The Economics of Digital Music, or How Does the Money Flow?
Catherine Fitterman Radbill
The public’s enthusiasm for digital music services represents the ongoing transition from music ownership to music access. The economic impact is significant. Purchases (ownership) return a small but noticeable chunk of money. Streams (access) result in much less money, with revenues measured in parts of pennies.
David Harrell, guitarist for the Chicago indie rock band The Layaways writes a blog called Digital Audio Insider. In his July 2011 posting, Harrell explained on his blog that the band’s average payout from Spotify (a service that offers music access, not ownership) from August 2009 to March 2011 was 0.2865 cents per stream.4 Compare that to the roughly 70 cents the band would receive for each 99-cent download (a music purchase) on a service like iTunes. In this model, it would take 244 streams to earn the same amount of money for the band as one download.5
Even within the digital webcasting world, the rates vary. Spotify is an interactive music service, and pays more to license its music from rights holders than noninteractive webcasters do. If The Layaways’ music had played on a non-interactive webcaster like Pandora during that time, they would have received only 0.01 cents per stream, compared to the .02865 cents per stream from Spotify.6
The lesson here? Bands make more money selling their music than streaming it, but fans often choose streaming over ownership.
So what is the secret of making money from digital distribution of music? Some feel it might be advertising. Robert Pittman, Clear Channel’s Chairman of Media and Entertainment Platforms, explained that advertising dollars come slowly to new media and services, based on his experience at MTV and AOL.7
“The good news is that we [Clear Channel] have billions of dollars in advertising revenue from our terrestrial radio business,” stated Mr. Pittman. “So even though it’s not big business now, we can afford to invest and grow our online audience. We have the deep pockets to wait it out.”8
Great for Clear Channel, but not such welcome news for entrepreneurs starting new digital media ventures.
Billboard’s Glenn Peoples sums up the new economics of the digital music era this way: “We’re increasingly living in a streaming world but we want download royalties. When the download market was growing, people wanted to return to the boom years of the CD. But in ten years, streaming revenues will be the norm. Just as today’s young musicians grew up without CD revenues, musicians of the future will know little else than streaming royalty rates.”9
Excerpt from Introduction to the Music Industry: An Entrepreneurial Approach by Catherine Fitterman Radbill.
Catherine Fitterman-Radbill is the Director of the New York University Steinhardt School’s Undergraduate Music Business Program.