Rockonomics

by Alan B Krueger

  Managing Musicians

  Choosing the right manager is a tricky business for musicians. A band’s manager can easily earn as much money as an individual band member. But good managers are well worth their cost. Some managers, such as Cliff Burnstein and Peter Mensch, are widely respected for their professionalism—they understand the business and can steer their clients toward financial sustainability and a long career. Others are “hometown managers”—they started with the band in the early days and are learning the business as they go, if they’re lucky. Paul McCartney once lamented that the Beatles’ first manager, Brian Epstein, “looked to his dad for business advice, and his dad knew how to run a furniture store in Liverpool.”26

  Elvis Presley went through a couple of hometown managers before he connected with Colonel Tom Parker, who was a former carnival barker and undocumented immigrant to the United States.27 But Parker understood the music business and was able to raise Elvis’s career to a much higher level and negotiate favorable record and merch deals. One of Parker’s insights was to have Elvis appear as a guest on Frank Sinatra’s television special on ABC, in his first televised appearance after returning from military service in 1960. The strategy worked and enabled Elvis to cross over to an older audience. Parker’s commission rate allegedly exceeded 50 percent of Elvis’s income. But in recognition of Parker’s role, Elvis once said, “I don’t think I’d have ever been very big if it wasn’t for him. He’s a very smart man.”28

  Upon achieving national or international acclaim, some superstars decide to save money by managing their own career, or by bringing management in-house. Kanye West broke with his longtime manager Izvor Zivkovic, and later with Scooter Braun, to try this strategy. Bruno Mars, Beyoncé, and Taylor Swift are pursuing similar strategies.29 Time will tell whether they will work. But if history is any guide, it is easy for a musician to be taken advantage of, with or without a manager.

  Within Your Means

  Many musicians get into financial trouble because they do not live within their means or do not plan for the future. Will Smith, who performed hip-hop in the group DJ Jazzy Jeff & the Fresh Prince before being cast in The Fresh Prince of Bel Air, is a textbook example. The duo won the first Grammy Award given out for Best Rap Performance for their hit “Parents Just Don’t Understand” in 1989. Their first album went triple platinum. Thinking that the good times would continue, Smith spent extravagantly. His second album, however, was a flop. Smith jokes that it went “double plastic.” He neglected to pay his income taxes, and the Internal Revenue Service repossessed Smith’s car and motorcycle, assessed him with a $2.8 million tax debt, and garnished his income. “Being famous and broke,” Smith recalled, “is a s****y combination, because you’re still famous and people recognize you, but they recognize you while you’re sitting on the bus.”30

  On the verge of bankruptcy, Smith caught a break. A chance meeting led to an impromptu audition at Quincy Jones’s mansion in Bel Air, and the rest is history, as Smith went on to become one of Hollywood’s biggest stars.

  Musicians are not so different from many Americans when it comes to making financial decisions, but the unpredictable nature of their income, the high rate of self-employment, and the laser-like focus on their art often makes their financial situation more perilous. Because musicians typically earn their income as independent contractors, they do not have an employer who withholds income from their pay for taxes. Like Will Smith, many musicians fail to set aside income for tax purposes, and run into trouble with the IRS.

  Many musicians have also been aggressive in trying to avoid tax payments. The pop singer Shakira, for example, came under investigation for possible tax evasion in Spain.31 And some musicians have gotten into trouble because their business manager or tax adviser set up a scheme to evade taxes—for example, by booking income through a third party in a tax haven—that caused the musicians to lose control of their income. Keith Urban and Madonna appeared in the leaked “Paradise Papers” documents that detailed offshore tax arrangements.

  But it is excessive spending—leaving too little to live on after their career is over and neglecting to provide for children’s college tuition and other needs—that is a problem for many musicians, and millions of Americans. The case of Elton John provides an extreme example. In an ultimately embarrassing lawsuit, Elton John once sued his former manager and PricewaterhouseCoopers for $30 million for financial mismanagement. Not only did Elton John lose the suit, but court documents revealed that he spent more than $60 million in less than two years, including $400,000 on flowers. Justice Andrew Ferris observed, “Sir Elton is clearly a man of an uncommonly generous disposition. He likes spending money on himself and on gifts or other benefits to friends. But he has little or no interest in business matters and does not bother to understand matters which do not interest him.”32 To add injury to insult, John was required to pay around $12 million in legal costs.

  Earning a lot of money is not a foolproof barrier against financial insolvency and bankruptcy. The rapper Curtis Jackson, known professionally as 50 Cent, reportedly earned over $300 million in two years. In 2016, he agreed to pay $23 million to creditors a year after filing for Chapter 11 bankruptcy protection. His debts included $17 million to an audio equipment company and $6 million to the girlfriend of a rival rapper for invasion of privacy.33

  A study of National Football League players drafted from 1996 to 2003 found that 16 percent had filed for bankruptcy within twelve years of retiring.34 The median player earned $3.2 million (in 2000 dollars) over his career, and the median career lasted six years. Moreover, players who were better-paid or had a longer career were not less likely to fall into bankruptcy. This suggests that spending beyond their means is the problem, not inadequate income.

