The Melting Iceberg Syndrome and the Music Business

I really don’t want to write this post.

I’m an optimist; a glass-half-full type.

I believe in opportunity that comes from disruption.

I believe that there will always be people making music, and that there will be methods for these artists to monetize their creations, and that there will be business opportunities for those interested in working in the music business to innovate and make money.

However….

I don’t believe people are adequately assessing the current situation with respect to the trajectory of the music business (and, by that, I mean today’s music business, and not what it might become — by the way, no one knows what it might become).

There was a good piece that ran yesterday, written by Frédéric Filloux, entitled “The NYT’s Melting Iceberg Syndrome.”

While I tend to agree with the article’s assessment of the NYT’s digital operation, what really struck me was the relevance of the Melting Iceberg Syndrome and its relationship to the current music industry.

Mr. Filloux sums up the theory well:

…no matter how large the iceberg is at the beginning, it inexorably dissolves as it drifts toward warmer latitudes. The progression is barely visible but, at some point, as the exposed part liquefies under the sun, the iceberg’s center of gravity moves upward and it suddenly capsizes without warning (that’s why there is no permanent manned base on icebergs): “As an iceberg melts, the resulting change of shape can cause it to list gradually or to become unstable and topple over suddenly”. (From The use of catastrophe theory to analyze the stability and toppling of icebergs Annals of Glaciology, 1980).

What prompted me to write this piece was a piece on Hypebot entitled, “Another Industry First: Music Royalties Fall 1%.”

While the title of the article isn’t surprising, what is surprising are the reason PRS assumes royalties were down: “PRS suspects that digital piracy and a fall in high street sales are to blame.”

There is, imho, a glaring omission with respect to why royalties might be down: lack of royalties due to streaming.

It’s this issue that really resonates with me with respect to The Melting Iceberg.

I’ve written at some length about the rapid acceleration of streaming.

In an era of constant connectivity and universally available content, there is no distinction from a user’s perspective between streaming and downloading.

There is however a distinction from an artist/content owner’s perspective.

Put simply, if you’re an artist who is used to getting ~$7 for the sale of a ~$10 download from iTunes (or ~$.7 for the sale of a ~$1.00 single), you’re revenue (royalty?) is being diminished by several orders of magnitude when that same album/song is streamed.

While the figures change in terms of payments depending on if the stream is interactive (ala rdio, spotify, etc) or non-interactive (ala Pandora), in both cases the payment from streams is a number that has a decimal point, and then several/many zeros before a number that’s not a zero pops up (e.g. $.000x or $.000000x).

Thus, streaming — not “piracy” or “street sales” — is what’s causing the decline in royalties.

And, I do very much believe that the 1% decline is the tip of the proverbial melting iceberg, and that the iceberg is indeed listing, and that the days of artists/content holders seeing royalty payments even approximating amounts they’ve been accustomed to from the sales of downloads are rapidly coming to an end.

Certainly, direct to fan models offer some support, but, again, when customers begin demanding streams as opposed to buying downloads, artists will need to evolve and service the customers via a stream, and this will materially impact their revenue models.

In fact, it could obliterate the direct to consumer model. The very thing that makes d24 so compellng — cutting out the middleman in order to have a higher margin for downloads — is fundamentally altered. When (eventually – sooner rather than later) a customer comes to a favorite artist’s site, and wants to stream the music, will they really pay more to do so from an artist’s site than they do as part of a spotify/rdio subscription? Will they pay at all?

No. Of course not. The value proposition is all off.

This doesn’t mean that others (subscription, exclusive tracks, tix, merch, special packages, whatever) won’t fill some of the void, but those hefty margins that occur currently when a customer dls directly from an artist’s site will soon(ish) be a thing of the past.

Sorry for the doom and gloom. Maybe I’m wrong (I’m not).

As I’ve said, there will be new models that emerge (and, yes, there could be an increase in volume of streams that will offset some of the decline in revenue loss, but there’s going to have to be a massive increase of streams; I don’t see it), but I feel very compelled to at least raise the question: Are artists/content holders preparing themselves for the days when their margins from downloads are obliterated and they are only getting revenue from streams?

I hope so, but I wouldn’t be building on the iceberg right now.

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  1. Wendell Stamps’s avatar

    You make a good point – it’s apocalyptic but true. I think a lot of people like to think that services like Spotify would ideally function like TV re-runs, really it will be nothing of the sort. More money for bandwidth providers, less for content creators.

