Turning Talking Heads

With apologies to LBJ, but when you’ve lost David Byrne, you’re losing the argument over whom to blame for music artists’ meager share of the streaming pot.

Two years ago, the former Talking Heads front man came out as the scourge of Spotify, casting the streaming service in an op-ed that ran in the Guardian, as a sort of malevolent force that was destroying all that was good and holy about the music business:

There are a number of ways to stream music online: Pandora is like a radio station that plays stuff you like but doesn’t take requests; YouTube plays talking_heads_album individual songs that folks and corporations have uploaded and Spotify is a music library that plays whatever you want (if they have it), whenever you want it. Some of these services only work when you’re online, but some, like Spotify, allow you to download your playlist songs and carry them around. For many music listeners, the choice is obvious – why would you ever buy a CD or pay for a download when you can stream your favourite albums and artists either for free, or for a nominal monthly charge?…

The amounts these services pay per stream is miniscule – their idea being that if enough people use the service those tiny grains of sand will pile up. Domination and ubiquity are therefore to be encouraged. We should readjust our values because in the web-based world we are told that monopoly is good for us….In future, if artists have to rely almost exclusively on the income from these services, they’ll be out of work within a year.

Other artists, like Dave Lowry of Cracker, joined the sad chorus. But in an op-ed published in the New York Times on Sunday, Byrne struck a very different tone regarding streaming, even managing a (somewhat begrudging) compliment for Spotify for trying to illuminate the industry’s opaque payment system:

It’s easy to blame new technologies like streaming services for the drastic reduction in musicians’ income. But on closer inspection we see that it is a bit more complicated. Even as the musical audience has grown, ways have been found to siphon off a greater percentage than ever of the money that customers and music fans pay for recorded music. Many streaming services are at the mercy of the record labels (especially the big three: Sony, Universal and Warner), and nondisclosure agreements keep all parties from being more transparent…

It gets worse. One industry source told me that the major labels assigned the income they got from streaming services on a seemingly arbitrary basis to the artists in their catalog. Here’s a hypothetical example: Let’s say in January Sam Smith’s “Stay With Me” accounted for 5 percent of the total revenue that Spotify paid to Universal Music for its catalog. Universal is not obligated to take the gross revenue it received and assign that same 5 percent to Sam Smith’s account. They might give him 3 percent — or 10 percent. What’s to stop them?

The labels also get money from three other sources, all of which are hidden from artists: They get advances from the streaming services, catalog service payments for old songs and equity in the streaming services themselves.

Byrne’s newly nuanced view is of a piece with a gradual but accelerating shift in the debate over streaming within the industry (as well as outside it), from a near-exclusive focus on the per-stream royalties paid by the streaming services to the role of the middlemen who collect those royalties and are supposed to distribute them to artists.

That shift gained momentum earlier this year with the leak of a now-expired contract between Spotify and Sony Music, cited by Bryne in the Times, that laid bare much that was not widely known (although no secret to industry insiders) about just how, and how much the streaming services pay the major label groups:

Putting together a picture of where listeners’ money goes when we pay for a streaming service subscription is notoriously complicated. Here is some of what we do know: About 70 percent of the money a listener pays to Spotify (which, to its credit, has tried to illuminate the opaque payment system) goes to the rights holders, usually the labels, which play the largest role in determining how much artists are paid. (Arecently leaked 2011 contract between Sony and Spotify showed that the service had agreed to pay the label more than $40 million in advances over three years. But it doesn’t say what Sony was to do with the money.)

The labels then pay artists a percentage (often 15 percent or so) of their share. This might make sense if streaming music included manufacturing, breakage and other physical costs for the label to recoup, but it does not. When compared with vinyl and CD production, streaming gives the labels incredibly high margins, but the labels act as though nothing has changed.

Consider the unanswered questions in the Swift-Apple dispute. Why didn’t the major labels take issue with Apple’s trial period? Is it because they were offered a better deal than the smaller, independent labels? Is it because they own the rights to a vast music library with no production or distribution costs, without which no streaming service could operate?

The answer, it seems, is mainly the latter — the major labels have their hefty catalogs and they can ride out the three-month dry spell. (The major labels are focused on the long game: some 40 percent to 60 percent of “freemium” customers join the pay version after a trial period.)

The shift in the discussion is obviously bad news for the labels. For years they have effectively deflected the ire of artists who feel ripped off by streaming by pointing the finger at the streaming services, and narrowing the debate to the largely meaningless calculation of per-stream royalties. There was plenty of empirical evidence that something was wrong with that argument, of course. Whatever the royalty rate Pandora and Spotify were paying it was sucking all the profit and then some from their businesses, as they turned in quarter after quarter of net losses. But as the streaming services were the new kids on the block they made convenient foils for the labels.

Though Byrne doesn’t use the term, the behavior he’s describing by the labels is more or less the textbook definition of rent-seeking. Economically speaking, the labels are bringing very little to the streaming party. They’re putting no new capital at risk, they’re marketing costs have been all-but eliminated by algorithmic discovery, they’re generating precious little net new economic activity. They’re mostly just collecting rents for the use of their vast catalogs of sound recordings, most of which have long-since been recouped and amortized.

The labels do, however, have the law on their side. The copyrights they hold — by contract and statute — are going to go away, and will guarantee them a seat at the table unless and until Congress were to change the law.

It’s enough to give an artist the blues.

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