Part 1: The Melting Iceberg Syndrome And The Music Business

By George Howard (follow on Twitter)

With Amazon.com’s recent announcement, the topic of streaming and downloading has become a front-and-center topic.  Rumors are also, of course, flying about the imminent launch of similar services from Google and Apple. Given all of this it’s imperative for the informed artist to not only understand the landscape of streaming, but also how this delivery change impacts revenue models.

To this end, this week we focus on illustrating two points of view in our articles. While these articles both examine the same topic, and, ostensibly at least, appear to come out on different sides, the reality is that there are likely both positive and negative impacts as a result of these changes.  One thing however is certain, these are disruptive times in the music business, and with disruption comes opportunity…seize it!


I’m an optimist; a glass-half-full type.

I believe in opportunity that comes from disruption.

I believe that there will always be people making music, and that there will be methods for these artists to monetize their creations, and that there will be business opportunities for those interested in working in the music business to innovate and make money.

However…

I don’t believe people are adequately assessing the current situation with respect to the trajectory of the music business (and, by that, I mean today’s music business, and not what it might become — by the way, no one knows what it might become).

There was a good piece that ran yesterday, written by Frédéric Filloux, entitled “The NYT’s Melting Iceberg Syndrome.”

While I tend to agree with the article’s assessment of the NYT’s digital operation, what really struck me was the relevance of the Melting Iceberg Syndrome and its relationship to the current music industry.

Mr. Filloux sums up the theory well:

…no matter how large the iceberg is at the beginning, it inexorably dissolves as it drifts toward warmer latitudes. The progression is barely visible but, at some point, as the exposed part liquefies under the sun, the iceberg’s center of gravity moves upward and it suddenly capsizes without warning (that’s why there is no permanent manned base on icebergs): “As an iceberg melts, the resulting change of shape can cause it to list gradually or to become unstable and topple over suddenly”. (From The use of catastrophe theory to analyze the stability and toppling of icebergs Annals of Glaciology, 1980).

What prompted me to write this piece was a piece on Hypebot entitled, “Another Industry First: Music Royalties Fall 1%.”

While the title of the article isn’t surprising, what is surprising are the reasons PRS ( a Performing Rights Organization in the UK) assumes royalties were down: “PRS suspects that digital piracy and a fall in high street sales are to blame.”

There is, imho, a glaring omission with respect to why royalties might be down: lack of royalties due to streaming.  It’s this issue that really resonates with me with respect to The Melting Iceberg.

I’ve written at some length about the rapid acceleration of streaming.

In an era of constant connectivity and universally available content, there is no distinction from a user’s perspective between streaming and downloading.

There is however a distinction from an artist/content owner’s perspective.

Put simply, if you’re an artist who is used to getting ~$7 for the sale of a ~$10 download from iTunes (or ~$.7 for the sale of a ~$1.00 single), your revenue is being diminished by several orders of magnitude when that same album/song is streamed.

While the figures change in terms of payments depending on if the stream is interactive (ala rdio, spotify, etc) or non-interactive (ala Pandora), in both cases the payment from streams is a number that has a decimal point, and then several/many zeros before a number that’s not a zero pops up (e.g. $.000x or $.000000x).

Thus, streaming — not “piracy” or “street sales” — is what’s causing the decline in royalties.

And, I do very much believe that the 1% decline is the tip of the proverbial melting iceberg, and that the iceberg is indeed listing, and that the days of artists/content holders seeing royalty payments even approximating amounts they’ve been accustomed to from the sales of downloads are rapidly coming to an end.

Certainly, direct to fan models offer some support, but, again, when customers begin demanding streams as opposed to buying downloads, artists will need to evolve and service the customers via a stream, and this will materially impact their revenue models.

In fact, it could obliterate the direct to consumer model. The very thing that makes direct to fan so compelling — cutting out the middleman in order to have a higher margin for downloads — is fundamentally altered. When (eventually – sooner rather than later) a customer comes to a favorite artist’s site, and wants to stream the music, will they really pay more to do so from an artist’s site than they do as part of a Spotify/rdio subscription? Will they pay at all?

No. Of course not. The value proposition is all off.

This doesn’t mean that others (subscription, exclusive tracks, tix, merch, special packages, whatever) won’t fill some of the void, but those hefty margins that occur currently when a customer downloads directly from an artist’s site will soon(ish) be a thing of the past.

Sorry for the doom and gloom. Maybe I’m wrong (I’m not).

As I’ve said, there will be new models that emerge (and, yes, there could be an increase in volume of streams that will offset some of the decline in revenue loss, but there’s going to have to be a massive increase of streams; I don’t see it), but I feel very compelled to at least raise the question: Are artists/content holders preparing themselves for the days when their margins from downloads are obliterated and they are only getting revenue from streams?

I hope so, but I wouldn’t be building on the iceberg right now.

Part 2: The Melting Iceberg Syndrome, The Music Business And The Change Under The Couch Cushions __________________________________________________________________________________________________

George Howard is the former president of Rykodisc. He currently advises numerous entertainment and non-entertainment firms and individuals. Additionally, he is the Executive Editor of Artists House Music and is a Professor and Executive in Residence in the college of Business Administration at Loyola, New Orleans. He is most easily found on Twitter at: twitter.com/gah650

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