Will Apple Music Succeed Where Pandora and Spotify Have Failed?

Stephen Carlisle June 12, 2015

On June 8, 2015, Apple announced its new music streaming service, Apple Music, and took direct aim at Spotify and Pandora. ¹ This move capped a busy month of court rulings, document leaks, and more than a little finger pointing and name calling in the pitched battle between content creators and the streaming services. To recap:

• On May 19, 2015, persons unknown (but all available evidence points to Spotify) leaked the contract between Sony Music and Spotify to the website The Verge. ² (NB: The actual contract has been removed, but the link will take you to an in depth discussion of its terms.)
• Just four days later, on May 23, 2105, in an interview with the New York Post, Spotify CEO Daniel Ek said that “greedy middlemen” were responsible for the microscopic payments musicians and composers receive from Spotify. ³
• On May 27, 2015, Judge Gutierrez granted Flo and Eddie’s Motion for Class Action Certification in their case against Sirius XM Radio ⁴ (this link has a further link to the opinion), a lawsuit previously discussed in depth on this blog. ⁵ This order has been stayed pending an appeal.
• The same day, Judge Louis Stanton of the District Court for the Southern District of New York ruled that Pandora has to pay 2.5% of gross revenue to BMI, the performing rights organization that represents music publishers and composers. ⁶ Pandora was seeking a rate between 1.7% and 1.85% of gross revenue. ⁷

Taking on the most damage from these events is Pandora. This blog has detailed before the financial black hole that is Pandora. ⁸ From 2011 through 2013 Pandora has lost $86 million. ⁹ In the first quarter of this year, Pandora has lost $48.3 million. ¹⁰ On the announcement that it had received a negative ruling from the rate court, Pandora’ stock fell 2.3%. ¹¹ With the announcement of Apple Music, Pandora’s stock plummeted another 4%. ¹² The Flo and Eddie decision is significant, because Flo and Eddie have sued Pandora on precisely the same grounds that have already provided a win against Sirius XM in both California and New York. Factor in that the rate courts’ decision is retroactive to 2013, and is calculated on the gross revenue, not the net, it’s not hard to spot the huge black cloud in the skies over Pandora headquarters. As it stands right now, Pandora will owe BMI $15.9 million for 2013 alone.

Judge Stanton made several telling findings of fact in his opinion about Pandora. Its revenue stream is derived 80% from its free tier, and 20% from its pay tier. ¹³ Pandora’s main problem is that it sells only 60% of its available advertising space. ¹⁴ On a per listener basis, a terrestrial radio station pays two times what Pandora pays and Spotify pays eight times what Pandora pays. ¹⁵ Between 2010 and 2013, BMI cut deals with “Spotify, Rdio, Rhapsody and Apple iTunes Radio at rates ranging from 2.5% to 4.6%.” ¹⁶ Yet Pandora with a straight face tells the rate court it should not pay any more than it pays, and at the same time petitions Congress to lower these rates even further. Pandora’s real strategy is to trim its “content costs” from 60% to 40%, ¹⁷ instead of finding better ways to sell its unwanted advertising inventory. As Judge Stanton noted, “at present Pandora has not demonstrated sustained profitability.” ¹⁸

And what of those “greedy middlemen” that Spotify complained about? Pandora pays 60% of its revenue to the record companies for use of the sound recordings. ¹⁹ Aren’t they the real culprits here from making streaming sustainable for both the companies and musicians alike? Well no.

As pointed out by Chris Castle over at the Music-Technology-Policy, if this is true, then an artist who is not signed to a record company and controls their own rights, should see a sustainable payment for their rights. ²⁰ He provided a link to the Spotify royalty statements from 2013-2015 posted by cellist Zoë Keating, ²¹ about whom this blog has written before. ²²

I invite you to follow the link and look at the royalty statement. It’s incomprehensible. There is absolutely no way to tell how or on what basis or formula Spotify is calculating the royalties it does pay.

