Great Explanation of The Current Music Landscape

That article is awesome. I didn't know LinkedIn had blog type content. 

Couple of immediate takeaways: the average consumer spends $24/year on recorded music. In 1979 it was about $100, and much of the interim time it was around $75. But not today.

Labels are keeping most of the income from streaming, due to the terms of archaic contract agreements based on the old ownership model. The streaming payouts also depend on the accounting from free tiers of services like Spotify. Artists/labels do not get paid on free tiers, other than adding to the number of streams divided by the gross revenue/month. Ad revenue does not offset the difference between paid and free tiers/subscriber, so artists/labels are supporting the free tiers of streaming services, which they offer for growth.

Services like Spotify may well start signing artists directly, the way Netflix has started generating its own content, bypassing or as Liam Boluk says, 'disintermediating' Hollywood.

I'm pasting a section of the text, but the whole article is worth studying. 

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>A year’s subscription to Spotify costs $120. Though it seems pricey today (which is exactly the problem), the sum is largely in line with what used to be spent on an individual purchasing level. For more than three decades, the average American over 13 spent more than $75 a year on recorded music – and received significantly less than Spotify offers today. At times, including much of the 1990s, the average spend was over $90. Today, however, such spend is far outside the norm – and more so each day. In 2014, the same demographic group’s spend (which includes streaming services) was only $24 – a 76% drop from 1999. At its current rate of decline (-7% CAGR over the past 5 years), this figure will drop below $20 in two years.
At what point are the strategic advantages of a scaled user base offset by accrued losses in consumer willingness to pay? Not only is it notoriously hard to change the perceived value of a product or service, even the most successful efforts will take time. This does not mean unpaid subscriptions should be dropped entirely. The logic behind maximizing the number of music listeners also makes sense – it’s the best way to drive paid subscriptions and generate revenue from those who might otherwise pirate. However, Spotify should begin to move some of its more differentiating features, such as synchronized running, to its premium tier, increase the frequency of advertising (which hits only non-paying subscribers) and re-introduce listening caps that will force heavy users to pay for unlimited service.
Alternatively, record companies and publishers could pressure Spotify to reconsider its focus on user maximization at the expense of revenue optimization by adjusting contract terms. As long as the service incurs no material costs for free subscribers (only a royalty on incremental revenue and server costs), it has a reduced incentive to drive paid adoption or maximize royalty payments. To correct this, labels could require fixed payouts per unpaid subscriber on either a per-stream or per month basis.

Without Changes to Label Agreements, Artist Upside Will Remain Marginal
So far, we’ve discussed the first three sections of the streaming payout model: revenue (which is up to the streaming services and users), royalty payments (regulators and the streaming services) and payment structures (streaming services and labels). In many ways, the remaining function, label payouts, is the most pressing problem – especially where streaming is concerned. The figures quoted by artists when criticizing the “unlivable” royalties paid out by streaming services, for example, are after their labels take their share. Though the dataset is limited to France, Ernst & Young reported that Spotify and Deezer retained only 21% of gross revenue last year. Labels took home more than twice that amount – and nearly three times as much as artists, songwriters and publishers combined. Put another way, labels retained 73 of every 100 cents paid out by Spotify and Deezer, while the tens of thousands of artists and songwriters collected only 11 and 16 cents, respectively. One could argue the distribution is even more skewed than payout rates suggest, as Sony, Warner and Universal own a reported 25% of Spotify. Today, that stake is worth more than $2B (up from $1B in Q4 2013) – a sum that nearly matches the total value of all royalties paid by Spotify to date – and will be retained in its entirety by the three labels.

What makes this distribution particularly problematic is its resilience. Over the past 15 years, the music industry has been transformed in almost every way, yet the rates paid by labels to their artists remain largely unchanged. This needs to be corrected. Labels are still important – and by far the best pathway to mainstream success – but their role in the music value chain is continually diminishing and is significantly less essential than it was even ten years ago:
• Physical distribution, including manufacturing, fulfillment, logistics, etc., remains valuable, but its importance is in terminal decline 
• Social media, social music networks and direct-to-fan engagement are slowly disintermediating the A&R process and chipping away at corporate mass marketing campaigns and radio promotional activities
• Falling equipment costs means many artists now use or own private recording studios
• The concert industry has also become exceptionally streamlined, bearing little resemblance to the hyper-fragmented roadshows of the 70s and 80s
The most concrete example of the declining role of music labels, as I wrote two years ago, is Macklemore:
In 2013, Macklemore became the first unsigned artist in nearly 20 years to have a number-one single in the United States, “Thrift Shop”. The track was a grassroots success story born on social music sites such as SoundCloud and Hype Machine, rather than in state of the art studios and ad agency lofts. And if “Thrift Shop” didn’t scare music labels, Macklemore quickly gave them a second reason to be. Three months later, he proved he was no “one hit wonder” with another chart topper: “Can’t Hold Us”. A third track, “Same Love” hit #11  shortly thereafter.
Macklemore’s success doesn’t mean that music studios and labels don’t add value. Breaking out of obscurity – let alone to Macklemore’s newfound fame – remains exceedingly difficult. “Thrift Shop” was actually the fifth single from his album “The Heist”, which was released more than 18 months before the single appeared on the Billboard charts. But if obscure artists can have a multiplatinum record without label support, what must the Katy Perrys and U2s of the world be thinking? Artists typically receive less than 15% of the revenue from an iTunes sale (after Apple’s 30% distribution cut), with the rest going to the record label and to a lesser extent, songwriters. U2 is a large operation, to be sure, but they’re also a reliable and routine one. Rather than hand over usurious portions of their music sales to a record company, why can’t they pay salaried team to manage their concert tours, contracts, studio sessions and retail distribution (the last of which Macklemore hired Warner Music Group for)? Many of the more complex studio responsibilities, such as retail negotiations and managing manufacturing and fulfillment contracts, are quickly becoming anachronisms in the age of digital distribution and flat prices.
The need for changes in the artist-label contract isn’t new. But with revenue down more than 70% and an unprecedented number of artists competing for the remainder, the business can no longer afford the financial structures of yesteryear. Indeed, this is why many believe Spotify will begin signing artists directly, disintermediating labels just as Netflix has done to television networks.[6] At the same time, artists must recognize that "better" revenue shares or direct-to-streaming-service deals may result in reductions in (much-loved) contract advances.[5] 

