M&E Connections

M&E Journal: Making Money with Music: The Importance of Differentiation, Segmentation and Control

By Steve Curd, CEO, Scaeva Technologies

In 1999, the recorded music industry generated $40 billion. By 2017 it had fallen to less than half of that. Assuming that each of us is willing to spend the same amount on music each year, a staggering $100 billion of potential revenue has gone missing over the past few years. That is money that should have found its way to countless artists, producers, songwriters, engineers and record companies. The bad news is that although the industry has had 20 years to fix the problem, demand for stolen music actually increased by 15 percent in the past year.

According to the Recording Industry Association of America (RIAA), “we continue to operate in a distorted marketplace, replete with indefensible gaps in core rights, inhibiting investment in music and depriving recording artists and songwriters of the royalties they deserve.” Predictably, this decline has had a chilling effect on an art form that is the livelihood for people working hard to deliver a product with immeasurable value for every one of us. Where did the money go, and will it ever return?

To answer this question, it is important to understand the dynamics driving the problem, and to consider the innovation necessary to regrow industry revenues. The ultimate mission is to ensure artists and other creatives receive economic credit for the product of their talent and hard work.

A little history

When music distribution was based on physical objects – vinyl, plastic or tape – technological changes drove inventory turns. For example, when we first began buying cassette tapes, the demand for vinyl LPs rapidly fell as cassette revenue grew. Then, with the introduction of the CD, many of us actually repurchased music delivered on CD media due to improved sound quality, even though we had previously purchased vinyl records or cassettes for the same material. At the same time, LPs and cassettes were discounted to make room for the newer format. All of which supported a seemingly never-ending revenue stream.

In addition, copying vinyl and tape was time-consuming and resulted in reduced quality. This created a natural impediment to piracy, and another aid in driving industry revenue.

With the introduction of the MP3, music undertook a fundamental shift to digitally- based content. By 1999, digital bits could be easily ripped from the digital format CD, compressed as MP3 files, and instantly transmitted around the world for anyone to enjoy. This introduced an opposite dynamic: one person could purchase and rip a song, then “share” it with millions of other fans online. This drove revenue down through the 2000s in sync with falling storage costs and rising internet speeds. However, despite the doom and gloom, technological advancements and shifts in consumer behavior are providing signs of hope for a full recovery.

Streaming

While physical purchases and download revenues have fallen precipitously, total revenue from streaming services has been growing robustly (up 40 percent in 2017). Since artist royalties are paid on a per-stream basis, the coveted goal is to appear on as many playlists as possible. Consider Spotify: with 200 million users, 30 million songs and over 20,000 new songs added per day, streaming competition is fierce. Top artists do well (fans streamed Ed Sheeran’s “Shape of You” two billion times). Songs on “coffee shop” playlists also do well due to number of organic plays, although they are seldom selected by individual fans.

However, there is growing evidence that despite the recent growth in revenue, streaming is enabling a new form of piracy: stream-ripping. Despite the “all you can eat” streaming subscription model, a staggering 35 percent of all internet users are stealing music through a myriad of readily available software packages.

Despite some evidence that streaming may be lessening piracy, an IFPA study shows that over half of 16-to-24-year olds streamrip music. To limit the economic impact of this massive problem, streaming platforms must consider a carrot and a stick approach. First, they should continue to evolve ways to differentiate paid subscriptions to encourage subscribers to pull out their wallets. Although most services provide a free and a premium (paid) tier, there should be multiple premium tiers with increasingly valuable packages of benefits to avid music fans. Second, new technologies are emerging that effectively eliminate the ability to stream-rip digital content, carrying encryption to the end-point of consumption. This effectively foils the common stream-ripping software from functioning.

Direct to fan

Another trend that is gaining attention lately is the direct artist-to-fan publication model. As artists begin to organically build armies of loyal fans through Instagram, YouTube, Discord, Facebook and other social media sites, they are breaking through one of the traditional strongholds of the record companies. Through services such as GigRev, artists can effectively manage their own fan relationships, offering monthly subscriptions that come with numerous benefits: early access to new music, discounted merch, unique fan-oriented content and more. This is also supported by new fan-focused customer relationship management (CRM) platforms.

For example, Grammy-nominated artist and Harvard Business School grad Ryan Leslie booted his record label and launched the SuperPhone platform. This enables him to create personalized relationships with every one of his fans through his #Renegades music subscription club. For a dollar per month, fans get access to his music and a personalized relationship with the artist. Ryan has built a loyal subscription fan base himself, primarily through YouTube and Twitter. Further, new technologies are emerging that enable further differentiation between casual listeners, fans, and super-fans by micro-targeting features and content. Unlike Spotify or Pandora, these tech tools enable finding and supporting those fans willing to pay for unique experiences with their favorite artists.

Control and rights tracking

Finally, differentiation requires new ways to both control and track digital content. Prior to release, it is vital to focus on network security and encryption to reduce the risk of leaks and prerelease piracy. This is especially important given the number of collaborators involved in the creation of a hit, coupled with the sophisticated skills of new age hackers. Post-release, content can be indelibly identified through watermarking or embedded metadata to assist in tracking down sources of leaks and theft.

A concept pioneered by Shazam that generates acoustic fingerprints of music can also aid in identifying content “in the wild,” while eliminating the need to modify the content itself. However, lack of standardization in encoding digital rights frustrates post-identification monetization efforts. Numerous efforts are currently underway to digitally match content with rights holders (some even use blockchain ledgers), which can serve to close the loop in getting the owners paid.

Summary

Fueled by the rapid transition to streaming platforms and sophisticated theft techniques, the music industry remains mired in rampant piracy and misaligned monetization incentives. Billions of dollars remain uncaptured as a result, and the artists, songwriters, producers and performers suffer the greatest economic consequences. To solve this, we must modify our thinking and untether from the outdated models of the past. Music is one component of a set of valuable digital assets connecting us with the talented artists that touch our lives in immeasurable ways.

Thankfully, we can learn from other industries as we refocus on effective digital asset management, and leverage the power of differentiation, segmentation and control.

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