changing revenue models. It is no secret that sales continue to decline while consumers’ access to and consumption of music via various streaming outlets is dramatically increasing. But what is the actual financial impact to the record labels with this shift? We will explore the reality of the actual financial streams that record labels see as compared to the general costs they incur to work artists to country radio.
CD sales are no longer a mainstay. While they may remain available in the marketplace for years to come, a quick walk through any retail store will reveal smaller and smaller shelf space for CDs. More relevant today is digital sales. It is probably hard to find a person on the street who does not have some sort of mobile device that has the ability to play digital music. The alarming statistic, recently revealed however, is that while Q1 ’14 CD sales are down over 20%, digital sales were also down by over 13% in the same period, a continuation of the decline that the industry observed in 2013. What is more staggering is that for the first time since the launch of the iTunes store in 2003, individual track downloads were down nearly 6%. What is a label to do when album sales are already down, and now they are experiencing a downward trend in individual tracks?
The potential silver lining is that interactive streaming (e.g., Spotify) was up nearly 35% during Q1 ’14 and for the first time, subscription-based streaming revenues topped $1 billion last year. On top of that, global digital music revenues actually increased just over 4% in 2013, totaling $5.9 billion. But is this really a silver lining when it comes to dollars and cents (or in the case of streaming, fractions of a cent)?
Digital Sales Revenues
When a label sells a $.99 single on iTunes, it receives approximately $.69 from Apple. Out of that $.69, the label must pay its distribution fee based on the actual retail price (ranging from 10-20%), the mechanical license fee to music publishers ($0.091), and credit the artist with the artist’s royalties (which are typically inclusive of producer royalties). Let’s assume for the moment that the distribution fee is 20% and the artist royalty is 15% based on the wholesale price (i.e., the $.69 per download). After all of these items are paid, the label is left with a whopping $0.2975 per download. Granted, the label will not have to pay out the artist royalties until the artist is recouped, but even throwing that amount back into the pot, it leaves the label with net revenues of approximately $0.40 per download. However, a semi-successful single that sells 100k units, only generates a measly $40k in label revenues (as opposed to approximately $408k if those sales were albums utilizing the same formula). Compare that $40k against the hundreds of thousands of dollars that a label spends to sign and launch an act. It’s not unheard of to see an initial single promotion and marketing budgets soar above $400k. At those rates, the label would have to sell one million singles just to break even on the promotion/marketing spend, and that doesn’t even take into account the general overhead a label incurs in operating on a daily basis.
Streaming, on the other hand, has seen an increase in average royalty rate per stream to the tune of 33% ($0.005 up from $0.00375 last year). However, whether from YouTube, Spotify, Rhapsody, TouchTunes or the like, it takes many streams at $0.005/stream to equal the forty cents of revenue that a single download generates (80 streams to be exact). Regardless, while one stream “merely” pays $0.005, each additional stream is still paying something to the label, whereas if one purchases a single on iTunes and plays it 200 times, the label only receives $0.40. Put another way – open up your iTunes and look at your Top 25 Most Played playlist. If you’ve had iTunes for awhile, you may be surprised to see how many times you have played some of your favorite songs. If your top played song (let’s assume it is 200 plays) was listened to via streams instead of a download, the label would have received around $1.00 instead of just $0.40.
Will Streaming Save the Labels?
If consumers continue the recent trend in streaming consumption, then labels may actually see more digital revenues in the long-run. Many are quick to be alarmists and claim that the labels are quickly on their way out because of the decrease in digital sales, but when the overall music revenues continue to go up, it is hard to envision how that could be the case. We must all recognize the shift in how consumers are consuming music and find new opportunities to monetize the music in a way that helps everyone survive. The reality is that there appear to be many more opportunities for exploiting music today than ever before. However, we, as an industry, must work together to ensure that such opportunities are properly exploited and that music providers pay a reasonable rate for the great art that so many invest significant resources to create.
Jason Turner is a partner at Keller Turner Ruth Andrews Ghanem & Heller, PLLC, a full service entertainment and sports law firm in Nashville. He is a frequent guest speaker on emerging entertainment legal issues and an adjunct professor of Entertainment Law at Stetson University College of Law in Gulfport, FL.