Sunday, July 16, 2017

Soundcloud and the Terrible Business of Music

As the imminent bankruptcy of Soundcloud looms, it's as good a time as any to think about monetizing strategies for streaming services. Of course, I don't really care at all about the health of the streaming services themselves (and all of them are still terribly unprofitable). I care about finding a sustainable business model where money actually makes it back to musicians ("music creators"). And not just the 0.01% of musicians either. We have to find a system that pays out to middle-class and niche musicians also. So far such a system has not been developed.

Over the last twenty years an insane amount of private equity investment has flowed into streaming and media platforms, as investors assumed that someone, somewhere would find a way to profitably monetize media streaming. I focus on music streaming here, because the visual-streaming services (Netflix, Hulu, HBO) have taken several different turns from the music business in their business models that has actually put the content side of the business on surer footing than in the music business (a post for another day- it's still not clear they're profitable). This huge investment has financed the growth of marketshare for unprofitable companies, basically on the backs of investors and the lowly "content providers" at the bottom of the food chain. Lots of modern "sharing-economy" companies have similar positions, for instance the venerable Über, for whom an argument can be made that investors have just been subsidizing the world's taxi rides for the past five years.

In our case, investors have effectively been subsidizing the world's access to music. I've helpfully categorized these services for you:

Terribly unprofitable:
• Pandora (never turned a profit since 2000, trying to change to a subscription based model)
• Soundcloud (a mess of business models, including ads, subscriptions for listeners, premium subscriptions for commercial music, and subscriptions for musicians to host their music there)
• Tidal (does this still exist?)

Pretty unprofitable:
• Spotify (They continue to be unprofitable but their subscriber base is growing, there's a chance they might pull it off).
• Apple Music (still attempting to negotiate lower royalty rates- red flag!!- but acting optimistic. Obviously Apple Inc. overall is ridiculously profitable).
• YouTube (of course Google and Alphabet overall remain profitable, and YouTube plays a big part in driving data towards Google's ad / spy business.)

YouTube is, of course, the largest music streaming service in the world. Much of the music streamed on YouTube was not actually uploaded by the people that own the copyrights to that music. YouTube dictates its own terms to its "partners" (a brilliant euphemism), and they can take them or leave them. Through regulatory capture and monopolistic powers it also pays around $1 per 1000 plays, whereas Spotify and Apple are stuck around $7 per 1000 plays. $7 per 1000 plays is still probably unsustainable for creating a healthy music recording business, but this only helps to illustrate which way the cost pressure is going on the various actors in the music economy.

Someone, somewhere, will come out of the woodwork to tell me "actually, sharing is good for musicians." That may be, but so far not monetarily.

The debate over free music and royalties and streaming music can quickly get bogged down in entrenched, passionate arguments over "information wanting to be free" - which I guess is true but is kind of an abstract metaphysical argument; who cares what information wants, I care about people - so it's worth clarifying just exactly what the problem is here. Why are so many of these multi-billion-dollar market-cap companies unprofitable? Why is it so hard to be a musician in the new economy? Why are musicians always complaining so much?

First of all, music doesn't "want" to free, because music is abstract, patterned combinations of soundwaves that don't have the agency to want anything. It's people that want music to be free. And then there are some people that don't want music to be free, because they need to figure out how to make a living. Those people are musicians.

Creating music takes the time and labor of many people. Despite much of the process now being on computers, the basic fundamental act of music creation hasn't changed that much for centuries. It still takes composers, performers (whether they use these words to describe themselves or not) and recording engineers. Modern digital technology has chipped away at some of these costs around the edges, but it has actually done very little in reducing the amount of labor it takes to produce an album.

In other words, home recording studios and cheap knock-off microphones made in China might have lowered the barrier of entry to someone who wants to DIY an album, but if you literally do-it-yourself yourself it takes an incredible amount of time. Ask Jherek Bischoff. You might reduce your out-of-pocket expense in terms of paying other people, but this is just shifting the total man-hours all onto the back of a single person: you. And it's probably less time-efficient than recording in a fully staffed professional studio.

One of the most important truths that governs our collective march into the new economy is that labor is more expensive than capital. It's why healthcare is getting more expensive even as computer chips are getting cheaper. And music making is very labor intensive, which means it is very expensive. Productivity has not appreciably increased in music creation.

The economist William Baumol actually studied musicians when he came up with his landmark "Baumol's cost disease." He was confused as to why- when it takes no more work for a string quartet to perform a composition today than it did 200 years ago- are the musicians paid so much better today than they were back then? He reasoned the wages to the string quartet must keep pace with wages in more productive economic sectors. Otherwise there would be no more string quartets.

The opportunity costs of spending 200 hours in your bedroom self-producing a commercial album are huge. Think of all the things one could be doing with that time instead that would be way more profitable! The musician must try and recoup some of those costs one way or another, or the activity becomes unsustainable. They still need money to pay rent and buy avocado toast.

