ANTHONY BOURDAIN

The result is that the music industry finds itself fighting over pennies while waving goodbye to dollars. For instance, the growing but still specialized market for vinyl records is generating more revenue than the music on YouTube, one of the biggest destinations on the Internet, but that’s because YouTube pays royalties in the tiniest fractions of cents.

Yes that’s right.  The next bit of rubbish you will hear to justify why these people should keep their jobs is that streaming supposedly is more profitable than CDs.  What does that even mean?  Wait for it–in the access model they’ll make it up on volume.  Kind of like infinite shelf space.  This is, of course, total crap.  How much do you think it costs to render an accounting statement for 1 billion streams?  A statement that probably requires a minimum of 3 billion calculations.  Quick–forget the profit, is the transaction cost more or less than the five figure royalty payment?  That’s five figures to the right of the decimal place.  Not to mention the cost of one–one–customer service call.  There’s a reason why YouTube’s royalty department doesn’t answer the phone.

Think about this.  Top line CDs wholesaled for about $10.  Digital albums wholesaled for about $7–a 30% drop.  But also realize that digital downloads blew up the album so you are really talking about singles that wholesaled for about $0.70.  Rather than tell Apple that single tracks were not going to be possible, Billboard accommodated with the concept of “Track Equivalent Albums.”  FYI, ” TEA” has virtually nothing to do with real albums from a margin point of view.

Let’s digress for a moment.  I have for a long time told a joke about the Billboard chart.  If you want to know which records are the most profitable–not sold the most but contributed the most profit at least on a percentage basis–take the Billboard album chart and invert it.  Why?  Because the records at the top of the Billboard album chart have the highest marketing spend and artist advances.  That’s why they’re on the top of the chart.

But it’s entirely possible that all things being equal and dropping out phenoms like Adele and Taylor Swift as outliers, the records at the top of the chart don’t break even or don’t break even by much.

And then came streaming.  Again, rather than tell streams sorry, no deal, the Big Thinkers in the music business embraced them.  Billboard once again accommodated with a cry straight from Bedlam called the “consumption chart”, a completely nonsensical exercise in the promotion of doom.

I will make a bet–most people who go to streaming services are not that different from people who went into record stores or who go to iTunes.  They already know what they want to buy.  Why?  Because someone marketed a record to them.  Whether it’s because they saw them at the Superbowl halftime or opening at the Mohawk, or they heard them on K-Rock or Austin Independent Radio, they already have an idea about what they want to buy.  The trick is the same as it’s always been, introducing them to other music to buy.

Except now it’s getting you to listen to something else with a wholesale price that’s not $10, it’s not $7, it’s not $0.70–no, it’s $0.005 or less.  Probably less.

Understand this–it’s only a matter of time before sales of the higher margin records that justify the marketing budgets that drives listeners (and maybe, maybe subscribers) to streaming services drop so low that those marketing budgets essentially go away.  And also understand that this situation was as predictable as the Sun rising in the East.

What, you may ask, does this mean for streaming services?  You mean after freemium goes away?  For starters, I would expect to see artists start looking to these services for significant nonrecoupable marketing or exclusivity payments as label marketing starts to dry up.  This has long been true of mass market retailers although it may be expressed as minimum orders of exclusive CDs sold on a one-way trip (i.e., not returnable).  (Not exactly the same, but Dr. Dre is delivering exclusive video content to Apple and the “Beyonce” Apple exclusive from 2013.)  Since the streaming services are in the “own nothing” business by design, they should be willing to pony up in return for, oh, say having an exclusive window on their subscription service.

Then there’s the minimum guarantees and flat money that services pay to some labels.  The popular tech industry blog, Complete Music Update, suggests that these payments should go away–ask not what the streamers can do for you, ask what you can do for the streamers:

[Because] everyone needs the Spotifys and Apple Musics of the world to sign up as many paying users as they can.

A more coordinated industry-wide strategy to help make that happen would be a good Plan B for if and when the safe harbour reforms are denied by law-makers. Because yes, that would mean helping tech giants, digital entrepreneurs and venture capitalists (who are almost certainly evil) get rich on the back of “our content”, but at the same time, possibly the biggest concern for the music industry just now is that the single biggest revenue stream in the single biggest recorded music market is wholly dependent on wholly loss-making services. That’s just not sustainable.

So, advances and guarantees are a great way for the record industry to return to growth in the short-term, but these services need to become properly profitable to assure growth in the longer term.

Let’s introduce a concept here:

When you’re dealing with streaming services, also known as insolvent companies, you take a look at your license term, figure out what you think you’ll make during the term, then get at least that much money up front.  Why?  Because you’re a greedy so and so?  Not at all–because you’re not a venture capitalist and you’re not as stupid as you look.

This is what I call the “Venezuela deal”–how you make sure you’re covered when dealing with someone wholly unreliable.  Someone who would, for example, admit that they stiffed songwriters and publishers to the tune of no less than $30 million without tying up an industry-wide settlement or naming a single publisher in the press release announcing their settlement with…theoretical publishers.

So contrary to what the Spotify puffers are puffing, the minimum guarantees are likely to stick around and the nonrecoupable marketing and exclusivity payments are likely to increase.  And we’re worried about this because…why?  Because streamers might go out of business?  And that’s a problem…why?

Try the bouillabaisse.  The halibut is in season.