Rockonomics

by Alan B Krueger

  Pandora’s experiment yielded another important finding. Pandora offers both free ad-supported radio and paid ad-free subscription services, although the company earns 80 percent of its revenue from the ad service.22 For $4.99 a month, listeners can receive an ad-free personalized radio experience. The free ad-supported service and subscription service are substitute goods. As the inconvenience of the free service increased, listeners switched to the paid service. The chance of someone signing up for a paid subscription increased by 0.14 percentage point for every additional ad played per hour. More listeners dropped the service altogether, however. For every user who signed up for the paid service, three stopped using Pandora. Older listeners were more likely to pay to avoid the inconvenience of ads, while younger listeners were more likely to drop the service, probably to switch to an alternative free streaming service, such as YouTube.

  Figure 8.1: Average Hours Listening to Pandora for Low-Ad Group and for High-Ad Group, as a Percentage of Control Group

  Source: Jason Huang, David Reiley, and Nickolai Riabov.

  Music Discovery

  Although radio remains an important source for discovering new music, especially in the Midwest, streaming is rapidly becoming an important source of music discovery as well. In its public filing with the Securities and Exchange Commission in 2018, Spotify reported that 31 percent of listening time on its platform occurred through its playlists, up from 20 percent just two years earlier. A playlist is a set of songs selected by human curation or a computer algorithm (e.g., machine learning), or a combination of the two methods. Playlists can be created for a mass audience, such as Spotify’s “Today’s Top Hits,” or personalized for an individual. Spotify offers more than thirty-five million tracks for listeners to choose from, so it is obvious that some sort of mechanism is necessary to simplify song selection. Spotify’s public filing noted, “Given the success of our playlists in driving music discovery, they have become one of the primary tools that labels, artists, and managers use in order to boost artists and measure success.”

  In fact, playlists are becoming the new gatekeepers for music. The economists Luis Aguiar and Joel Waldfogel examined the effect on the popularity of a song of having that song included on one of Spotify’s playlists.23 Using a variety of statistical methods, they concluded that playlists can wield significant influence over song discovery. For example, here is one of their findings: “Being added to Today’s Top Hits, a list with 18.5 million followers during the sample period, raises streams by almost 20 million and is worth between $116,000 and $163,000.” Not surprisingly, labels vie to have their songs included on playlists to promote their artists.

  Even with the advent of individualized playlists, listening to music remains a social activity. Spotify and other streaming platforms have built-in social features, where users can share their music recommendations with others in their network. Facebook also allows users to share their musical tastes with friends. And playlists that recommend a small set of songs to millions of listeners tend to magnify superstar effects. These features reinforce bandwagon effects and strengthen cumulative advantage benefits for star recording artists. As discussed in Chapter 4, there is little sign so far that streaming has moved music away from a superstar market, where a relatively small number of performers garner the lion’s share of the rewards.

  The Long Tail

  Although the long tail of recording artists who soldier on with little recognition or reward is likely to remain long and lonely, the Internet and digital technology are changing the way that new superstars are discovered and how everyday musicians do their work. In the right hands, a laptop computer armed with GarageBand or Logic Pro software could have as much recording capability as the Abbey Road Studios. It has never been easier for undiscovered musicians to produce high-quality pilots and demos and to make them widely available. This makes it possible for superstars to emerge without the traditional A&R nurturing and search process. Justin Bieber, for example, was discovered after posting his music videos online, as was the multi-talented Jacob Collier. The highly skewed shape of the distribution of successful musicians is unlikely to change because of streaming and digital technology, but the means by which artists move from one end of the distribution to the other has already changed.

  And digital technology is encouraging more music to be produced than ever before.24 In 2018, for example, some 18,000 new releases were added per month to the online music encyclopedia MusicBrainz, more than twice the amount (8,400) added monthly in 2004.25

  It is often said that streaming makes it possible for many musicians to make a little money but difficult for any to make a lot of money. The data bear this out. The 2018 MIRA Musician Survey found that 28 percent of musicians earned some income from streaming, but the musician in the middle of this group earned only $100.

  If more opportunity does come about for members of the long tail, it will probably be through platforms such as Patreon, which enables artists to directly collect subscription fees from their patrons (see Chapter 2), or other start-up companies that give unknown “bedroom” artists a platform to directly promote and stream their music over popular services.

