The Death Of Supply And Demand In The Music Industry

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I spent four years in college learning about the world of business, and in that time no one theory was engrained in me more often than the Law Of Supply And Demand. For those of you who need a little explanation, allow me to borrow definition from our friends at Investopedia:

A theory explaining the interaction between the supply of a resource and the demand for that resource. The law of supply and demand defines the effect that the availability of a particular product and the desire (or demand) for that product has on price. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.

It’s important to understand that the law of supply and demand is not actually a law, but it is a well known and understood realization that if you have a lot of one item, the price for that item should go down. That said, if you have a lot of one item, but also a high rate of demand for that item, the price should go up. If supply is low and demand is high, the price soars even higher. Grasping this concept is one of the very basic building blocks to any economic understanding.

When it comes to music, the demand for new content has always been high. As soon as we were able to produce media for mass consumption there was an immediate demand that the creative minds of the world continue to deliver fresh material on a regular basis. Radio introduced people to musicians and singers that they would then seek out at record stores or concert halls. Records and the memories created from concert experiences fueled consumer to consumer promotion, which created new fans for various acts who in turn also demanded new content. That process has continued to build audiences and develop talent for over half a century at this point, with social media and the age of streaming simplifying the process in ways people as recently as twenty years ago never could have imagined. There is a drawback to all this simplicity however, and if you ask me it has led to the law of supply and demand becoming something that no longer applies to the world of entertainment.

It’s no secret that streaming has made the vast majority of the world’s music accessible with a few keystrokes or clicks. One might think that would satiate the constant demand for fresh content, but in fact the opposite seems to have occurred. As soon as people dug through all the albums they had ever loved, they began digging into the records they always meant to listen to and never thought to buy. Once that effort grew tiresome, their focus switched to new content. Within a matter of hours, days, or weeks they have experienced everything they were ever curious about in the world of music and are ready to discover what comes next, all for a price that is – generally speaking – less than $15 a month. If they heard something catchy on the radio today, a quick turn to Spotify or Rdio would allow for endless repeat listens, as well as an opportunity to learn more about the artist’s work without making an additional investment beyond the low monthly service fee mentioned above.

..And therein lies the problem.

There is a large amount of music in the world that is waiting to be discovered, and there are numerous artists with international recognition who hope to continue delivering infectious material to their fans. Likewise, there is a growing user base across streaming platforms, and as those numbers rise so does the demand for new content. What never seems to change however, at least not in a way that offers legitimate aide to those creating the music, are the rates charged by streaming services for access to their vast libraries of music. The people behind these companies seem to view their services as something that aides bands by simply existing, and therefore don’t see the need to increase the rate they are willing to pay per stream. If artists don’t approve, they don’t have to join. They also have to miss out on the tens of thousands who use streaming as their primary means of listening to music, but that’s their choice. It’s not a choice as much as it is a shakedown in my opinion, but those are the options.

Let’s say I have a Spotify account and one day, just by chance, I discover your music. I fall in love with the first single, tweet about my excitement (likely without tagging you), and then browse the rest of your catalog within the span of a few short hours, if that. When I’m done you may have a new listener, but someone with that title is not exactly a fan. I enjoy your music, but aside from a few fractions of pennies and a possible social media mention I have done nothing to support you. There may be a store on Spotify with your merch, but whether or not I make a purchase is going to be based almost entirely on the music itself. There is no opportunity for me to engage with you, the artist, even though I am able to dig through everything you’ve released without taking my hand off my mouse.

It’s not just the music industry that is reaching this conclusion, either. Netflix took on demand movie and TV streams to every device a person could own, but in order to continue growing their user base Netflix has had to constantly update their offerings, even going as far as to venture into creating original content of their own. Consumers applauded their efforts so far and, just like before, there is now an increased demand for the high quality content offerings to continue. The same can be said for any Netflix competitor, be it Amazon, Hulu, or something just now being developed. Every platform needs a constant feed of fresh content in order to retain, let alone develop their consumer base.

With increasing demand there should be increased payouts to talent, but that is not what is happening. In fact, a senior team member at Spotify recently claimed the company has no current plans to change the per stream rate paid to musicians. Even if the company raises its rates, which it will more than likely do over time because – again – the demand for more of what they offer exists, artists will likely not see any additional money being funneled to them. To make matters worse, artists will also continue to see a decline in sales from physical releases as the world of streaming grows in popularity, which will only worsen a situation that has already forced countless creative minds to rethink their dreams of making art for a living.

