Bottom Lines

Illustration by Ayo Arogunmati

Musicians are often critical of the business of music and its asymmetric distribution of value among the creators and the investors. There are criticisms of music labels, streaming platforms and venue owners publicly, but rarely do musicians present alternatives to resolve their issues with the value distribution. As music consumption shifts to digital channels, the asymmetry will be determined by streaming platforms, suggesting that artists should think about different methods to compute and allocate the value distribution realized on each platform.

The lack of offering viable alternatives from artists suggests they don't think there are other methods or they are bound to standard terms without the ability to negotiate better share of their value, with the exception of certain top tier artists, on these platforms. Even with the lawyers, accountants and managers to oversee the affairs of the artist, the acceptance of the current method of distributing value shows the power asymmetry between the artist and the streaming platforms.

The power of streaming platforms is derived from the lock-in of listeners on to one of two major platforms for their music consumption and this intermediary role in which listeners and the artist are required to interact or transact through a tollbooth further depeens the power of these platforms.

Streaming platforms have changed music consumption patterns with their business model, primarily subscription based consumption supported by an advertising tier. The transition from vinyl to CD maintained a one-to-one or one-to-few ratio, but with streaming the process is always one-to-many. As a result, subscription models are the dominant form in the streaming business and the music business. Artists get a share of value from these subscriptions but are they accurately capturing their share using the current form of revenue allocation?

Artists want fair allocations, but streaming platforms say that the current method is the most fair way to allocate share value. That method, which pools the total revenue collected in a month for each artist and allocates the percentage of total revenue per listen is how artist currently get paid on platforms (Total Revenue x (Artist specific number of listens / Total Listens on the platform). A volume driven approach that is simple, efficient and favours the top revenue generating artists.

New or non-mainstream artists might drive traffic through month-over-month subscriber growth, but if their volume of music consumption relative to total volume is low, their payout will be low. There is no upside to the peaks in their listenership. This mechanism for distributing value is the issue for artists, but most artists don't speak to this issue clearly or provide alternatives to resolve this problem. If we all agree that streaming is the best way to access music, then we should also create a solution for the distribution of value to the artist that is correct, complete and fair. The solution is not create another platform that uses the same calculation methodology that fails to correct the allocation issue, but to find new ways to determine how value should be distributed.

There are several limitations or restrictions that impact the price of a product or service on offer in the marketplace. The price has to reflect the cost, variable or fixed, the perceived or real value to the customer, and the competition, the players with more capital and scale. The cost to deliver the product or service can be accurately measured and factored into the pricing, but the other two constraints, customer and competition, require more sophisticated approach to price accurately.

Three pricing methods have been developed to address these constrains and they follow directly from the factors that affect pricing. There is the cost-based, customer-based, and competitor -based methods and each method or pricing theory were developed for goods or services sold in the physical world, but not for goods accessed digitally formed with 0s and 1s. Cost-based methods are inherently circular, costs are a function of sales, assuming limited fixed costs, and sales are a function of prices. More scale reduces the circularity, but there is an optimal point that price and costs diverge. Customer-used pricing fails to reveal the value to the customer. The customer can have too much power, resulting in underpricing. Competition-based pricing ignores the value proposition of the product or service on offer and can lead to pricing decisions that are unrelated to the demand.

If we were to connect these pricing theories back to the streaming platforms, we see that all three methods are factored into the pricing, but the quantification of value to the customer and value relative to that on offer from competitors is not easily determined. This further highlights why there is a need for alternative value distribution methods to assess whether the current method is right and how this value distribution informs pricing.

A graph of the relationship between pricing data and the sophistication of pricing method created will likely to show a cluster around low sophistication pricing and high use of data. This mismatch of pricing data to pricing method not only in non-technology companies, but also in technology companies. As consumption moves to digital channels, the pricing sophistication should be better as any low level pricing method will result in understating value and incorrect distribution of value to artists, streaming platforms, record labels and the listeners

So the solution is a more sophisticated pricing method, but the proponents of the current method will suggest improving through better costing or more customer focus to achieve the same goal. But why not consider other value-based approaches that reflects not only the value created, but also allows for an ongoing calibration of value, communication of value, ensuring all players in the value chain capture the right amount of value.

If there are other alternatives to test how value is distributed to the artist why is it not tested? There is inertia and maintaining the status quo, but we know the best way to do things is to evaluate all alternatives and compare. If it survives through multiple business cycles then we can be more certain the method is better than the others. If the other methods fail compared to the current method, then we should revert back to the status quo .

A few alternatives are presented below to reevaluate the value distribution on streaming platforms. It is not an exhaustive list, but does provide approaches worth considering for any artist on these platforms.

Equal Weighted

This method allocates an equal amount to each artist, but likely leads to an exit by the top performing artists who believe they are the source of most of the income on the platform yet not fairly compensated for their contribution

Proportional Weighted

This method can measure value distribution based on new and old songs on the platform. It can either allocate more to new songs to foster more creativity, but it can also lead to increased quantity of music and less quality. Value distribution to older songs lowers innovation but it recognizes the longevity of a song

Direct and Indirect Weighted

Direct allocation is when a listener enters the app and chooses the song without any recommendations or playlists developed by the platform. Direct shows intent and has a 1-to-1 relationship between amount paid and the single listen of each user

Indirect allocation is when a listener is assisted by recommendations or playlists. Indirect is passive and the value allocation should be less than the direct method for each listen

Time Weighted

This method measures how much of a song is completed compared to songs started but not finished. The value distribution will be higher for finished songs relative to unfinished songs

Genre Weighted

This method evaluates the consumption of different genres of music and the genres that drive new subscriptions on the platforms. If that specific genre is being consumed at a higher rate than others, then artists under that genre should be compensated at a higher rate than those in other genres driving less traffic to the platform. As genres shift in their power and influence over time due to the cyclicality of music, the allocation will be guided by this market shift in consumption

Volume Escalators

This method is based on listenership whereby if the consumption of your songs hit certain milestones then the artist gets paid at different tiers for each milestone.

Specific Weighted

This method pays the artist based on what each listener consumes in that period. It is simple, fair and resolves the allocation issue

Notes

[1] The dominant form of value distribution is the pro rata method, but recently other user centric methods have been implemented or proposed to different streaming platforms

[2] Universal Music Group on its FY22 call discussed plans to develop new artist centric value distribution methods