  One such company is Rehegoo Music Group, founded in 2014 by Italian entrepreneur Marco Rinaldo. Rehegoo’s model is artist friendly compared with traditional record companies. Artists are signed to a short contract (e.g., one year), which can be exclusive or non-exclusive. Artists typically record their music at home or at a local studio and upload it to Rehegoo. Rehegoo then remixes the music, creates compilations and albums, arranges for the music to be available on major streaming services around the world, and promotes the music to target audiences. Their artists include Lynn Samadhi, who creates meditation music; Marcus Daves, who composes and records jazz tunes; Luna Blancos, who makes New Age music; and hundreds of others. For songs that are exclusively provided to Rehegoo, royalties are split fifty-fifty. Rehegoo’s songs are being streamed more than four billion times a year, and the company is growing exponentially.26

  Rehegoo has offices in New York, Los Angeles, and London, but the heavy lifting is done in a converted century-old brick textile factory in Bielsko-Biala, Poland, which I visited in June 2017. One could literally see the old industrial economy transformed into the modern service sector in Rehegoo’s hulking facility. Rooms that previously housed looms and spindles in the 45,000-square-foot factory had been transformed into soundproof recording studios with state-of-the-art equipment, open offices for marketers, publishers, and graphic designers, and spaces for chilling out, with foosball and ping-pong tables for entertainment. Rehegoo is a microcosm of the industrial transformation taking place in America and around the world.

  Rehegoo shared with me proprietary data on the net monthly earnings from streaming and digital downloads received by each of the top thirty artists on its platform from January 2015 to March 2018. Figure 8.2 shows that earnings have been growing across the board, but especially for those at the top. The top five performers earned an average of $57,800 over the most recent twelve months, compared with $13,500 in 2015. The fanning out of the spaghetti-like lines indicates that variability in earnings across artists is growing over time. Notice also that, except for the top five earners, it is rare for an artist to make a large jump ahead of his or her peers from one month to the next. Nonetheless, the bulk of musicians have increased their earnings over time. The thirtieth-ranked artist saw income rise from around $100 a month in 2015 to over $1,000 a month two years later. If this trajectory continues, and if these results can be replicated on a wider scale for more artists, Rehegoo may indeed realize its goal of making “the world a better place for the people who create music.”

  Figure 8.2: Top 30 Artists’ Monthly Streaming Income from Rehegoo (U.S. Dollars)

  Source: Author’s calculations with data supplied by Rehegoo.

  “Swish, Swish”:
Music Responds to Incentives

  The economic incentives imbedded in streaming are changing the nature of the music that is produced and heard. With a tap on a screen or keyboard, listeners can instantly skip through songs. To qualify as a “spin” that counts toward royalties and chart tallies, a song must be streamed for at least 30 seconds. According to Marc Hogan of Pitchfork, “That’s why, while how a song starts has always been important in pop, with streaming it’s more crucial than ever. Catchy bits come early and at a quick clip.”27 Hogan cites Katy Perry’s single “Swish, Swish,” which features Nicki Minaj, as an example of a song that devotes much of its first thirty seconds to sampling familiar-sounding British house music, because listeners tend not to skip over songs that they have heard before.

  Another trick is to have the most popular member of a collaboration appear in the first thirty seconds of a song, and the less famous member(s) later on. Looking at the Billboard Top 100 songs in 2016 and 2017, there is ample evidence of this strategy.28 The median rank (in terms of streams) of singers who appear in the first thirty seconds of a Top 100 song in 2017 was 72, while the median rank for those appearing in the rest of the song was 129. In 2016 the difference was even starker: the median rank for singers appearing in the first thirty seconds was 59, and for those who make their appearance later in the recording, their ranking was 129. An example is Post Malone’s “Congratulations” (featuring Quavo): Post Malone’s familiar voice appears at the start, and Quavo’s vocals can be heard after thirty seconds.

  The demise of the album is an even more dramatic change in music production wrought by streaming incentives. An album, of course, is a compilation of songs that are sold together. In economic terms, albums are bundled songs. Bundling requires consumers to buy songs that were not necessarily their top choice, which facilitates price discrimination and provides benefits for record labels and artists. Digital downloading and streaming enable albums to be unbundled (although streaming subscriptions can be viewed as bundling the entire catalog of music).29 You can buy or stream individual tracks. J. R. Rotem, the acclaimed songwriter and record producer who has worked with Rihanna, 50 Cent, Gwen Stefani, and other stars, readily acknowledges that streaming is changing the way he approaches songwriting. “For the most part, it seems the concept of making an amazing album as a full body of work seems to be less important than making a song,” he told Music Week. “The way people consume music, people are switching from one song to the next, they’re listening to 30 seconds of one to another.”30

  Whether artists and producers consciously respond to incentives or the Darwinian selection process that governs popularity and economic success under streaming incentives leads to changes in music is, in some sense, irrelevant. The fact remains that music is changing in response to the incentives embedded in streaming.

  Taylor Swift: Economic Genius

  Artists have pursued different strategies in response to the emergence of online streaming platforms. Most have allowed their labels to negotiate deals for streaming services to include and promote their songs in their enormous catalogs. Jay-Z and a coalition of other top artists acquired the company that owns the fledgling streaming service Tidal in 2015, and promised artists higher royalties for their music in exchange for exclusivity.31

  Another artist who stands out is pop star Taylor Swift. The twenty-eight-year-old singer and songwriter is already one of the most successful musicians of all time. As we saw in Chapter 6, she has pioneered Verified Fan, slow ticketing, and loyalty points, boosting her revenue and selling more complementary products (merch) in the process. She has also pioneered a bold strategy in music streaming, producing beneficial results for herself and other recording artists: strategically withholding her music from Spotify, Apple Music, and other streaming services from time to time.

