A deeper look at how much musicians make online

A deeper look at how much musicians make online
13 April 2010

Information is Beautiful have just published a chart comparing how much artists and labels earn according to the royalty deals of various real and digital music formats. The results are interesting in themselves: to break the US minimum wage of $1,160 every month, a recording artist must sell somewhere between 1,161 and 3,871 retail albums (depending on the deal they strike with their label); but to reach the same figure through Spotify earnings in a month they need to hit over 4.5 million plays. iTunes, Napster, Amazon, Rhapsody and Last.fm all fall somewhere between those two extremes.

That looks like a pretty damning indictment of the digital model of music retail. But it doesn’t tell the whole story.

IIB’s chart doesn’t factor in the relative popularity of digital streams over physical purchases. You might need nearly 4,000-times as many streams on Spotify as you do physical purchases, but is that number achievable? How does it look compared to what is actually happening?

To be fair, it probably doesn’t look like a bridgeable gap at the moment: in the aftermath of Michael Jackson’s death Spotify registered around 10 million requests for Jackson’s music in 20 hours. It’s hard to imagine a scenario more likely to drive Spotify demand, but even then we’re talking thousands of dollars, not even tens of thousands.

But that still doesn’t tell the whole story. Online streaming of music is only likely to grow as a retail model so, even if royalty rates don’t improve (and, as the model increases in profitability, those rates can always be renegotiated), artist revenues are going to increase. At the time of its ‘Michael Jackson moment’, Spotify wasn’t even in the US, so was making those millions of plays solely on its recently-established European market. CD sales, even if they will persist in some small number for many years yet, look likely to decrease or bottom out in the coming years: no one is predicting that sales will increase.

What this means is that although the differential of 4,000 Spotify plays to one CD album sale looks a long way off now, it’s only going to get more and more likely as CD sales drop off and streaming grows. And it doesn’t take much of an increase in the per-track royalty rate to rapidly shrink that figure: while IIB quote artist royalties of $0.00043 per track for Spotify, that increases to $0.0022 for Rhapsody, meaning 732 Rhapsody streams equal one high-royalty physical sale.

So the present may not be rosy yet for artists selling their music online, but we have only just begun in the last couple of years to get this right, and it is only going to get better. What is really interesting from the IIB figures, and something that really should prick the ears of artists, is a comparison of royalty rates between labels and artists over the differing formats. The data for the following table are taken entirely on IIB’s chart. Because I’m interested here in the relationship between artist and label earnings, I’ve left out the entries for self-publishing formats.
Format sale price label revenue artist revenue label/artist
Retail CD (high-end deal) 9.99 $2.00 $1.00 2
Napster/iTunes, album 9.99 $6.29 $0.94 6.69
Retail CD (low-end deal) 9.99 $2.00 $0.30 6.67
Amazon/iTunes, track 0.99 $0.63 $0.09 7
Rhapsody fixed $0.0091 $0.0022 4.14
Last.fm* fixed $0.00015 $0.005 0.03
Spotify fixed $0.0017 $0.00043 3.95

*IIB admit themselves that they don’t fully understand Last.fm’s royalties model, so there is the possibility of error in these figures. Update: And they’re beside the point now anyway, since Last.fm have announced today that they’re giving up on streaming. (Thanks Halvard!)

I’ve added the right-hand column myself to indicate the ratio of total royalty earnings between label and artist. A figure of 1 in this column would mean that the artist and label receive an equal share of the available royalties from each sale. Figures greater than one reflect a larger share for the label; less than one a larger share for the artist.

Several things become clear from this. Setting aside the Last.fm figures as a potential outlier, iIt is clear that the best deal ratio-wise is still to get a good contract on physical CD sales but even then the label will make twice as much as you for each sale. Even a bad deal on retail CDs will give you a better cut, proportionately against your label, than the three main mp3 stores, Amazon, Napster and iTunes (no figures here for emusic). Track sales through iTunes, the model everyone gets excited about, offers the worst royalties ratio for artists of all formats surveyed: labels receive 7 times as much of the available royalties than artists.

Now look at the streaming services. They may, on a sale-by-sale basis, offer much smaller royalties than physical or even mp3 sales, but in terms of how much of the available royalty stream is going into artists’ pockets rather than labels’, they’re a much better deal. Neither artist nor label gets treated well by the current royalty models of the streaming services, but that’s largely a function of new technologies entering unknown markets: there’s not a lot of profit to spread around yet. But, within that, artists and labels are being treated on much more equitable terms than they are by any of the physical or mp3 options available: those 7:1 ratios under iTunes improve to 4:1 or better with Rhapsody and Spotify.

If those Last.fm figures as published here are correct they offer an insanely good deal for artists in the long run. But even if those numbers are open to question, Rhapsody and Spotify offer deals that compete well, in ratio terms, with those for retail CDs. If the market for streaming services grows to replace the collapsing CD retail sector, artists will rapidly see the benefits.