Streaming royalties are convoluted and complex. For example, streams are divided into categories like interactive, on-demand and webcaster. Some offer statutory licenses. In other situations each license has to be negotiated with individual rights holders. And pure-play statutory webcasters like Pandora have different rates from terrestrial radio webcasts. Is it any wonder that even professionals can get confused?
Meanwhile the overall music industry pizza is shrinking. Since 1999 overall U.S. revenue is down over 50% from about $14 billion in 1999 to under $7 billion in 2014. And it is easy to explain. Revenues from physical product were paid in dollars, digital downloads earned dimes, but streaming pays only fractions of pennies. Currently there are a modest 8 million paid U.S. streaming subscribers. They pay an average of $7.50 a month and the respective companies distribute about 70% of that income in royalties. That check comes to about $500 million! Nice payday, but not enough to feed a $7 billion industry. To fund today’s U.S. industry at its present level would likely take 90-100 million paid subscribers.
We’ve also learned that the Internet is not like a Walmart. It can’t be locked up at night and therefore controlling the distribution of music has become virtually impossible. For example, I can send a song file or link to thousands of friends with a single click. And who gets paid when that sharing takes place? No one.
As economists know, distribution affects supply and demand, scarcity and finally pricing. When an industry loses its ability to control distribution, its pricing usually drops which helps explain the above discussion. Something fundamental has changed in the music industry which explains how music became a public good. What are we not seeing?
From Product to Public Good
It might be hard to pinpoint the exact moment the change occurred, but the digital economy has transformed music from a product into a public good. Please read that again. …a public good. How do we know that and what does it mean? Let’s first look at the definition economists use to describe public goods.
Public goods are defined as Non-exclusionary. That is they can be used by everyone, including those who don’t pay. Also they are Non-rivalrous which means one person’s consumption does not reduce a good’s usefulness to others.
Harvard Law Professor William W. Fisher III offers some compelling points about public goods in his book, Promises To Keep: Technology, Law and the Future of Entertainment (Stanford University Press, 2004). Fisher compares the dire internet-caused circumstances facing today’s musical intellectual property owners with other historical precedents. Throughout history he asserts, governments have taken steps to, “counteract the danger that public goods will be underproduced.”
“A small number of socially valuable products and services have the following two related characteristics,” adds Fisher. “First, they are ‘nonrivalrous.’ In other words, enjoyment of them by one person does not prevent enjoyment of them by other persons. Second, they are ‘nonexcludable.’ In other words, once they have been made available to one person, it is impossible or at least difficult to prevent other people from gaining access to them. [Public] Goods that share these features are likely to be produced at socially suboptimal levels.”
So if the digital economy has transformed music from a product into a public good that everyone can access, can we still find a way to compensate intellectual property owners?
The answer is yes, there is a way to compensate intellectual property owners for the use of a public good—music. A detailed description of such a plan is the subject of this writer’s new book about collecting and distributing stream music royalties, The Digital Solution.