  The life cycle model in economics presumes that people will save when their incomes are the highest, putting aside money for periods when income is low and for retirement. But as economists have documented, many people have a tendency to overspend out of their current income, either because self-control problems cause them to make impulse purchases or because they excessively discount the consequences of their actions for their future financial health, a phenomenon economists call hyperbolic discounting. Another explanation was frequently mentioned by managers who worked with superstar musicians: many failed to appreciate that their stratospheric earnings could turn out to be ephemeral. Will Smith, for example, seemed genuinely surprised that his second album bombed and his income failed to keep up with his spending habits.

  To help musicians take charge of their financial lives, career coach Astrid Baumgardner gives them seven sensible rules to follow.35 First, “articulate your challenges,” including spending too much money and overcharging credit cards. Second, “gain basic financial literacy” so you will understand how to handle your finances throughout your life. Third, “think expansively about revenue streams,” as musicians often piece together a living through gigs, teaching, publishing, and other sources of income. Fourth, “budget wisely”: review your income and expenses to ensure that you are living within your means, being paid what you’re owed, and not being overcharged. Fifth, “avoid debt,” including credit cards and other sources of debt with high interest rates. Sixth, “save now,” as income will fluctuate; you will be grateful for those savings when you hit a rough patch or retire. Seventh, put money aside for taxes that you will owe Uncle Sam, and record your expenses so you can deduct them from your income for tax purposes.

  Brand-New Day

  At one level, all of these rules boil down to understanding your costs, planning for the future, and living within your means. Excessive costs are deadly for businesses and personal finance. Artists who spend a fraction of their time monitoring where their money is going to and coming from will be more financially secure and able to pursue their passion throughout their lives, whether they are journeymen musicians or arena headliners.

 
; *1 This is an oversimplification: the royalty rate can vary across distribution modes and across countries, the rate often escalates as more recordings are sold, and more popular artists can negotiate higher royalty rates. Note also that the artist’s net royalty rate can be lower if producers receive a share of royalties out of the artist’s share.

  *2 Using the fact that a musician was underage when a contract was signed is not a new negotiating tactic. The Rolling Stones were able to reach a settlement with their first co-manager, Eric Eastman, in part because they were underage when they signed and thus the contract was of questionable legal validity.

  CHAPTER 8

  Streaming Is Changing Everything

  Technology always wins. But what if you can make a better product than piracy?

  —Daniel Ek, co-founder and CEO of Spotify

  The year Napster was launched in 1999 also marked the peak year for recorded music revenue. Revenue from recorded music fell by more than half from 1999 to 2015, from $14.6 billion to $6.7 billion in the United States, even before adjusting for inflation.*1 The reason for the decline? The switch to digital music enabled piracy and illegal file sharing to explode. It is only with the advent of streaming that there has been a rebound. From 2015 to 2017, revenue increased by $2 billion, erasing the last ten years of declines and providing a much-needed boost to the music industry.1

  A mind-boggling total of one trillion songs were legally streamed in the United States in 2017, and that figure could double by 2019.2 The advent of streaming services has changed the economics of the music business. Music streaming services provided on platforms such as Spotify, Amazon, Apple Music, Deezer, QQ, Tidal, Google Play Music, Internet radio, and YouTube are rapidly transforming music from a durable-goods/ownership market to a service/leasing market. Streaming is expanding the amount of time people spend listening to music, and helping reduce music piracy around the world by providing a more convenient service for consumers at an affordable price. Daniel Ek, who co-founded Spotify in 2006, correctly predicted that if he built a better, more convenient service, consumers would be willing to pay for music.

  The music industry has been upended by new technology about once every decade. Faster-playing 78s gave way to long-playing (LP) albums and 45s in the 1950s and 1960s; cassettes and eight-track tapes proliferated in the 1970s, and those gave way to the Walkman in the 1980s, followed by CDs. MP3 players and digital downloads emerged in the 1990s, and the iPod in the 2000s. Today streaming is surging. You can mark the rate of technological progress by the old devices that you discard, or that pile up in a drawer or a closet, never to be used again. We are likely in the early days of the streaming revolution, and the music distribution business is sure to morph again in the future. Nonetheless, the current state of music streaming provides a clear lesson on how economics is tied to technology, and how economic incentives and technology shape our culture.

  Mapping Streaming

  As recently as 2008, two-thirds of the revenue from recorded music came from the sale of physical products (mainly CDs), and 30 percent came from digital downloads (mainly tracks sold through the Apple iTunes store).3 Today, streaming accounts for two-thirds of recorded music revenue, and physical products and digital downloads each account for about 15 percent. Vinyl records survive mainly as novelty items, although demand is growing again among aficionados. The main driver of demand propping up CD sales is the stock of old cars still on the road. Older vehicles have CD players in their dashboards.4 Once these aging vehicles are phased out, however, CDs could well go the way of eight-track tapes.*2 “I definitely believe the next decade is going to be streaming plus vinyl—streaming in the car and kitchen, vinyl in the living room and the den,” Jack White, singer and founder of Third Man Records, recently told Rolling Stone. “Those will be the two formats.”5

  Given that vinyl is expensive and much less portable than streaming, I suspect it will remain popular only among a relatively small set of enthusiasts. Streaming is the present and future distribution mode for music. And streaming is changing everything in music.

