Competition and streaming deals

beats-spotifyFollowing on from yesterday’s post I discovered several things:

1. Taylor Swift is powerful. Really powerful. Apple responded to her letter and agreed to change course and pay artists etc for the three month free trial period. Maybe she can do more than just move the dial in music compensation.

2. Readers of this blog love Taylor Swift. Me suggesting she may be wrong about this issue and even about the notion that she should get paid more than independent artists unleashed a torrent of hate.

3. Putting down a model can generate clarity and innovation (as occurred in the comments).

It is that last thing that I want to comment on here. My colleague Kevin Bryan wrote that Apple’s three month trial is there because of its competition with Spotify that has a free streaming service (that doesn’t include Taylor Swift but includes many others). Let me build in his argument here following on from yesterday’s model.

1. Assume now that on Spotify, artists etc receive a share of b of its revenue based on advertising. Let’s call that monthly revenue R.

2. Assume also that S users switch from Spotify to Apple during the trial and s < S the number who switch to a paid Apple music subscription.

In this situation, the impact of Apple on artist etc revenues is $10xam – 3SbR – sbRm; thus, in contrast to my previous analysis, I need to take into account the impact on artist revenues from other sources. That impact is twofold: (i) if Spotify viewers switch to become paid subscribers from Apple then, if a$10 > bR, artists etc earn more but (ii) they lose Spotify revenues during the three month trial. If Apple are, as is clearly falsely assumed, all powerful over artists etc, then a is probably just a little higher than bR/a which still leaves artists etc short 3SbR as a result of the free trial.

My assessment assumed that a good benchmark for compensation for artists etc for the free trial would be something that aligned their interests with Apple. Without compensation, they would, as Kevin Bryan argued, prefer a shorter trial than Apple would. To get them on the same page, Apple would need to compensate artists 3SbR for the trial period.

Note that this is much less than compensation, as if, all the users in the free trial were, in fact, paid subscribers but it is a positive amount of compensation nonetheless. And it appears that Apple will not be compensating artists as if there were paid subscribers.

Cue says Apple will pay rights holders for the entire three months of the trial period. It can’t be at the same rate that Apple is paying them after free users become subscribers, since Apple is paying out a percentage of revenues once subscribers start paying. Instead, he says, Apple will pay rights holders on a per-stream basis, which he won’t disclose.

But we can guess using algebra. Spotify says that, in 2013, 25% of its subscribers were paid and they generated $120 per year in revenue. They also said their average revenue was $41 per subscriber. As this blog isn’t the New York Times, I can reveal to you by the magic of algebra, therefore, that this translates to around $14.67 per year for non-subscribers or $1.22 per month. Spotify says that it pays around 70% of this to artists etc and it doesn’t seem to distinguish between paid and unpaid contributions (which is strange but a topic for another time). Anyhow, I’ll use this as an estimate for b.

What about S? It is really hard to tell. Spotify has 60 million users. If all the free users switch to Apple for three months, then artists will lose $2.56 per user or $115m in total. If all users switch to Apple, then artists will lose $7.17 per user for a total of $430m. That is the likely upper limit of Apple’s liability here. As Apple Music will eventually be on all platforms, we don’t need to distinguish between iOS and Android etc for this analysis. Suffice it to say, if Apple use my formula to compensate artists for the free trial, it is going to add up the more successful Apple is in competing with Spotify. What is more, as Apple won’t be able to tell which of its users are coming from Spotify than not I suspect that it will likely set its per user compensation to artists in the three month trial as something less than $2.56 per user.

This may all seem like a lot of effort to sort out pricing but I believe that it is actually pricing between platforms and copyright holders that is at the heart of issues regarding streaming and the future of music. We shouldn’t be afraid to get our hands dirty with a little math to work this out.

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