The advent of digital technology is actually kind of a double-whammy of unfortunate economic circumstance for the musician. When the phonograph and music recording technology was first invented, it actually created a new income stream for musicians. Suddenly, musicians could sell records! New money they never had before! A whole new business is born! Digital technology, at least so far, has had the opposite effect on musicians. It's effectively taken away the income stream from recording. Musicians have to rely on older, more archaic, income streams, and fight the streaming services tooth-and-nail for a bigger cut of their actually-quite-miniscule revenues.

(An off-topic argument worth exploring:

Music creation is as unproductive an economic activity as ever, but one thing that could potentially change that is computer-assisted composition. At least according to NPR, digital technology and Artificial Intelligence has the potential to soon write music for us. This would reduce the cost of music creation, as labor would be replaced with capital. Maybe robots could play the instruments.

I submit that this is stupid. No one cares. Half the pleasure of music is that it was created by humans, for humans. If we could build robots to compose music, hell, we could also build robots to listen to it for us as well. Does that mean no one is going to listen to music anymore because robots can take care of it for us?

We have already built computers that can play chess better than our greatest chess players. And we can build a machine that could easily beat a human in a 100-yard dash or throw baseballs faster than our best pitchers. Has this put chess, sprinters, and pitchers out of business? No. Because it's a human activity so we fundamentally don't care if computers can do it better than us. Which they can't. Yet.)

Finally, we approach an understanding of the problem facing musicians today, which is the direct cause of the trouble facing the unprofitable streaming services: while revenues to musicians have decreased due to proliferation of digital distribution platforms- which has dramatically increased the productivity of people working in music distribution like YouTube employees- the act of music creation is still painstakingly human and labor intensive.

As the productive YouTube employee's wages increase, according to Baumol, it puts further upwards pressure on musician's wages themselves, as they at least try and keep pace. The musician probably lives in the same high-cost city as the tech worker. If they aren't paid enough, eventually everyone will quit musicianing to try and get a job at YouTube. They'll have no choice.

All new digital technologies have done is lowered the cost of copying and distributing music. Think about it: in order to get music to people, it used to take things like trucks! and record presses! and retail stores! and warehouses! Of course the true cost involved in all that was the labor of the people employed in moving all that music around. But those jobs are gone. Music is free now!

Except that the cost of music creation hasn't actually gone away. It's as expensive as ever. It's just been shifted back onto the creators themselves, and onto rich wall-street investors who may or may-not have been duped into investing in music streaming services. Today, musicians are expected to pay to host their music on Soundcloud, with no real hope of renumeration. They have to pay for the production, recording, and promotion of their own album with the only hope of making any money back that someday they get picked up for a sync licensing deal or are famous enough to charge $200 for live concert tickets. No investor in their right mind would finance the creation of new music from an unknown artist expecting a return on that investment (some may do it as a charity donation).

It's this cost / revenue imbalance that no one has solved yet, and its really not that complicated. Pandora, Spotify, and Apple frequently report back to investors and regulators that they could reach profitability if only they could reduce royalty payments back to their suppliers. They are paying huge percentages of revenue back to the music creators! It's not fair! They have to compete with YouTube, after all. And YouTube effectively pays its suppliers nothing. When your competition gets its labor for free, it's hard to compete on cost.

But as we now understand, of course the streaming services have to pay a huge percentage of revenue back to their "suppliers"- that's where all the labor cost actually is! Remember, labor is more expensive than capital. It explains the modern world.

There's so many angles to explore here that this is only a cursory introduction to the structural problems facing the music streaming business and the music business as a whole. But I do leave you with this thought on YouTube, the supposed shining light of the streaming business (at least from the streaming business's perspective):

It's hard to find up-to-date data, but YouTube claims it's paid out $2 billion to its "partners" over the years of its existence, at least up to 2016. It couches this in positive terms. It's difficult to calculate how many total hours of work went into creating YouTube's unfathomably large database of human media creation, but they say that 300 hours of video are uploaded to YouTube every minute (that's 49 years of content per day!!!!1!!) Conservative estimates would mean that there are upwards of 95 thousand years of videos (much of which is actually music) hosted by YouTube. And for this humongous supply of content, cat videos and all, they've paid $2 billion dollars. Imagine how many hours of human thought and labor go into creating an hour of music, from composition through to recording, for which, if royalties were distributed evenly by hour, your share would be $2.40. A hundred thousand years of video content and that's all they have to show for it? And YouTube hasn't even turned a profit yet!

From the perspective of the musician then, YouTube seems like a terribly bad business. A failed one even. Their ad-based model can't possibly generate enough revenue to pay for professionally-produced content.

As such, the upheaval will continue. Streaming services have two options for survival: they have to lower the amount paid to musicians even further, or they have to figure out ways to increase their revenue. It's not rocket science. Until the music business figures out how to get more dollars from outside its sector into its sector, it will remain in turmoil.

It's almost as though by definition, sharing doesn't make that much money.