Streaming

How Ice Cream Can Help Make Sense of Streaming Royalties (Op-Ed)

Thomas Hesse
Klas Förster

Thomas Hesse, CEO and Founder of Dreamstage.

Music streaming costs the same whether you stream one track a month or 3,000 -- $10 a month. It's all-you-can-eat. If music were ice cream, the parlors of Spotify and Apple charge the same to eat a tub a day as they do to eat a cone a month. But while this simple model created an incentive to get a critical mass of music lovers to subscribe to these services, it's probably not fair for the long term – and it's already starting to creak at the seams.

For creators whose music is on these services, revenue depends on only one thing: Their market share of all fans. Consider Joey, a hypothetical 55-year-old jazz fan who listens to one album of ten tracks a month; and Ben, a 16-year-old hip-hop lover who streams 3,000. Right now, they each pay $10 to streaming services, of which they share roughly $6 with labels. But in the ice cream analogy, Joe is the cone-a-month eater who likes the bourbon flavor, while Ben would rather have a tub of strawberry every day. Under the current model, 99.67% of their combined $12 go to the artists Ben likes, while the only one Joey listens to gets 4 cents – basically nothing. Joe's money essentially subsidizes the artists Ben likes. In ice cream terms, fans of bourbon flavor are subsidizing those who prefer plain strawberry.

This issue is drawing more attention after Soundcloud's recent decision to switch partly to a "user-centric" model, under which each subscriber's fees would go to the artists that he or she actually listens to. In the example above, in a pure user-centric model – which Soundcloud is only partly implementing – the jazz artist Joey listens to would receive his full $6 – or at least the portion the label pays through to the artist – while those Ben likes would receive his.

Obviously, this would represent a major win for Joey's artist, as well as a loss for Ben's. But it does feel fair in one key aspect: Joey might not have subscribed to the service in the first place if that album he listened to wasn't available. To return to the ice cream analogy, fans of bourbon flavor would no longer subsidize strawberry.

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But wait – wasn't Ben eating a tub a day while Joey only took a cone a month? Shouldn't Ben pay more as well? And shouldn't those artists that have been played so much as a result of Ben's insatiable listening get credit for that? The user-centric model really only starts to look fully fair if heavy users would pay more – which means differentiated subscription pricing by the music services. Just as listeners who consume less music – or who spend less time with online services than they do with vinyl or CDs – should see their preferences reflected in support for the artists they like, it also seems unfair that they pay the same as those who stream music for hours a day. And users who listen for five hours a day may well be willing to pay more than $10 a month.

The current deal is just too sweet for those who eat ice cream by the tub.

The user-centric model is more fair – and kudos to Soundcloud and CEO Mike Weissman for pushing it – but it really only starts making sense if subscription prices can vary by usage. That way, artists preferred by infrequent users will get a fair share of the revenue brought in by their fans, but those who dominate the attention of heavy listeners will also make more – or at least avoid making less. The current system was a pragmatic model to bring music streaming into the mainstream, but as the industry matures it's time to rethink it. Since subscriptions can only grow so much in a given market, this new model could also generate more revenue overall – to the benefit of creators and services alike.

Arguments that user-centric accounting would be too complicated, or that the current model would be too expensive to change are in my view not the key issue – so much value has been generated by music streaming that changing the accounting infrastructure should be affordable if it makes sense, even if it's not easy. This is particularly true if significantly more revenue would come in from a new pricing model that would better reflect the value of music.

Thomas Hesse is the Founder and CEO of DREAMSTAGE, a premium ticketed streaming service for live music performances (www.dreamstage.live). He was the president of Sony Music in charge global digital business and U.S. sales and distribution when streaming music was introduced to the market.