As music streaming grows, royalty worry leaves industry on sour note

Written by New York Times | New York | Updated: Jan 30 2013, 08:57am hrs
Like plenty of music fans, Sam Broe jumped at the chance to join Spotify two summers ago, and he hasnt looked back.

Spotify, which began streaming music in Sweden in 2008, lets users choose from millions of songs over the Internet free or by subscription, and is increasingly seen as representing the future of music consumption.

Broe, a 26-year-old from Brooklyn, said that having all that music at his fingertips helped him trim his monthly music budget from $30 to the $10 fee he pays for Spotifys premium service.

The only time I download anything on iTunes is in the rare case that I cant find it on Spotify, he said.

A decade after Apple revolutionized the music world with its iTunes store, the music industry is undergoing another, even more radical, digital transformation as listeners begin to move from CDs and downloads to streaming services like Spotify, Pandora and YouTube.

As purveyors of legally licensed music, they have been largely welcomed by an industry still buffeted by piracy.

But as the companies behind these digital services swell into multibillion-dollar enterprises, the relative trickle of money that has made its way to artists is causing anxiety at every level of the business.

From 78 rpm records to the age of iTunes, artists record royalties have been counted as a percentage of a sale price. On a 99-cent download, a typical artist may earn 7 to 10 cents after deductions for the retailer, the record company and the songwriter, music executives say. One industry joke calls the flow of these royalties a river of nickels.

In the new economics of streaming music, however, the river of nickels looks more like a torrent of micropennies.

Spotify, Pandora and others like them pay fractions of a cent to record companies and publishers each time a song is played, some portion of which goes to performers and songwriters as royalties. Unlike the royalties from a sale, these payments accrue every time a listener clicks on a song, year after year.

The question dogging the music industry is whether these micropayments can add up to anything substantial. No artist will be able to survive to be professionals except those who have a significant live business, and thats very few, said Hartwig Masuch, chief executive of BMG Rights Management.

Spotify has 20 million users in 17 countries, with five million of them paying $5 to $10 a month to eliminate the ads seen by freeloaders.

In a recent interview, Sean Parker, a board member, said he believed Spotify would eventually attract enough subscribers to help return the music industry to its former glory that is, to the days before Parkers first major enterprise, Napster, came along.

I believe that Spotify is the company that will make it succeed, said Parker, who is also a former president of Facebook.

For those whose income depends on royalties, the biggest concern has been whether streaming cannibalizes CD and download sales by offering a cheap or free alternative. Cliff Burnstein, whose company, Q Prime, manages Metallica and other major acts, said that even if streaming hurts sales, all is not lost as long as the number of paying subscribers continues to climb rapidly.

There is a point at which there could be 100 percent cannibalization, and we would make more money through subscriptions services, Burnstein said. We calculate that point at approximately 20 million worldwide subscribers.

Metallica recently announced an exclusive deal with Spotify. If those subscriber ranks grow, royalty rates will also climb, recapitulating a process seen whenever new technologies have been introduced, said Donald S Passman, a top music lawyer and the author of the book All You Need to Know About the Music Business.