    Reply

    1. George Howard’s avatar

      Wendell, you bring up a good and interesting point with respect to bandwidth. Certainly if the cable/isps get (more) in the mix, and if/when net neutrality erodes, this might all sort of get lumped into a cable bill, I suppose. nnthe problem with that is curation, etc., and cable providers (via music choice or whatever it’s called) haven’t really been able to make music much a part of their business.

      Reply

    2. Robert Holsman’s avatar

      Its a pretty bleak proposition, but I can see no reason why it won’t come to pass. I now use spotify almost as much as I play from my own iTunes library and for one simple reason – I’m never going to be suprised by anything iTunes plays at me. I own it all, therefore I have heard it all. And with mobile devices approaching the point where we can all access streaming services all the time wherever we are, other than the sound quality there’s little incentive to purchase and store the music. nnIt would seem that the best solution would be for artists to stagger releases – music available to purchase on the day of release but not released to streaming services until later. Perhaps to premium subscribers to ensure revenue, or just singles to get attention? Rather like movies on TV which go to premium subscription channels first. There are options available for bands to monetise the services, but there’s no doubt that streaming will massisvely impact revenues as it gains more acceptance.nnMarvellous article by the way, thanks for the info!

      Reply

      1. George Howard’s avatar

        Robert, thanks for the kind words.nnI think you bring up a very important point with respect to not discovering anything new in our iTunes library; again, it goes back to curation, filters, recommendations, etc.nnI like your idea about artists staggering/altering how they release music.nnGeorge

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      2. Jjkeops’s avatar

        The music industry looks upon streaming services solely as a supplemental income in the interim between now and the point where intellectual property rights are enforced effectively on the www. This is especially true of Spotify – which paid a percentage of its shares to major labels in return for the use of their catalogue. The rate of royalty payment on music is negligible, but where the labels make their money is on the income of the company itself – via advertising and subscription fees – not on the pitiful rate of payment per stream. At present, the debate within the music industry is whether streaming can be seen as a help or a hindrance to record sales. There are those who argue on either side of the debate, the jury’s still out. nHowever, it will all become moot when filesharing is minimised. This will happen, (despite what filesharers believe about the untraceability of their actions via darknets etc), and it will happen not through anything as pitifully weak (in the scale of things) as the music industry’s demands. More likely it will come at the insistence of pharmaceutical or technological industries where intellectual property is a mainstay of their value, or as a governmental response to the threat they see in internet anonymity (wikileaks). At that point, unless music streaming has proved itself incontrovertibly as a valid promotional tool for recorded music sales, musicians and labels will simply withdraw their music from such services. The public will get sick of seeing ‘file not available’ when they click on their favourite song, and Spotify and the rest will become the gathering place for all the sub-par offerings of bands who currently give their music away on free downloads in the assumption that throwing free product at consumers who are already bombarded with other wannabees’ free product will somehow result in monetizable fanbase.

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        1. George Howard’s avatar

          This is a brilliant comment, and I agree with almost all of it.nnyou’re right, of course, that the interactive streamers (rdio, spotify, etc) have made deals with the devil/labels, and that any real profit will come from revenue/liquidity event. the problem is these companies (as yet) don’t have profit, and I’m not sure who would be a buyer.nni very much agree with you about the decrease in files haring; again, when you can stream whatever you want, there’s no reason to have the actual file, and thus no real reason to use torrent sites.nnI also agree that better IP protection won’t come from the music industry, but rather from players with much more at stake (as you say: pharma, etc.), but that entertainment firms could be the beneficiaries (to a degree).nni also agree that master owners (be they labels or individual artists) will sooner or later wake up and make better deals/withhold their content from these interactive streaming sites until they get a better royalty. the problem, of course, is that these interactive streaming sites can’t afford to pay a better royalty, and thus the master holders will hold their content/sell/stream from their own site(s).nnThe only thing i disagree with is that – at least in the US – non-interactive streaming services (e.g. pandora) can rely on compulsory license laws that enable them to grab whatever content they want and pay the established rates. in other words, the master holders and publishers can’t stop them from using their content.nnAs pandora appears to be the only service with a viable business model (maybe), i believe that this model will likely be the future, and – as i said in my post – this doesn’t bode well for content owners.nnthanks for your great comments.nnGeorge

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