Is streaming killing the music industry?

Who remembers the good old days of spending money on music? That simple transaction between artist and consumer, of capital in exchange for labour – the formula that kept our favourite industry buoyant. But nowadays there’s no need for all that faff, as a click of a mouse lands the majority of music straight into your lap for either a tiny bit of money (£5-10 a month), or (if you don’t mind a few adverts) no money at all.

Spotify is a service made in heaven for the consumer, easy, fast, cheap and with minimal effort required. How on earth did we survive without it? And why did those bloody pop stars make us pay so much for music before? Well, it’s not quite as simple as that of course. Because the reason why record labels give Spotify et al. rights to their artist’s music so cheaply is because they’ve sort of been backed into a corner. Piracy came first you see, so if they didn’t, most people would go and (illegally) download the latest Rihanna album for free anyway.

Streaming services make music legally available for the fraction that it would cost from somewhere like iTunes or HMV. They generate profit from advertisers on their free service, and from users who pay for the tiered subscription services. Around 70% of all the revenues that Spotify makes go directly to record labels, publishers and collecting societies. These rights holders then pay the artists according to the deals they have in place.

Spotify pays royalties in relation to an artist’s popularity on the service. For example, they pay out approximately 2% of their gross royalties for an artist whose music represents approximately 2% of what users stream. This means that a popular song or album could generate more revenue for an artist over time, than it historically would have from upfront unit sales. But in general, the rate artists are getting paid is pretty low and Spotify’s founder Daniek Ek has recently said you’d have to stream one song 200 times in order to generate the equivalent of a paid for download.

The rate of income is a big issue because the less money artists earn from selling music, the less money goes into the industry as a whole. This means there’s less to spend on nurturing new acts, who don’t get a No.1 record first of all (by being on a TV show like the X Factor), but with a bit of time and cash might just be the next Nirvana/Madonna/Adele/James Brown. Secondly, it might be all well and good for major labels with a lot of big commercial acts on their roster (David Guetta (EMI) and Rihanna (Def Jam – Universal) were the most streamed artists of 2012), but for small independent labels it doesn’t make as much sense.

Taylor Swift recently withheld her new album Red from Spotify, Deezer and Rhapsody. For her label Big Machine Records, the minimal income stream is negligible. And having her album available for free could potentially stop people buying the record. Although of course, the LP did turn up on piracy sites Grooveshark and BitTorrent and was also up on YouTube.

However, it’s not all bad and as a discovery and exposure platform, Spotify is hard to beat. Think of it like a radio station that plays all music released on demand, not just the tracks that are lucky enough to get playlisted. And an ever increasing amount of apps and social media partnerships make it very easy for users to share new music. Mumford & Sons’ latest release through Glassnote Records got a huge amount of streams on Spotify, but was also one of the biggest debut sales weeks for an album last year. So it could be argued that people found the Mumford album on the service, and loved it enough to go and buy it properly. But, this is a rare example. So what are we going to do? Where is the money going to come from? Will only rich people be able to be pop stars? Will our charts be dressed head to toe in ever more commercial garbage? Will music disappear?

Well, no-one knows for sure, and that’s one of the reasons why the music industry is probably the most happening industry at the moment. In the meantime artists are lending their faces to advertising (Cheryl Cole & L’Oreal, Katy Perry & Pop Chips), expanding their income options (Lady Gaga’s Eau Du Parfum) and doing synch deals (like Paloma Faith’s song on the John Lewis advert), to fund their next album/tour.

Traditionally, people would use reviews, recommendations or radio play to decide whether to exchange pocket money for music, nowadays we get to hear an entire album in full before measuring its worth. But unless someone decides to banish the internet from the face of the earth, the days of making serious money from recorded music are a long and distant memory.

However, that’s not the end of the story and if labels get it right, there’s still some serious cash to be made. In fact, instead of dying a slow and painful death, the music industry is actually a major contributor to the UK economy. It contributes nearly £5 billion, of which £1.3bn comes from exports earnings and employs around 130,000 people. In real terms, Adele’s record label XL records made a cool £41.7m profit in 2011. Sony Music UK revenues tipped £191m in the 12 months to March 31 2012 and the company’s highest paid director made £952,508. And Universal Music Group (worldwide) made over £2.5bn in the first nine months of 2012.

Yes, things have changed since the glory days of yore. Employees no longer fly First Class, labels don’t expense ‘fruit and flowers’ (read: drugs and hookers) or frequent The Ivy at lunchtime. Revenues have gone down, salaries have halved, belts have got tighter and employees work harder. But in general – as long as you’re good – there’s enough to make a fair living from. And that’s all anyone really needs isn’t it?