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Users of Music, from Tech Giants to Fans, Need More Incentive to Fix a Broken Market: Op-Ed

Like it or not, the days of buying music are just about over. We are now entering an “interactive streaming” phase of music consumption with more people listening to more music in new ways by many more artists.

In addition to the consumer shift, technology companies are using music to generate hundreds of billions of dollars through market share, software/hardware sales, free shipping subscription services, IPOs and/or the sale of their company. Spotify alone is valued at over $8 billion, close to the combined value of all the entities controlling the music its software distributes.

Despite the increase in music consumption and skyrocketing revenue, the per stream royalties earned by rights holders and artists are in a free fall, declining to the point where even a “successful” artist can barely make enough to buy food. In December 2014, if you controlled the recording and the composition of your songs you earned $0.0075 per stream in Spotify Premium in the US.

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Songwriters and music publishers are getting hit even harder than performers and sound recording rights holders. Many songwriters' and music publishers' songs are being used without licenses and without any payment. For the songwriters that do get paid, the per-stream rate is so low (currently about $0.00067 for each stream on Spotify Premium in the US), it can barely be called money.

If we value music as a society, or as a commodity for businesses to use, less money going to those who create or control it means less incentive and resources to write and record it. As the shift to streaming accelerates, these issues need to be addressed quickly to assure the long-term viability of the music industry -- before it is strip-mined out of existence.

Many of these issues trace back to a fundamental misalignment of interests. For the traditional music industry, sales of recorded music have historically been the driver of revenue. However, for the technology companies, music is used to generate revenue in less obvious ways: to gain market share, sell hardware and software, have an IPOs or sell their company. The value gained by these tech companies comes not through the sale of music, but through their use of music as a cheap add-on commodity to attract and retain users -- in the process, devaluing the inherent worth of the music they exploit.

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For example, Spotify’s value has increased to over $8 billion, despite losing money every day on music. Its focus and financial value is predicated on market share rather than revenue from the streaming of the music. Along similar lines, Amazon has sold music at a significant loss (i.e. the Lady Gaga album for $0.99) in order to acquire new customers for Amazon Prime, or to up-sell other items it carries.

Compare this business model to that of the music industry, in which the revenue made from the sale or stream of the music is the financial end in itself.

If this misalignment of interests is not corrected, there is no incentive for the services to adopt and share the music industry’s goal of revenue generation from the sale, or stream, of a song. As an example, assume the rights holders or artists make nothing (and one could argue that’s pretty close to what they make per stream right now) and note how it has no direct impact on the financial bottom line of the technology company using the music.

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This misalignment may also help explain why interactive streaming services are not getting all the required licenses, nor paying songwriters all the royalties they’ve earned for the use of their compositions.

As an example, Audiam estimates show a minimum of over 200,000 unlicensed songs being used by Spotify in the US last year (although the figure is thought to be much higher). The use of music without licenses is considered to be copyright infringement. In addition, in just the US, songwriters were not paid royalties by Spotify on what appears to be over 14 billion monetized streams.

It’s important to note this level of infringement and noncompliance is not restricted to Spotify, it is endemic across most of the interactive services.

The streaming services are aware of this problem, but have done nothing to fix it. They want to build their fortunes on the backs of creators, but then complain that paying those creators accurately and on time is too hard to deal with.

Their “solution” is to outsource this responsibility to third parties -- Music Reports and HFA in particular -- that they already know, through their pre-existing history with them, cannot fulfill all of the required obligations.

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The streaming services should invest in the necessary infrastructure to facilitate the proper procurement of licenses and accurate payments, rather than outsourcing, complaining, and blaming the music industry for their own shortcomings. This is not a crazy request; it’s a basic requirement to be in the music business (not to mention it removes legal liability).

In addition, they should re-visit another problem area, the formula used to calculate streaming royalties. Right now, over 99 percent of a subscriber’s monthly subscription fee is spread out and paid to all the artists streamed in the service as opposed to just the ones that single customer listens too. For example, as bizarre as it sounds, if a music subscriber listens only to the Sex Pistols, a portion of his/her subscription money is paid to Liza Minnelli and every other artist whose song streamed in that month.

To correct this inequitable situation, the money from each subscriber should be paid only to the artists the subscriber listens to. The end result would be an increase in royalties to streamed artists, with an increased incentive for artists to motivate their fans to sign up for a subscription.

This ties into the next problem. The music industry needs more of the general population to pay for music. Unfortunately, the current value proposition of “unlimited streaming of 40 million songs” for $10 a month is not one most people are willing to pay. To solve this problem, there needs to be a different positioning, marketing campaign and service that appeals to the masses.

For example, for $10 a month, your own music is available to stream from the cloud on demand from any device. It’s also backed up and available to re-download whenever you like. In addition, you also get a music “concierge” that, based on your listening habits, handpicks and presents 10 new songs each month (less is more). This concierge also auto-generates custom crafted playlists on demand for daily listening or any special event you may have (birthday, wedding, anniversary, graduation, party etc). And with an opt-in by the subscriber, the concierge can even tell you which other people in the world share your musical taste and allow you to explore their songs and playlists.

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Another option is to bundle the music service into the cost of the billions of smart phones, tablets, computers and other devices (not an easy feat, but something to take note of).

Unfortunately, solving these problems and building the right systems is not the path many of the interactive services are taking. Instead they are spending money attempting to convince Congress that it’s too hard for them to figure out who controls which rights, and too hard to deal with the inconvenience of licensing from, and paying royalties to, the right entities.

The irony in all of this is that the music industry has not done anything to hamper or harm technology companies' quest to reap billions off the backs of the creators. In the meantime, revenue for artists is plummeting, works are being used without licenses, systems are not being built to pay rights holders, and many artists are not even getting paid the pittance they have rightfully earned.

My request is very simple: can streaming services please assure they have a license and make accurate payments on time? If not, can they please not use the music?

We’ve been able to move from a completely illegitimate music service like Napster to a semi-legitimate service like Spotify. Is it really asking too much for them to become completely legitimate and not destroy the industry in their quest to build their fortunes?

Jeff Price is the founder and CEO of Audiam.

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