“As you will see in her statement, Zoë’s per-stream royalties ranged from $0.0000013284 to approximately $0.01 per stream, except for 3 streams in “CH” (presumably Switzerland) that broke $0.02.” ²³

Are you kidding me? One stream paid a little more than one ten thousandth of a cent? How is a musician or composer going to earn a sustainable living on a royalty of one ten thousandth of a cent? And remember, this is without those “greedy middlemen” getting in the way.

For his part, Spotify’s Daniel Ek states “And if we build the revenue model around ‘freemium’ [a business model that gives basic products away for free], the music industry will be much larger than it’s ever been before, more artists will be able to make a living by being artists and more people will listen in turn.” ²⁴

This is what David Lowery over at The Trichordist derisively calls “magic unicorn math,” ²⁵ because when you take a look at the real numbers, they show just the opposite happening. Let’s go back to Chris Castle’s analysis of Zoë Keating’s royalty statement.

“Zoë’s per stream average from 2013 was $0.0042, in 2014 it was $0.0040 and was $0.0032 in 2015. So even though Zoë’s own total streams increased from 416,112 to 1,487,584 during the 2013-2015 period, her average per stream royalty declined from $0.0042 to $0.0032.” ²⁶

The bottom line? On 1,487,584 streams, Zoë was paid $4,821.07, or a little more on an average than three tenths of a penny per stream. ²⁷ It’s hard to see how an artist can make a sustainable living on these payments. And it gets worse from here.

“And don’t forget that Mr. Ek is quick to point out that streaming revenue is a growing share of overall digital revenues and displacing downloads. Yes, that’s right. In a race to the bottom, micro-margin streams are replacing high margin downloads. Correct, it’s called cannibalization.” ²⁸

Yet the tech companies and their apologists scold the musicians and composers saying that if they don’t accept these meager crumbs that Pandora and Spotify are offering them, the whole music business will collapse further.

“Casey Rae, chief executive officer of The Future of Music Coalition in Washington, warned against changes that could hamper Pandora’s growth. ‘For songwriters to get paid, the music has to be played. If Webcasting is not viable, there’s a whole side of the marketplace that will evaporate,’ he said.” ²⁹ (Just so you understand who’s doing the talking here, The Future of Music Coalition is partially funded by Google. ³⁰)

So if webcasting is “not viable” at present royalty rates, why would Apple want to get into the streaming business? How does Apple think they’re going to make a profit?

Simple. Apple is going to charge for the service. ³¹ Like Sirius XM, it will offer a free trial, but thereafter you have to pay $9.99 a month. ³² It’s not that webcasting itself that is not viable, it’s just that the terrestrial broadcast, ad supported, model does not work for streaming, as detailed previously on this blog.

Plus, Apple has people with actual music business experience at the controls here, like famed record producer Jimmy Iovine, ³³ who was also one of the founders of Interscope Records. Think about it. Let’s hire people who have actually been in the record business and know how it works, and know that what works that is not what is being peddled by Pandora and Spotify. Iovine had this to say to The Guardian:

“You come out, you build this service, and a lot of it is based on free. So if you have a hit record, you’re only being paid on 20% of it, because 80% of it is free. So this generation [of] artists, the next five to seven years, they’ve got to pay for the future? What’s that? No. No! That’s wrong from my viewpoint. From a musician’s standpoint,

“So if you get 100m streams and you’re only really being paid on 20 million, that doesn’t work for the artist. Record companies will be here forever, but those artists will not be here forever. The individual who writes that song, at that moment, deserves to be compensated for it in a fair way.

… “90% of them were broke last week! These aren’t trust-fund people coming in making this music, y’know! Maybe there’s eight artists in the world that can just do anything they want financially, but there’s thousands of artists who could use a couple of bucks to get by and do this stuff right,…

“That’s where I come at it from, you know what I mean? And we tried to build something that had enough of each thing to build an ecosystem that just feeds off each other, and gives back to an artist.” ³⁴

Apple Music’s Eddie Cue had this to say:

“Our viewpoint was very simple: let the artist and label control it. They can put it up on Connect for free if they want to, or they can put it up behind the [subscription] paywall, or they can make it available on the iTunes Store for sale. They’re in control of their music and how they want to distribute it.” ³⁵

Let the artist control their music? It’s Apple Music to my ears.