  Streaming comes in a variety of forms. One important distinction concerns interactive versus non-interactive services. With interactive services, consumers can choose which artists, albums, or songs to play. In non-interactive services, music is preprogrammed, similar to a radio broadcast. Another important distinction concerns ad-supported streaming services, where the listener pays nothing but the content is occasionally interrupted by advertisements, and subscription-based models, where the listener pays a monthly fee for ad-free content. Some platforms, such as Spotify and Pandora, provide both ad-supported and subscription plans.

  As far as artists and record labels are concerned, paid subscribers offer a better deal for them. Royalty payments per song are greater for music streamed via subscriber services than in free ad-supported services, as subscription revenue greatly exceeds ad revenue.

  Paid subscriptions have grown exponentially in the United States in recent years. It is growth in paid subscriptions that is driving the increase in recorded music revenue. From 2013 to 2017, the number of paid subscriptions increased almost sixfold, from 6.3 million to 35.3 million.6 Revenue received by artists and record labels from paid subscription services increased at an even faster rate, rising from $0.6 billion in 2013 to $4.0 billion in 2017. Revenue from ad subscriptions grew as well, but at a slower pace and from a lower level, rising from $0.22 billion in 2013 to $0.66 billion in 2017.

  Several large streaming platforms are engaged in fierce competition for listeners and subscribers. Spotify and Apple Music both had more than 20 million paid subscribers in the United States as of mid-2018, and Amazon is not far behind.7 Amazon’s unlimited service doubled its subscribers in the last six months of 2017, according to CEO Jeff Bezos, and is available in forty countries. Worldwide, Spotify has 157 million active users and 71 million paying subscribers. Apple has an estimated 45 million paying subscribers worldwide; it does not offer a free ad-supported service. Pandora has 75 million active monthly users but only 5.5 million paying subscribers. Sirius XM Radio has upward of 33 million paying subscribers in North America. Chinese Internet giant Tencent’s streaming platforms reach the most ears worldwide, with more than 800 million monthly listeners who are overwhelmingly using their free ad-supported service.

  Today there is a great deal of optimism about the future of the music industry, because streaming is not close to reaching its saturation point. If one uses cellphone penetration or the adoption of subscription video services such as Netflix as a guide, the number of music streaming customers could easily experience double-digit annual growth rates in coming decades. William Morris’s Marc Geiger has predicted that the number of worldwide paid subscribers will grow from around 100 million today to 1 billion over the next fifteen years.8 And he foresees an even larger number of ad-based listeners.

  The Muddy Waters of the Streaming Business

  Streaming creates a new and different type of product that is not directly comparable to physical album sales or digital downloads. Physical records, such as CDs, are durable goods, which individuals purchase and own; they can listen to the songs recorded on those CDs an unlimited number of times in the future. Streaming uses the output of the recording industry, recorded masters, to create a service: a vast catalog of audio streams that consumers can access whenever they want, wherever they want, as long as they pay the monthly fee required for the service (or endure ads) and have a device that can stream music. The service entails playlists, curated recommendations, on-demand song, album, and artist choices, and other features. Although from the listener’s perspective streaming has something in common with the old durable-goods model, it is quite different, and attempts to shoehorn streaming metrics into album sales have been ad hoc at best.

  Streaming is like leasing rather than buying a car. People who lease a car tend to drive it more and take less care of it th
an if they owned the car, because they are less concerned about the wear and tear on a leased car. Because a streaming subscription puts the entire music catalog at the listener’s disposal, streaming is equivalent to having a whole fleet of cars—sports cars, station wagons, SUVs, trucks, and so on—at your disposal, whereas owning a CD gives you access to only one particular car.

  Because it is a new product in a less-than-transparent industry, there is a lot of confusion concerning the business model underlying streaming. Streaming services such as Spotify typically pay 65 percent to 70 percent of their revenue in royalties to music rights holders (record labels, artists, publishers, and songwriters).9 Payout rates are confidential and are negotiated between record labels and streaming platforms. The calculation of the exact amount paid by streaming services is more complicated in practice, but assuming a fixed 65 percent to 70 percent ratio is a reasonable approximation.10 After the payout ratio is set, royalty payments are apportioned to song rights holders according to their share of streams on the service.

  To take a hypothetical example, suppose a streaming platform has 100 billion songs streamed in a year, collects $600 million in revenue from paying subscribers, and pays two-thirds of its revenue ($400 million) to rights holders. If a hit song accounts for 100 million streams on this service (which equals 0.1 percent of total streams), the payout to the rights holders of that song will be 0.1 percent × $400 million = $400,000. If an on-demand audio streaming service such as Spotify has more paying customers, and therefore more revenue, it will pay out more money to rights holders. Revenue collected from advertisers is also apportioned to rights holders according to their share of streams.