Rockonomics

by Alan B Krueger

  Paul Simon is also correct in saying that music is completely tied up with capitalism and it would be a mistake to separate it from the economic forces that drive our capitalist system. The industry needs a sustainable business model to keep the music playing and permit new artists to enter and succeed in the industry. But at its finest, music has the ability to transcend capitalism—and socialism, communism, and all the other isms. Yes, music is often used by Madison Avenue to hawk products, but it is also used to inspire social activism and political movements. It is not naive to think that music and musicians have played a significant role raising awareness, lifting spirits, and stirring souls in the feminist revolution (“I am woman, hear me roar”), the U.S. civil rights movement (“We Shall Overcome”), the collapse of apartheid in South Africa (“Biko”), and the fall of communism in Eastern Europe (the Velvet Revolution drew inspiration from the Plastic People of the Universe and the Velvet Underground).

  More than any other industry, music has the ability to rejuvenate lives, reinvent cities, break down barriers, rally resistance, and give rise to revolutions. As Bruce Springsteen once put it, “In some fashion, I help people hold on to their own humanity, if I’m doing my job right.”3 In economic jargon, music provides substantial positive externalities, meaning benefits for society beyond what music costs to create.

  Scaling Music

  No matter how you cut it, economically speaking, music is a relatively small industry. Global music spending in 2017 was only $50 billion, or 0.06 percent of world GDP.4 The music industry is small even compared to the rest of the entertainment industry. Worldwide, $2.2 trillion was spent on entertainment and media in 2017. Music represented just 2 percent of that market.

  I once commented to Russ Crupnick, a veteran music industry consultant, that I was surprised there were not more economists advising music companies. He gave a terse explanation: “There isn’t much money in music.”5 That’s hard to dispute.

  To put the music industry in perspective, more than three times as much money is spent on professional sports as on the entire music industry in North America.6 More revenue is booked by college and pro football alone.7

  Americans spend over five times more on cigarettes than they do on music. Incredibly, tobacco companies spend more money advertising their products than Americans spend on recorded music.8 Music is also small compared to much of our virtuous spending: Americans spend 50 percent more on health clubs, for example, than on music.9 Even the fees for unused health club memberships in the United States exceed the total revenue collected for recorded music.

  The Shape of Music Money

  Where do our music dollars go? Figure 2.1 provides one look at how total U.S. music spending was divided among major categories in 2017. You should be warned, however, that comprehensive, unassailable financial data for the music industry do not exist. Contracts are private, and the division of concert ticket and recording revenue is rarely disclosed. As Cliff Burnstein, the manager of Metallica, Red Hot Chili Peppers, and other acts, once cautioned me, “There is a limited amount of transparency in our business.”10 I had to rely on fragmentary data and the informed judgment and advice of industry professionals to apportion the various slices of the music money pie.

  This caveat aside, today about half of every dollar spent in the music industry goes to recorded music, and about half goes to purchases related to live performances. Fans experience and enjoy music most of the time through recorded music. Most musicians, however, earn most of their money today performing live events.11

  Figure 2.1: Estimated Division of Total U.S. Music Revenue, 2017

  Source: Author’s estimates based on Pollstar data, RIAA, Statista, and interviews with managers.

  The format on which music is distributed and heard has evolved throughout the twentieth century, with the invention of the phonograph, tape recorder, and radio. But it has changed even more radically and rapidly in the twenty-first century once music was digitized. Figure 2.2 displays record industry revenue collected from three broad formats over time: physical products such as CDs, cassettes, and vinyl records; digital downloads; and streaming. The digitization wave in the early 2000s had two significant effects that rippled through music sales. First, digital downloads eclipsed physical record and cassette sales. Second, file sharing and piracy cannibalized recorded music revenue. Napster, unauthorized ripped CDs, and other ways of illegally copying and sharing music caused the demand for legitimate records to steadily dwindle. For more than a decade, the record business was in secular decline, following the same track as the steel and coal industries. Avery Lipman, the president and co-founder of Republic Records, told me that the record business in this period was like being on a “slowly descending airplane for fifteen years.”12

  Figure 2.2: Record Industry Revenue by Music Format, 1973–2017

  Source: Author’s calculations based on data from RIAA U.S. Sales Database. Revenue from synchronized licenses is included in digital downloads.

  Then another tidal wave disrupted the industry. Rapid growth of streaming services such as Spotify, Pandora, and Apple Music all but displaced digital downloads. Digital downloads for iPods and other MP3 devices through online services such as iTunes, which seemed revolutionary a decade ago, are now a relic of the past, akin to eight-track tapes and 45s. Economists rarely get to see such creative destruction in real time. It’s as if Darwin was able to observe species evolving before his eyes while he visited the Galápagos Islands.

