Economics of Music Streaming

A Claim for Streaming When speaking economically, the digital music sector of the international music industry is undoubtably the most important sector in the industry - Economics of Music Streaming introduction. Within the last decade, music has seen cardinal changes in the way both major and independent labels distribute their products. An industry that once relied on Payola’s and mass distribution of physical records and CD’s now relies heavily on the power of the internet. The first instance of mass distribution of music through the internet was by the service Ritmoteca. om in 1998 [1]. Ritmoteca had a library of over 300,000 songs, offering individual songs for 99 cents each and albums for $9. 99. After signing distribution deals with many major music labels such as Warner Bros, Sony, and Universal, it was clear that the market for selling music online was opening up. The year following Ritmoteca’s inception, the peer-to-peer file sharing service named Napster opened its virtual doors to listeners across the world at the price of nothing [2]. At its peak, Napster had over 80 million users across the globe [3].

The service’s popularity sparked a great deal of controversy, as the artists whose music was being downloaded for free felt they deserved to be compensated. Naturally, dozens of lawsuits followed, resulting in Napster’s peer-to-peer file sharing system to be shut down. However, Napster was able to make somewhat of a comeback by competing in today’s ever popular music streaming industry, which allows for users to listen to music at a monthly fee or for free, all the while compensating artists. However, artists still feel they are being compensated at too low of a rate.

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Clearly, there is still friction in the industry between the consumers and producers. So the question remains, what are record executives doing to fix the problem with the products they are putting out? Before diving into this question and finding some resolve, there are two important changes in the industry that must be identified. First, and most importantly, the incentives of the consumers have changed. The industry has made fundamentally drastic changes because of services like Napster, and many other torrent sharing websites. There are still a large umber of people who prefer to buy music, as shown by Apple’s iTunes music store recently reaching a grand total of 25 billion downloads to date [4]. However, there is a large and significant group who prefer to download music for free because they simply cannot afford to fuel their passion for the art by paying for it. And because legislation regarding copyright infringement and digital piracy has changed people’s decision whether to pirate or buy music marginally at best, individuals are driven to continue downloading music for free.

Put simply, a large group of individuals’ incentives drive them to download music for free. Second, the supply and demand models in the industry have changed. Before music could be formatted digitally, there was theoretically a finite number of times one could purchase a physical copy of a single or album. This drove up the price of the product. There was also a finite number of times that consumers would purchase any given product, which could be predicted by the respective labels.

Individuals rushed to the nearest record store to buy the new album from their favorite artist quickly before the next die-hard did. Because of this, one could expect to pay up to twenty dollars for an album. This is far from the case today. Despite storage capacity, there is theoretically no limit to how many times one can download a song. There is not a finite supply. Thus, the price of the product has gone down. One can now expect to pay between ten and twelve dollars for an album.

Clearly, record labels are at odds with their consumers, and the market for purchased music is playing against them. The price of the product has gone down while individuals are obtaining the products for free at all time highs. The question remains: how can record labels and artists alike profit from a market that is working against them? Fortunately for the producers, and the consumers, there may be a few solutions. Julian Sanchez, research fellow at the Cato Institute, provides an interesting outlook on the issue of piracy, and what should be done.

He compares the actions taken in the movie and television industry to prevent piracy by stating: As the success of services like Hulu and Netflix suggests, consumers are only too happy to pay for content that’s made available in a convenient form, and at a reasonable price. If the content industries want a genuinely effective way to reduce global piracy, they should spend less time and money lobbying for new regulations, and focus on providing innovative services that make piracy unattractive. [5]

Producers of musical content cannot undo the adverse effects that piracy has had on the industry. Because of the internet and the way individuals have manipulated it to obtain music, many people are unwilling to change their habits. Here lies the issue between the producer and the consumer. Acts like the Stop Online Piracy Act (SOPA) and PROTECT Intellectual Property Act (PIPA) work against the incentive of many consumers by telling them that they cannot do what maximizes their utility. Producers are thus working against the likings of the consumer. This is wrong.

There have been, however, a number of efforts to play to these likings, and actually squeeze profits out of those consumers who prefer not to pay. Streaming content has been very successful in this regard. The music video service VEVO is one very good example. The service uploads music videos in partnership with major labels and obtains revenue through advertising. Many videos have reached over hundreds of millions of views. Clearly the consumer is taking advantage of the fact that they can listen for free, while the producer is creating some form of revenue.

