Growth in royalties requires more change than calculation – Billboard

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If The Beatles wrote a song about music royalties, the band would sing about “The long and winding road” with higher subscription fees and better paying artists and labels.

The music subscription business model has been a mainstay of the record industry since its debut in the early 2000s. But over the past two decades, many artists and rights holders have opposed the fee. royalties paid by streaming services. Some ratios have improved: ad-supported royalties increase as online advertising grows. However, royalties from subscription services have less room to change. The biggest innovation is the change in how a pile of money is divided.

This week, Warner Music Group announced it became the first major music group to agree to a user-based royalty calculation with SoundCloud. User-based – SoundCloud calls it “fan-driven” – which means that royalties are charged from the fees and streams of an individual subscriber rather than a group of anonymous users and listeners. If you pay $10 a month and the rights holders receive $7 in royalties, that fee is split between the rights holders of the tracks the user actually streamed that month. The traditional way of calculating royalties is to group the subscription fees across all the music streamed in a particular month. The user-centric system is arguably more equitable because the artist’s biggest fans become their most important financial backers (as explained by MIDiA research paper). The user-centric system can also prevent royalties from fraudulent streams from ending up in the wrong hands. And, by some estimates, user-centric accounting will lead to better royalties for indie artists who are dwarfed by superstars.

It’s a small win: SoundCloud wasn’t among the world’s 8 largest subscription services in Q2 2021, according to MIDiA Research, far ahead of Spotify, Apple Music, YouTube Music, and Amazon Music. In fact, SoundCloud wasn’t even named in the incident. After Deezer and Yandex, each at 2%, SoundCloud falls into the “other” group with a total market share of 10%.

WMG’s move is proof that royalties are neither stagnant nor easily swayed. SoundCloud’s business is largely ad-based, which is already a user-based approach to paying royalties (one listener, listener generates royalties, pretty simple). Most artists won’t benefit from the move to user-centric royalty until Spotify (31% global market share), Apple Music (15%), and Amazon Music (13%) ) apply accounting system. Not that the user-centric plan will be a financial windfall: a 2021 study by Deloitte in France estimates artists beyond the top 10,000 – so most of them – will see Their payouts increased an average of 5.2% and less for more popular artists. A 2014 Norwegian paper found that a user-centric approach would increase the royalties of Norwegian artists by an average of 13%. Royalties are a zero-sum game: if some artists make more, some make less.

However, changing the way royalties are calculated can only help so much. A registered business can only pay so much to rights holders and creators before an already difficult business model becomes completely unviable. The typical company paid about 70% of its revenue. A 15% increase across the board should provide good financial gains for many artists while reducing streaming companies’ gross margins from 30% to less than 20%. Artists shouldn’t care about Pyrrhic victories.

Then there’s the way the studios charge the artists royalties. Here there have been modest, uneven achievements. The labels’ royalty rates have changed little over the years, but their accounting has become more artist-friendly (see Warner Music Group and Sony Music’s decision to pay royalties to certain artists that don’t work). invited). Artists who want the best pay will either release their music independently, share the royalties with them, or negotiate higher salaries by entering into a joint venture or profit-sharing arrangement with the label. However, there are no guarantees: an artist may be better off getting a smaller share of the royalties but working with a label will help provide more streams.

There is also some pressure to reduce royalty prices. Exhibit A is Spotify’s Discovery Mode, a promotional feature that allows artists to trade off lower royalties for a change in streaming activity. In theory, earning smaller royalties would make sense if Spotify put the thumbs up and offered more streams. One possible downside, however, is what some US lawmakers call a “race to the bottom,” where artists and studios feel pressured to accept lower prices “to break through.” through an extremely crowded and competitive musical environment”.

So where else can artists and studios look for royalty growth? Get more coins from each subscriber and get more subscribers.

Increasing the subscription fee has the same benefit for the artist as an increase in the royalty rate. There seems to be a lot of lag in the market: the standard price has remained at $9.99 per individual subscription for over a decade. Spotify, which has raised the price of several plans for many people in recent years, admits it has more room to raise prices – “it’s totally part of the strategy,” CEO Daniel Ek said during the company’s June 8 investor presentation. Apple Music recently increased the price of its student plans in the US, Canada and UK from $4.99 to $5.99 (or £4.99 to £5.99 in the UK). And Goldman Sachs recently increased its estimate for ARPU enrolling in 2030 from $42.80 to $45.80.

But price increases can be few and far between. While Spotify believes it has the right to set pricing, it is not currently willing to pass a price increase. Instead, Ek cited the current “uncertain” economic environment as a justification for looking elsewhere for revenue growth. And there’s a good chance that subscription services will offer a higher-priced option for high-definition audio. Instead of charging, say, $15 a month to a small group of subscribers who are willing to pay more for better sound quality, Apple and Amazon have opted to make a better part of the sound in their subscriptions. standard subscription package.

That makes subscriber acquisition a path to greater revenue (though not necessarily a higher royalty rate). Even the most lucrative markets have room for growth. “Even in our most developed markets, we’re still leaving a huge user base,” Ek said during the investor pitch. And newer markets offer tremendous opportunity – at a cost. Some of the subscription growth comes from markets (such as India and China) that have lower average revenue per user than mature markets (mainly Europe and North America). For some new markets, the potential lies more in the size of the market than in the size of the fees consumers are willing or able to pay. In a sense, subscription royalties are like found money: legal services are flourishing where CDs and digital piracy have gutted the revenue of the market. In a purely rational sense, something is better than nothing, and subscription services in once barren markets are a win for brands and artists. But in the real world, some may be overwhelmed by global growth because of the relatively low ARPU of some markets. In India, home to nearly 1.4 billion people, Spotify charges the equivalent of $1.49 per month for an individual subscription – just 15% of the price in the US.

The future of music is about finding growth in new places, not necessarily getting more out of each consumer. Emerging platforms like Facebook, TikTok, Twitch, and Peloton have the potential to generate billions of dollars annually for artists and rights holders. At Warner Music Group, emerging platforms generated revenue at an annualized rate of $345 billion, as of the first quarter of 2022 (including recorded and published music), growing from $325 million last quarter. That kind of growth could outweigh any improvement from changing the way streaming royalties are paid or passing through to modest price increases.


As of July 22, % change from last week and change year to year.

Universal Music Group (AS: UMG): 21.42 euros, + 3.4%, -13.6% YTD
Spotify (NYSE: SPOT): $111.65, +9.1 percent, -52.3% YTD
Warner Music Group (Nasdaq: WMG): $27.49, +6.8 percent, -36.3% YTD
HYBE (KS 352820): 167,000 KRW, +6.7 percent, -52.1% YTD
Living country (NYSE: LYV): $91.58, +8.4 percent, -23.5% YTD
iHeartMedia (Nasdaq: IHRT): $7.75, +12.5%, -63.2% YTD
SiriusXM (Nasdaq: SIRI): $6.46, +1.7%, +1.7% YTD
Deezer (PA: DEEZR): 4.35 euros, -9.4%, -27.5% YTD

NYSE Composite: 14,790.79, +2.4%, -13.8% YTD
Nasdaq: 11,834.11, + 3.3%, -24.4% compared to the beginning of the year
S&P 500: 3,961.63, +2.5%, -16.9% compared to the beginning of the year Growth in royalties requires more change than calculation – Billboard

Fry Electronics Team

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