  Meanwhile, physical record sales have finally stabilized, albeit at a low level. There is a revival in vinyl record sales to music enthusiasts, and the CD market is propped up for now by customers with older cars purchasing new CDs for their dashboard CD players.13

  Streaming is having a revolutionary effect on music sales. After fifteen years of decline or stagnation, revenue from recorded music finally began to increase in 2016. And the signs are that this upward trend will continue for some time. The growth in music revenue is entirely due to streaming services, particularly the rapid growth in paid subscriptions for Spotify, Pandora, Apple Music, Amazon Music, and Deezer. These services are the music equivalent of an all-you-can-eat buffet, where fans get access to nearly all music ever recorded for a monthly subscription fee, or for putting up with the inconvenience of occasional ads. One important lesson from this revolution is that fans are willing to pay for music if it is provided in a convenient fashion. Streaming is upending the music business, favoring certain genres such as hip-hop, electronic dance music (EDM), and Latin music, as well as giving a second wind for royalties on deep catalog recordings by older artists such as Tony Bennett and classic rock bands including the Beatles and Rolling Stones.14

  The amount that artists and other copyright holders are paid when their music is streamed varies, depending on whether their music is played on ad-supported or subscriber-supported services. It also varies across services. But a song typically earns royalties of around $2,000 to $3,000 per million plays.15 Spotify, the largest streaming service, pays out approximately 60 percent of its revenue in music royalties.16 We are still in the early days of the streaming era; it has a great deal of room to grow. Given its potential to change the music business, I return to the role of streaming in Chapter 8. For now, it is clear that streaming is providing a much-needed shot of adrenaline for the recorded music business.

  Streaming is also giving a boost to publishing revenue, which currently makes up 9 percent of music revenue. Publishing is the complicated and somewhat antiquated business of securing payments for the right to use music. Songwriters can publish their own music; more commonly, they work with a publisher to ensure that adequate payments are made for the various rights to use music. Although concrete figures do not exist, artists who compose music typically receive about 45 percent of publishing revenue.17 Increasingly, this revenue is being split among a
larger number of songwriters and collaborators, as music has become more sophisticated, with more hands and minds involved in the composition.

  Another revenue stream that bears mentioning, although it accounts for only 1 percent of all music revenue, is sync licenses. Sync licenses are required to synchronize music in videos, TV shows, movies, and commercials. For example, a sync license is required for music videos played on YouTube, the video-sharing service acquired by Google in 2006. YouTube’s role in music today cannot be overstated: fully half of all Americans listened to music at least once a week on YouTube in 2017, exceeding the combined share of Americans in any given week who turn to Spotify and Pandora.18 Almost organically, YouTube became a major and controversial player in the music business. YouTube accounts for a third of all online music streaming time—and yet only 6 percent of music revenue.19 This imbalance is likely to change, although industry professionals are pessimistic that it will change quickly. In 2017, YouTube paid out over $1 billion to record labels and other rights holders for music, roughly the same as in 2016.20

  Is YouTube a positive or negative development for musicians and record companies? There is no straightforward answer. On one hand, the share of YouTube revenue that is paid out for musical copyright is small compared with streaming services, which is a source of anger for many musicians and labels. On the other hand, record labels and artists used to have to bear the cost of distributing and marketing music videos. So to the extent that YouTube has replaced MTV, and has much wider reach, it is a profitable development for record companies and musicians. Because artists generally earn a small share of their income from recordings, on net it is likely that YouTube has been a positive development for artists trying to break in and develop an audience; established stars, however, have a legitimate beef with YouTube’s relatively meager royalty payments.

  New Business Models

  Digitization and the Internet are providing new opportunities for musicians to record and sell their music directly to their fans. An early experiment in this vein was carried out by the English rock band Radiohead. In 2007 Radiohead released its album In Rainbows directly on its website and asked fans to pay whatever they wanted to digitally download it. The experiment was a test of music fans’ responses to economic incentives. Any payment made was entirely voluntary. Fans could elect to pay nothing for the album. And roughly 60 percent of the million fans who downloaded the recording from the band’s site in the first month did pay nothing. Millions more downloaded it for free from unauthorized websites. But 40 percent of those who downloaded the recording from Radiohead’s official website did opt to pay, contributing an average of $6 per album that they downloaded. Radiohead, which owned the master license to In Rainbows, netted nearly $3 million from their pay-what-you-want experiment. Tom Yorke, Radiohead’s frontman, claimed, “In terms of digital income, we’ve made more money out of this record than out of all the other Radiohead albums put together.”21

  Radiohead’s experiment was a harbinger of new music distribution methods to follow. The hottest singers, such as Taylor Swift, Adele, and Beyoncé, now tier the way they release their music. Swift, for example, waited three weeks before she made her latest album, Reputation, available on Spotify, Amazon, Apple Music, and other streaming services. Why? The services pay less in royalties than she would have received from full album sales. Her most ardent fans purchased her album. The strategy resulted in over 1.2 million record sales in its first week, edging out Ed Sheeran’s for the strongest sales of any album in 2017.22

  Technology is rapidly facilitating “disintermediation,” enabling musicians to produce, record, publish, and distribute their own music without the need of a record label. Companies such as Kobalt are emerging to help independent artists publish music and collect royalties. And services such as DistroKid enable artists to upload their music to streaming services and online stores. With a profusion of new music, the Herculean challenge for new and lesser-known artists is garnering an audience.