Although the revenue is not coming directly from the music itself, it is an innovative way of creating revenue while keeping in mind the incentive of the consumer. There are also services that offer or require monthly fees to listen to content. These services come in many forms, but in most cases the consumer can not only listen to as much content as they want but can also have a choice in a familiar format. The streaming service Spotify may be the best example. Spotify allows its users to stream as much content as they want for free, while playing adverts in between every few plays.

Users are also given the option to sign up for a “Premium” account for only ten dollars a month, with the ability to stream content at will, advertisement free. This service is innovative because it caters to the wants and needs of both the producer and consumer in new ways. There are a number of services that provide a similar or practically the same service as Spotify, with millions of users taking advantage of the opportunity. [6] Time Magazine’s Eliot Van Buskirk argues that streaming content may not only improve the quality of the content, but attract listeners for longer periods of time as well.

He states: By paying out only when people actually listen instead of suckering fans into buying something only to leave it on the shelf, Spotify, MOG, Rdio, Rhapsody, and other on-demand unlimited music services build an incentive into the music business to create works of lasting value… And now, for perhaps the first time ever, [music’s] economics favor long-term quality over a flashy first impression. [7] An industry that once relied on massively popular singles that moved off the shelves quickly and vanished into obscurity after a short amount of time could potentially be susceptible to major changes, argues Van Buskirk.

As on-demand streaming services attract more users, consumers will begin to be accustomed to paying less and less for the content. Because more people are shifting to services that require much less money for use, or plays, labels will have to shift their practices and play to the fact that more plays equals more revenue. As Van Buskirk states “It’s no longer enough to convince fans to buy a disc once; instead, artists and labels have to turn them into lifelong fans. “[8] When the product is used more, producers will earn more, and at the same time potentially creating “the solution to what might be called music’s “quality problem. [9] In this case, both the producers and consumers are happier. Matt Mason, executive director of marketing for BitTorrent, makes a similar claim stating that “There’s a new business model for every piece of content you release… Instead of running an ad and trying to convince someone to buy a song or an album immediately, musicians need to focus on building a relationship, then in six months they can sell their fans a t-shirt or a digital download — and hopefully continue selling to those fans for the rest of their career. [10] This essentially reiterates Van Buskirk’s claim that a long lasting relationship with the consumer through a high quality good is necessary for generating revenue for both the artist and labels, while catering to the artistic needs of the consumer. On-demand’s streaming influence is becoming so prevalent that even Apple’s iTunes is attempting to stake its claim in the market.

The fact that a service like iTunes, whose influence on the online music industry needs no introduction, is attempting to become a part of this means of distribution should in itself say that a change to online streaming services is becoming the key source of revenue for record labels. [11] The influence of music streaming online on the industry as a whole is becoming more and more present. It discourages illegal downloads, and encourages profits. It is the solution to the problem of piracy and lost profits.

In the near future, it is possible that streaming services could be the main source of distribution and a key source of revenue for record labels. ———————– [1] Bloomberg Business Week, Company Overview of Ritmoteca. com, Inc. http://investing. businessweek. com/research/stocks/private/snapshot. asp? privcapId=113297 [2] Napster: Then and Now, http://iml. jou. ufl. edu/projects/spring01/burkhalter/napster%20history. html [3] Napster: Then and Now, http://iml. jou. ufl. du/projects/spring01/burkhalter/napster%20history. html [4] USA Today, Apple’s iTunes tops 25 billion song downloads, Brett Molina, http://www. usatoday. com/story/tech/2013/02/06/apple-itunes-25-billion-songs/1896057/ [5] The New York Times, Focus on Innovation Instead, Julian Sanchez, http://www. nytimes. com/roomfordebate/2012/01/18/whats-the-best-way-to-protect-against-online-piracy/the-content-industry-should-focus-on-innovation-instead [6] Esquire, What the Hell Is Spottily? Paul Schrodt, http://www. esquire. com/the-side/feature/what-is/spotify-us-launch-6092417 [7] Time Magazine, How The Business of Streaming Will Change Culture for The Better, Eliot Van Buskirk, http://business. time. com/2012/06/08/how-the-business-of-streaming-music-will-change-culture-for-the-better/ [8] Time Magazine, How The Business of Streaming Will Change Culture for The Better, Eliot Van Buskirk,

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