Streaming Money: A Back-Of-The-Envelope Analysis

A few weeks ago, I was having dinner with a friend of mine, a very talented musician who opted for a career in tech. When explaining his choice, he told me that “musicians don’t make money like they used to.” What he really meant by that was “nobody buys music anymore, everybody streams music, streaming doesn’t pay enough.”

He is right. Streaming is today’s most popular way to consume music and since 2015 accounts for the majority of the music industry’s revenue in the US (Variety). To fight streaming by encouraging people to buy CDs and downloads is like asking them to use cabs rather than Uber: it won’t happen because it’s less convenient and more costly to the consumer. So the question we should ask ourselves is the following: does streaming not pay enough given the current climate of the record industry?

Note: The purpose of this analysis is neither to defend the streaming services, nor to criticize them, nor to explain their payment system, but rather to give creators an overall idea of what they can earn.

ANALYSIS:

Let’s assume an individual artist wrote and recorded an album in its entirety. The artist is already established with a dedicated following. The new album has reached 10,000,000 streams on Spotify.

Spotify boasts an average rate per stream of $0.0072. To be conservative, let’s also assume that Spotify isn’t as generous as the claim and that the actual payout is half of that. That brings the average rate down to $0.0036 per stream.

10,000,000 streams x $0.0036 = $36,000

Depending on the recording agreement, labels will try to keep at least 50% of receipts  (excluding publishing royalties), and in many cases much more.   They will also strike deals with the streaming platforms themselves, agreeing to reduced payments from the services in exchange for large advances or even equity in the streaming company.  However, while artists needed label support to manufacture and distribute a record 20 years ago, they can now release music independently online. In fact, digital distribution costs can be as low as $50 per album per year. Consequently, an independent artist would keep close to 100% of the revenue described above, i.e. $36,000.

Many creators complain that payments are lower than in the glory days of the music industry. One thing is for sure: the global music revenue is 60% of what it was 15 years ago (MBW). So yes, artists and writers make less than what they used to. However, that doesn’t mean the old model would work more in their favor today. Let’s compare an independent artist releasing streaming exclusives to an equally popular major label act selling CDs and another one selling downloads.

1,500 streams = 1 album sales (CNN) <===>  10,000,000 streams = 6,667 album sales

• CD sells for $9 wholesale

Manufacturing cost: $1
Distribution: 15% x $9 = $1.35
Net per Unit: $6.65

Net sales = $6.65 x 6,667 = $44,335.55

If an artist has a record contract with a 20% royalty rate (which is higher than what most labels would offer), this brings his/her payment down to $8,867.11. For each song sold, the label pays $0.091 to the publisher/writer (i.e.  mechanical royalties). Say the album contains 10 tracks, mechanical royalties add up to $0.091 x 10 tracks x 6,667 albums sold = $6,066.97. Artist/writer gets $14,934.08 total.

• A digital album sells for $7.70 wholesale

Distribution: 15% x $7.70 = $1.16
Net per Unit: $6.54

Net sales = $6.54 x 6,667 = $43,635.52

Applying a 20% royalty rate yields $8,727.10, plus $6,066.97 in mechanicals, totaling $14,794.07

CONCLUSION:

The concept of an independent artist is a recent one that has grown in popularity in conjunction with streaming. Some of today’s most successful artists are independent and have garnered their followings without the help of any record label. That’s because the key marketing tools, i.e. social media and streaming platforms, are available to anyone with an internet connection. The streaming services will have to make many concessions in order to satisfy the industry’s demands. These include more transparent payments, efficient licensing methods and fair compensation to publishers, all of which are being addressed as we speak. In the meantime, creators have a platform to release their music as they wish, while retaining all their rights, and making up to three times the amount they would with a record label lurking over their shoulder.