Going Beyond the Record
Music, itself, may be commoditizing – but as concerts have shown, there are opportunities to expand musical content into new experiences and products. Last year, Deadmau5 launched a paid app ($5/month or $50/year) that gives subscribers access to exclusive music, videos and intimate behind-the-scenes reports. Taylor Swift took on a role as New York City’s official global brand ambassador and served as a one-time Victoria’s Secret Angel. Private performances and Las Vegas residencies have also become more popular and lucrative in recent years. In 2011, for example, Jay Z and Kanye West were paid $3M each for a private show in Dubai. Though their ultimate share of this revenue is private, it would have taken 500,000 albums (enough for gold certification) or a 5x platinum single to match this topline. A number of celebrity musicians have even parlayed their fame into significant cross-industry successes, from clothing to beverages, venture investing and sports franchises.
This type of brand extension dominates the video and news industry today. The core product is transformed from a profit center into a platform or brand upon which additional products can be sold, be it theme parks or wine tours. Even still, compressed economics tend to make cost structure a key competitive advantage. Those willing and able to survive on less revenue tend to be fine – and in many cases can establish an empire (e.g. Maker or BuzzFeed). For those who grew in an era of plentiful consumer spend and limited competition, this transition is tough, but for indies – many of whom gave away free CDs to drive awareness – the playing field has become more level.

TUNING IN
The role of music in modern civilization is hard to overstate. Music punctuates our daily life, crosses cultural and national boundaries with ease and is unmatched in its ability to transform our mood or transport us decades into the past. The idea that the category is losing value is tragic, whatever the cause. Yet the decline, which began long before the emergence of ad-based or subscription streaming models, doesn’t need to be terminal. Services such as Spotify, Pandora and Tidal have the opportunity to reverse 15 years of declining consumer spend and B2B revenue. Their models will likely need to evolve, but most key metrics continue to improve even as the major services have scaled their user bases. However, many musicians – especially those sitting atop the industry today – will need to come to terms with the fact that their music could be worth less than they believed and that they’ll need to find new revenue opportunities outside the recording studio. This outcome is far from unique – it’s affecting publishing, gaming, television and film. Most importantly, however, artists must recognize that without new label agreements, their tide will never turn.
- Liam Boluk

Since the accounting is so precise, streaming users could theoretically pay only for the music they actually listen to, at a "living" royalty rate. Lofi YouTube would be the "radio" in that scenario.

Yeah, this is a sleeper post.... that guy really went into the nuts and bolts of things and laid it out so anyone should be able to read it and get a grasp.

A lot of the fault here is on the record labels, not the indie's, but the major labels. Back in my day trading stocks you saw a lot of this, namely, it was in MBS and stock derivatives. The banks would lend the money and have Fannie Mae and the Rural Housing people back the loans, then they busted those mortgages up into fractions (stocks, funds, etc.) and the banks would then purchase large tranches of these, so they had no reason to care if people could pay their loans, they were making money hand over fist two floors down on their trading desk.

Same issue applies here to the major labels. They have a good majority of ownership in these streaming services, they are releasing material to them not caring about what comes on the top, they are making money from both the ad based and paid tiers because they not only are firstly collecting on the 70%, but are also getting 30% of these companies bottom line, not to mention whether or not there have been high percentage dividend promises on the preferred stock. It's different than common stock so it's not publicly disclosed. I'm not even sure if it's preferred stock, it could be bonds, which always have a coupon that will be paid.

The savior is Apple Music, they are a publicly traded company, their bottom line funnels down from all of their products and services and is traded on the exchange floor, so the 72% they are paying is really 72% and that is based off of pure subscription tier. They have 10 million already signed up, I would bet a buffalo nickel that's already increased significantly since the report, and once people subscribe it's highly unlikely they don't keep the service because Apple has always been very good at creating a sense of culture around products and services, they will convince people that $15.99 a month to have unlimited music access available in their already existing iTunes library is "cool" and "the new standard in music."

I haven't gone through this yet but here's another one: www.nytimes.com/2015/08/02/opinion/sunday/open-the-music-industrys-black-box.html?_r=0

Glad you posted this! It is excellent, and ads to the discussion and understanding.