  One new model that lesser-known musicians are turning to involves subscription services where fans pay the artist directly. At Patreon.com, for example, artists set a monthly subscription fee (or per-download fee) for the music they make available through the site. The artist keeps 90 percent of the revenue, a division that is essentially the flip side of a recording contract. The singer and songwriter Amanda Palmer released her song “Machete” and a David Bowie tribute entitled Strung Out in Heaven: A Bowie String Quartet Tribute exclusively on Patreon. With more than 11,000 patrons, she has grossed over $1 million in two years. As Palmer says, “I’ve been struggling since I got off my label in 2008 to find the right platform for ongoing support, through which I can release constant material (and get paid).” She has also used Kickstarter to crowdfund the cost of producing music and videos.23

  The Radiohead experiment demonstrated something else, which had already been discovered in countless pie-splitting economic experiments: not everyone is motivated purely by self-interest. In two-person pie-splitting experiments (often called the Ultimatum Game), the first player makes a proposal about how to divide a fixed pie, say $100, between herself and a second player. The second player can accept or reject the proposal. If the proposal is rejected, both players get nothing; if the proposal is accepted, the players divide the pie along the lines the first player proposed. If you were the first player, how much would you offer the second player in this situation? The optimal strategy is for the first player to offer the second player a pittance, say a penny; the second player should accept that proposal because getting something is better than getting nothing, and player one receives the most from this strategy. Of course, many people do not consider it fair to offer such a small amount, and in practice the first player typically offers close to a fifty-fifty split, because she considers it a fair division. When people do attempt to keep most of the money for themselves, they often find that their proposal is rejected. The second player is willing to forfeit the money he would have received, because he feels the offer is unfair.

  Radiohead’s pay-what-you-want experiment provided real-world evidence that considerations of fairness can motivate human behavior. You can count on some people to be generous—and others to be greedy. Increasingly musicians are figuring out ways to charge more to consumers who are willing to pay more, a practice called price discrimination. Indeed, Taylor Swift’s strategy for the release of Reputation can be seen as a clever form of price discrimination. Her hard-core fans, who were willing to pay the most, opted to purchase her album as soon as it was released, at a higher price. Others who were more price sensitive waited until it was available through streaming services.

  Sources of Musician Incomes

  Most of the money collected from recorded music does not go to the musicians who created the music. Record contracts typically give the musicians an advance upon signing against a 10 to 12 percent share of future royalties, net of costs. There is a simple reason for this uneven division: most records don’t pay off.24 Only one or two of every ten records that a record label releases actually covers its costs. Music labels take large risks. They are similar to venture capitalists betting on a lot of new artists and music in the hopes that a few will break out in a big way. To cover their costs, record companies must subsidize a lot of music that is in the red—that loses money—with a small number of records that strike it rich, at least until the successful stars can renegotiate their contracts.

  Today, even superstar recording artists, whose records account for the vast majority of industry-wide music revenue, make most of their income from live performances, rather than royalties. In 2017, for example, Billy Joel, the original Piano Man, earned $27.4 million from live performances, only $1.3 million from record sales and streaming, and $0.6 million from publishing royalties. In other words, more than 90 percent of his income was derived from live concerts.25 And that was true for Joel in the early 2000s as well, long before he lan
ded his monthly gig at Madison Square Garden (which insiders sometimes refer to as the Garden’s fourth franchise, after the Knicks, Liberty, and Rangers). Or consider Paul McCartney, who has written and recorded more number-one songs than anyone in music history. He netted 82 percent of his income from performing live shows in 2017.

  U2, who led all musicians with $54 million in income in 2017, earned 96 percent of their income from touring. And Beyoncé, who topped the list with $62 million in 2016, earned 88 percent of her income from touring that year.

  Of the top forty-eight musicians who toured in 2017, on average they earned 80 percent of their income from touring, 15 percent from recorded music, and 5 percent from publishing fees. Touring accounts for the lion’s share of income.

  There are some exceptions to this pattern, of course, even if they are typically short-lived. Canadian rapper Drake—who is in the rare position of producing his own music and owning his own imprint, OVO Sound—earned $23.3 million from recordings and “only” $13.6 million from live concerts in 2016, according to Billboard. Drake didn’t tour in 2017, and earned $10.3 million from recordings that year. “Revenue is lumpy from year to year,” Cliff Burnstein pointed out. His client, the heavy metal band Metallica, made a reported $13.2 million from record sales and $3.8 million from touring in 2016, but in 2017 earned $10.9 million from record sales and $30.7 million from touring. Over a five-year period, Burnstein said, the band typically earns more from touring than from record sales. In general, the days when Metallica made more money from records than from touring are long gone, according to Burnstein. And if this is true for Metallica, which ranks behind only Garth Brooks and the Beatles in record sales since 1991, according to Nielsen SoundScan, it is presumably true for just about everyone else.26