If you think Spotify and services like it may one day go away, you’re just as crazy as those who hold out hope a decent per stream royalty will be unveiled sometime in the immediate future. With marketing moves like their recent Family Plan, which allows users to add people to their account for at a rate of $5 per person, it’s clear Spotify is settling in for a long stay in the world of music. They don’t want to be the leader of music streaming, they want to be the leader of how people experience music, and there are at least a handful of competitors trying to do the same. Their prices will fall as well, which will make music more accessible than ever while potentially having very little impact on how much artists are from those streams. Does that make any sense?

Let’s play devil’s advocate for a minute: You could argue that lowering the cost of access to music will increase the number of people listening on a regular basis, which would increase the amount of songs being played and the amount of royalties being paid out. That’s absolutely true. More people does equate to more spins, which will – over time – add up. Spotify pays right around $0.007 per stream, which would usually mean it took 143 spins for artist’s to earn a single penny on their work. Spotify does not pay on a per stream rate however, even though that would be easiest to calculate. Here’s an explanation of how their system works as explained on their company website:

Every time somebody listens to a song on Spotify it generates payments, but Spotify does not calculate royalties based upon a fixed “per play” rate. Although much public discussion of Spotify has speculated about such a rate, our payouts for individual artists have grown tremendously over time as a result of our user growth, and they will continue to do so.

The royalties artists see on their royalty statements derive from the formula above on a country-by-country basis, and depend upon the many moving variables specified in the formula. Of course, it is possible to reverse engineer an effective “per stream” average by dividing one’s royalties by the number of plays that generated them, but this is not how we measure our payouts internally nor is it a reliable yardstick for Spotify’s value to artists.

An artist’s royalty payments depend on the following variables, among others:

• In which country people are streaming an artist’s music

• Spotify’s # of paid users as a % of total users; higher % paid, higher “per stream” rate

• Relative premium pricing and currency value in different countries

• An artist’s royalty rate

Recently, these variables have led to an average “per stream” payout to rights holders of between $0.006 and $0.0084. This combines activity across our tiers of service. The effective average “per stream” payout generated by our Premium subscribers is considerably higher.

Again, we personally view “per stream” metrics as a highly flawed indication of our value to artists for several reasons. For one, our growing user population might listen to more music in a given month than the month before (resulting in a lower effective “per stream”), while generating far more aggregate royalties for artists. As with any subscription service, our primary goal is to attract and retain as many paying subscribers as we possibly can, and to pass along greater and greater royalties to the creators of the music in our service. Theoretically, another service could generate higher effective “per stream” payouts simply by having users who listen to far less music. We believe, however, that our service and the lives of artists will both be best if the World’s music fans enjoy more music than ever before in a legal, paid manner.

Beyond the numbers above and the persistent public demand for content, let’s not forget the fact streaming services need musicians as much – if not more – than musicians need them. Spotify and services like it are consumers of music, very big ones at that, and they need a constant feed of new music in order to appease the millions of consumers who are seeking entertainment on their platform. Their demand for content should be met with a demand for higher royalty rates, but thanks to having secured separate deals with various major labels in advance of their launch those capable of causing the most trouble for these platforms remain largely silent while the DIY community are left to fend for themselves. You cannot blame the executives at those companies for doing what they could to make a dollar for themselves before streaming became the normal, but at the same time you have to wonder how many of them thought about the repercussion such platforms would have on the indie bands and tiny labels that don’t have exposure, funding, or widespread recognition on their side.

I want to say that a day will come when the law of supply and demand once again hold some sway in the music industry, but right now that seems almost impossible to believe. As long as the people controlling the way people listen to music are not directly engaging with the indie community there will be little hope for change unless musicians and those that support them rally in opposition. This is not a call for arms as much as it is food for thought, but there is strength in numbers and there are plenty of musicians hoping to improve their position in life. At the very least, artists need to make themselves away of the realities of these royalty agreements before uploading their music. If something doesn’t feel right, artists should feel comfortable explaining their desire to stay away with fans. Fans are there to support bands, not a company that uses music to far more money than they ever care to share with the artists behind it, and they will follow their favorite artists wherever they need to in order to engage with their material. No one is following Spotify anywhere simply because they are Spotify, and the same goes for Apple/Beats Music. Music is the true source of power, and it’s high time people remember that.

James Shotwell

James Shotwell is the Director of Customer Engagement at Haulix and host of the company's podcast, Inside Music. He is also a public speaker known for promoting careers in the entertainment industry, as well as an entertainment journalist with over a decade of experience. His bylines include Rolling Stone, Alternative Press, Substream Magazine, Nu Sound, and Under The Gun Review, among other popular outlets.