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The Economic Problem with Music – and How Music Streaming Could Solve It

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The Economic Problem with Music – and How Music Streaming Could Solve It The Economic Problem with Music – And How Music Streaming Could Solve it Prof. Dr. Peter Tschmuck Department of Cultural Management and Gender Studies (IKM) University of Music and Performing Arts Vienna Anton-von-Webern-Platz 1 1030 Vienna, Austria Tel.: ++43-1-71155-3415 email: [email protected] webpage: http://musicbusinessresearch.wordpress.com/ Contents Music as an economic good The challenges of the music streaming business model The revenue streams for Austrian indie labels The Economics of Music Streaming Music as an economic good The Economics of Music Streaming Music as a public good (Samuelson 1954) Private goods Excludability in consumption Rivalry in consumption Public goods Non-excludability in consumption Non-rivalry in consumption => „Free-riding“ problem The Economics of Music Streaming Music as a club/toll good (Buchanan 1965) When introducing a price mechanism – think of a toll road – a club good becomes excludable in consumption, but it is still non-rival. All music events with an access system – e.g. concerts and opera houses as well as music festivals – can therefore be defined as club/toll goods. The ticket price makes them excludable in consumption, but listening to the performances is still non-rival. In a concert, an individual appropriates the entire benefit from listening to the music despite the presence of other music lovers. The Economics of Music Streaming Music as an information good (Shapiro & Varian 1998) Originally, music was a public good (e.g. as music in the liturgy and as a public court entertainment). In the 18th century impresarios turned music into a club good by staging operas and concerts and collecting entrance fees. Music printing and later sound recording transformed music into a private good with a price mechanism constituting excludability and rivalry in consumption. Commercial broadcasting turned music into a public good financed by either commercials (private radio) or fees (public radio) In the course of digitization, the public good characteristics of music became even more relevant => P2P file-sharing. The Economics of Music Streaming How to solve the public good’s problem with music? 1. Broadcasting business model: ad-supported and/or public fees 2. Record business model: privatization of consumption 3. Subscription-based music streaming: club/toll good The Economics of Music Streaming The challenges of the music streaming business model The Economics of Music Streaming Who benefits from music streaming? The artists? The Economics of Music Streaming Subscriber pays The split of a monthly premium EUR 9.99 subscription of EUR 9.99 of a music streaming service in France EUR 2.08 (20,8%) EUR 1.67 (16.7%) go remain with Spotify to the tax authority EUR 5.24 are channelled EUR 1.00 (10%) are channelled to the record labels for to the collecting societies for further distribution. They for distribution to composers, pocket EUR 4.56 (45.5%) authors and publishers EUR 0.68 (6.8%) are distributed to all Source: SNEP-Ernst & performers for their music Young study, February 2015 streamed The Economics of Music Streaming Who benefits from music streaming? The artists? Answer: not really The Economics of Music Streaming Who benefits from music streaming? The streaming services? The Economics of Music Streaming Spotify‘s revenue and cost of revenue, 2012-2016 3.500.000 3.000.000 2.500.000 2.000.000 1.500.000 in 1,000 EUR 1.000.000 500.000 0 2012 2013 2014 2015 2016 Subscriptions 374.600 677.890 978.565 1.744.393 2.638.493 Advertising 55.500 68.157 98.823 195.843 295.011 Cost of revenue 386.498 614.523 876.089 1.623.624 2.482.973 The Economics of Music Streaming Spotify‘s annual operating loss, 2012-2016 0 -50.000 -100.000 -150.000 -200.000 in 1,000 EUR -250.000 -300.000 -350.000 -400.000 2010 2011 2012 2013 2014 2015 2016 Operating loss -37.556 -59.136 -76.876 -91.178 -165.180 -184.490 -349.412 The Economics of Music Streaming Spotify‘s cost structure, 2012-2016 3.500.000 3.000.000 2.500.000 2.000.000 in 1,000 EUR 1.500.000 1.000.000 500.000 0 2012 2013 2014 2015 2016 General and administrative 28.614 39.965 76.678 116.405 175.179 Sales and marketing 54.099 110.825 173.013 246.486 417.911 Research & development 37.946 72.723 121.030 143.307 206.853 Cost of revenue 386.498 614.523 876.089 1.623.624 2.482.973 Cost of revenue Research & development Sales and marketing General and administrative The Economics of Music Streaming SoudCloud‘s revenue and net loss, 2010-2015 30.000.000 20.000.000 10.000.000 0 -10.000.000 -20.000.000 -30.000.000 -40.000.000 -50.000.000 -60.000.000 2010 2011 2012 2013 2014 2015 Revenue 1.370.000 4.330.000 8.040.000 11.280.000 17.350.000 21.100.000 Net loss -1.550.000 -4.460.000 -12.430.000 -23.110.000 -39.140.000 -51.220.000 The Economics of Music Streaming Music streaming services that failed The Economics of Music Streaming Who benefits from music streaming? The streaming services? Answer: NO The Economics of Music Streaming Who benefits from music streaming? The recording companies? The Economics of Music Streaming Universal Music Group‘s revenue growth, 2015-2017 Source: Vivendi, First Half 2017 results, August 31, 2017, p.5. The Economics of Music Streaming Universal Music Group‘s first half year 2017 results Source: Vivendi, First Half 2017 results, August 31, 2017, p.25. The Economics of Music Streaming Source: Music Business Worldwide, “Sony recorded music sales fall 6%, hampered by strength of Yen”, April 28, 2017 The Economics of Music Streaming Source: Music Business Worldwide, “Warner Music just joined the $1bn streaming record company club”, February 7, 2017 The Economics of Music Streaming MERLIN‘s member survey 2017 Key findings Annual revenue distributions increased 52% to $353m. 64% of Merlin members report that audio streaming accounts for the majority of their digital revenues (2016: 46%). 67% of Merlin members stated that digital income accounted for over half their overall business revenues. 42% of members report that services such as YouTube account for less than 5% of their digital revenues The Economics of Music Streaming Who benefits from music streaming? The recording companies? Answer: YES, … but just the majors and a few indies The Economics of Music Streaming Music streaming revenue of Austrian indie companies from digital music distributor Rebeat in 2013-2016 6.000.000 5.000.000 4.000.000 in Euro 3.000.000 2.000.000 1.000.000 0 2013 2014 2015 2016 Streaming 274.067 458.955 564.877 5.214.375 Download 1.276.704 1.283.945 2.450.744 3.774.554 The Economics of Music Streaming Music streaming revenue of indie companies in Austria from digital music distributor Rebeat in 2013 and 2016 160.000 140.000 120.000 100.000 80.000 in Euro 60.000 40.000 20.000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 The Economics of Music Streaming Who benefits from music streaming? and of course … the music consumers The Economics of Music Streaming The Economic Problem with Music – And How Music Streaming Could Solve it Prof. Dr. Peter Tschmuck Department of Cultural Management and Gender Studies (IKM) University of Music and Performing Arts Vienna Anton-von-Webern-Platz 1 1030 Vienna, Austria Tel.: ++43-1-71155-3415 email: [email protected] webpage: http://musicbusinessresearch.wordpress.com/.
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