  Disappointed by the low compensation available from Spotify’s free ad-supported service, Swift removed her music from Spotify in late 2014, signing an exclusive deal with Apple, which only offers a paid subscriber service. She placed her music back on Spotify three years later, after Spotify and Universal Music Group, Swift’s label, agreed to allow artists to stream their albums only to paid subscribers in the first two weeks after release.*3 When she released her sixth album, Reputation, she kept it off all streaming services during the first week after it was released. Fans could only purchase CDs or digital downloads of the album—and they bought 1.2 million copies that week.32 The economic logic of the strategy implicitly involves segmenting markets to price-discriminate: customers with a higher willingness to pay are impatient and will purchase her album when it is not available on streaming services. And more revenue is available from paid subscription-supported services than free ad-supported services. The bottom line is that this aggressive strategy enabled Swift to sell more digital downloads and CDs, set more album sales records, and earn more streaming royalties.

  A risk for an artist is that segmenting the market in order to price-discriminate and maximize revenue can jeopardize the artist’s popularity—the artist can be viewed by fans as “in it for the money, not the art.” Part of Taylor Swift’s genius is that she has managed to pursue economic strategies to maximize her revenue while putting herself on the side of the angels and doing minimal, if any, damage to her reputation. In 2014, for example, she penned a Wall Street Journal op-ed standing up for recording artists, arguing: “Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for.”33 While one could question how rare music actually is as an economic proposition, the op-ed cleverly positioned Swift as a defender of art, not profit.

  Taylor Swift has also used her might to pressure Apple to pay artists for music that was streamed to new members during the free three-month trial periods that Apple offered potential subscribers.34 In 2015, Swift threatened to withdraw her music from Apple unless artists were explicitly compensated for music streamed during the trial period. “Three months is a long time to go unpaid, and it is unfair to ask anyone to work for nothing,” she wrote in an open letter to Apple.*4 Apple immediately backed down. “When I woke up this morning and I saw Taylor’s note that she had written,” Eddy Cue, Apple’s senior vice president, conceded, “it really solidified that we needed to make a change.”

  A Stream Runs Through It

  The music industry is probably not yet midstream (pardon the pun) in the streaming revolution. Streaming is the present and future technology of music. But the distribution business model will likely evolve and change directions for years to come. According to Steve Boom, vice president of Amazon Music, we have only scratched the surface of what the technology can deliver.35

  Spotify has demonstrated that it can draw tens of millions of paying customers away from pirate music sites. Spotify’s successful and novel initial public offering (IPO) valued the company at more than $25 billion. Yet Spotify has lost money in each of the last three years. In 2017, Spotify’s loss was $1.4 billion on $5 billion of revenue. To become profitable, Spotify will have to control costs, raise monthly subscription fees above its competitors’ rates without losing subscribers, or generate additional revenue from creating complementary products (such as merch sales). Spotify could also attempt to compete with record labels by directly signing artists. Indeed, Spotify’s partnership with DistroKid, a service that allows artists to directly upload music to streaming services and online stores for a fee, could be a step in this direction.

  Spotify’s long-run existential challenge is exacerbated by the fact that Amazon Music and Apple Music can sustain losses because they generate large complementary benefits for their parent companies, and because YouTube is a close substitute that can operate under different rules (see Chapter 9). Apple is a hardware company that makes money from selling devices, such as iPhones and iPads. If Apple Music drives more iPhone and iPad sales, the company can happily withstand losses from Apple Music. And Amazon makes money from s
elling merchandise over the Internet. If the Echo Dot and Alexa prove to be popular portals that draw millions more customers to buy sneakers and other goods from the Amazon retail site, Amazon would be willing to sustain losses from Amazon Music.

  A similar dynamic is taking place elsewhere in the economy. Google, together with its subsidiary autonomous car development company, Waymo, for example, is challenging traditional automobile companies, such as Ford and General Motors. Google’s combination of technological prowess, deep pockets, and complementary activities poses a formidable threat to standalone car companies. Some banking functions could be similarly challenged by Apple Wallet.

  This raises the question of whether Spotify can be sustainable as a stand-alone company. Spotify could be absorbed by a company that might realize complementary benefits from having Spotify under its umbrella, such as Google, if Google Play does not succeed, or Chinese e-commerce giant Alibaba, if it wants to challenge Amazon in the United States, or some other Internet behemoth. Another possibility is that the major record labels—which already hold an equity stake in Spotify—could take over the company if it fails, although that would create an obvious conflict of interest, as they would have an incentive to promote their own music over that from independent labels. (The majors held about a combined 10 percent stake in Spotify before its IPO. They reduced their stakes after the IPO and shared their capital gains with their artists and independent labels.)