As Amazon turns up the volume on streaming, Spotify should shudder

Amazon Music Unlimited
Julian Chokkattu/Digital Trends

The music industry was recently buzzing with Amazon’s announcement that it plans to kick off its first national TV campaign for its music streaming service – Amazon Music Unlimited. While the company already has “tens of millions of users,” increased marketing dollars will be sure to score Amazon even more – at least some of whom could jump ship from industry leaders like Spotify and Apple Music in the hopes of scoring a cheaper monthly price for an all-you-can-eat buffet of streamed music.

Tamir Koch
Tamir Koch is President of eMusic, a digital entertainment pioneer and 20-year champion of independent artists and labels.  Today he’s passionate about the power of Blockchain to fix what’s broken in the music industry.

This campaign push from Amazon begs an important question. Knowing that it’s widely documented that streaming has resulted in operating losses for market leader Spotify, why is the e-Commerce giant putting money behind an unprofitable business? Peer behind the curtain and it’s a simple answer really: like Apple, Amazon’s primary business model is not making money off music — its instead focused on retail, logistics, web services, and Alexa-enabled smart devices. However, building a competitive product works to support its other business needs, even if its music service ends up being a loss-leader. At the end of the day, all Amazon really wants is to make sure people are using Prime services, and by tying its streaming music service to Prime, it’s doing exactly that.

A Stark Reality For Streaming Services

While Amazon and Apple can both afford to gamble with unlimited streaming, it’s companies like Spotify — whose main source of revenue is based on the unlimited streaming model – that should be concerned. Despite the continued dominance of streaming among consumers (streaming accounts for 62 percent of US music revenue in 2017 according to RIAA), the streaming model looks unsustainable for any company where music is the primary revenue source. Case in point: Spotify’s recent quarterly earnings — which revealed that it lost $458 million in revenue over the past 12 months.

The streaming model looks unsustainable for any company where music is the primary revenue source.

For streamers like Spotify, a rolling debt to major label shareholders represents a significant hurdle on the road to profitability. Why? The cost of royalties that providers pay to labels is far too high. Spotify’s recent label licensing negotiations — bringing its label payout from a whopping 88 percent to 77 percent — along with direct licensing deals with a small number of independent artists who can now upload their music directly to the platform, are strong signals that the business can’t sustain the payout levels to the big labels.

Artists Profits Are Dwindling

It’s not just streaming providers and their bottom lines that are hurting, but also the artists that fuel their playlists. A real and growing frustration is occurring among artists over the dwindling streaming profits they’re receiving — even though paid subscribers are spending upwards of $120 a year on streaming music services, as opposed to an average of $42 per person in 2010. In just one example that echoes the experience of many, Musician Peter Frampton announced that he had made only $1,700 for 55 million streams of his song Baby I Love Your Way.

Unfortunately, it’s not expected to get any better. As more consumers flock to “all you can eat” unlimited streaming options, artists are getting fewer dollars for more streams. In an industry driven by streaming subscriptions, certain parties (ie. labels and publishers) are guaranteed revenues while others — specifically the artists — are not. Artists, musicians and songwriters are left to pick up what’s left after everyone else takes their cut — which isn’t much.

spotify app

This, coupled with the fact that the top artists continue to get most of the streams, leaves the majority of artists and musicians scrambling to make any meaningful and sustainable income from their songs. Of the 377 billion streams in 2017, 99 percent of all music streaming comes from just 10 percent of available songs. That’s not by accident; big labels are funneling major marketing dollars to showcase their top artists on Spotify and Amazon’s “featured” playlists — leaving indie artists unpromoted and essentially, unpaid.

Another unfortunate result of unlimited streaming’s unsustainable model is that for artists, making a living depends more and more on touring and gigs. These days, the reality remains that most of the money artists make comes from live performances and merchandise, causing many musicians to either live a life on the road or skip out altogether and find their income from another source.

What Can Be Done

In the current system, unless service providers have alternative sources of revenue to prop up a music streaming service – e.g., Apple, Google and Amazon — or are prepared to lean heavily on payola practices, they’re facing an uphill battle of declining profits. Add this to the fact that the majority of the industry’s artists and musicians are accepting pennies on the dollars for their streams and it’s clear: Things must change.

There are solutions, though whether or not they are viable ones in the current music streaming landscape remains in question.

At its very core, blockchain offers a transparent, decentralized way for goods, files, and currency to be exchanged.

In order to survive, service providers must reconsider the unlimited and even single-price model. Simply put, it’s not sustainable in a fixed cost environment — both for themselves and the artists that they work with. In the future, there won’t be enough new, paying users to supplement the growing number of streams, further lowering the amount made per stream and average revenue per user. One solution is a pay as you go model, where heavy listeners pay more than those who only stream a handful of songs every month.

Just as important, a real and lasting adjustment needs to be made of the split of the theoretical profit pie that’s traditionally been divvied up between labels, streaming providers, distributors and musicians and artists. While artists themselves must demand that they take home more money per stream, the industry as a whole must be open to the benefits that new technological innovations can provide.

One of those advancements comes in the form of blockchain. At its very core, blockchain offers a transparent, decentralized way for goods, files, and currency to be exchanged. How does that work in the music industry? Blockchain can put the power back into the hands of artists through the use of smart contracts. Using smart contracts, every interaction with a song or album — from upload to purchase and stream — is documented within the blockchain, giving artists full visibility into rights and rewards associated with their music. Artists and labels will be able to better view, track, and manage music royalties and data, providing quicker access to funds and the flexibility to redistribute rights.

Looking Ahead

While innovations like blockchain aren’t a sure-fire saving grace to the challenges that streaming faces, it’s one tool that streaming providers and artists alike should consider if they want a lasting, efficient and viable model for selling and streaming music.

If not, the industry may see providers like Spotify fall to titans like Amazon that can afford to “lose” and ultimately, fans may be forced to spend more money on the music they crave.

The views expressed here are solely those of the author and do not reflect the beliefs of Digital Trends.

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