Your Streaming Music Payments Are Going Where?

On the way from your wallet to your favorite band, everybody takes a cut. Here's where it goes (more or less) and how Bitcoin could change the industry

Taylor Swift

Taylor Swift

Photographer: Jamie McCarthy/Getty Images

People in the music industry agree: The payments from streaming services are too damn low. But who is to blame? It's nearly impossible to follow the money precisely as it flows from fans to the people who write and sing the songs.

Now, a paper from a prominent music school untangles the web of royalty payments, service fees, and secret deals to give one of the fullest pictures yet of what is wrong with the economics of streaming music. It even proposes a potential solution: Bitcoin. 

The Rethink Music initiative at the Berklee College of Music's Institute of Creative Entrepreneurship spent the last year examining the business practices of the music industry. While companies such as Spotify and Pandora are often painted as villains, Berklee's report focuses on middlemen with incentives to keep things from getting simpler. 

“This is an industry whose fundamental business model has been completely upended, but its cost structure and its intermediary structure haven’t changed from a very different era,” says Panos Panay, the institute’s managing director. “Let’s just face it: You don’t need all these people in the supply chain.” 

The report doesn't come from a completely disinterested source. It was underwritten by Kobalt Music Group, a music publisher that is trying to make transparency its calling card. But the numbers largely line up with a widely cited study carried out by Ernst & Young and French record label trade group SNEP.

A quick primer: Every time a song is streamed, two types of royalties must be paid out. The larger one goes to the artist that performed the song or, more precisely, to the company that owns the rights to those royalties, usually a record label. The other goes to the songwriter or, again, to the company controlling those rights. At times, streaming services don’t even pay those companies directly but rely on organizations that manage royalties for large groups of copyright owners. At each step along the line, another company takes a cut. 

Here’s Berklee’s breakdown of the typical way that the royalties for a song streamed on Spotify, Apple Music, Tidal, or a rival subscription service would be divvied up. 

“It’s a typical collective-action problem, where everybody is benefiting in a small way from the inefficiencies in the way things are done,” said D.A. Wallach, a musician and investor who has also spent the last four years as Spotify’s artist in residence. 

There are lots of ways money gets stuck in the system. Record companies, or labels, cut deals in which they take less-generous royalty rates in exchange for equity in the streaming services themselves—and the chance to really cash in if these services go public or are gobbled up by even larger companies; individual musicians generally aren’t going to be included in those paydays. Streaming deals may include service fees that are paid to labels and aren’t split with artists. Many artists don’t start getting royalty checks until their labels have recouped the expenses they spent on marketing and other costs. And labels taking large advance payments for the royalties that streaming services expect to pay out can find themselves with a chunk of money left over. Berklee’s report estimates that artists may have lost hundreds of millions of dollars by not getting fully cut in on this cash.

The Recording Industry Association of America, a trade group for record labels and distributors, takes some issue with some of the arguments. "Unfortunately, some of the report's findings are flawed and based on anecdotes, misinformation and unsubstantiated rumors, rather than facts and analysis.  And some publicly available information didn't find its way into the report at all," says Jonathan Lamy, a spokesman for the group, in an email. According to RIAA, the percentage of revenue that record labels pay in royalties has increased in recent years. 

There’s an even more basic problem. All that math applies only after the correct rights-holders have been identified. Berklee estimates that 20 percent to 50 percent of money generated by streaming never filters back through to the people whose songs were played. 

“Unfortunately, the adage ‘follow the money' leads only to a dense thicket of micropayments and ‘black boxes’ where relationships among rights, royalties, processes, and participants, in the eyes of many, are deliberately obscured or, at best, have become hopelessly complex and outdated,” the researchers wrote in their report. One unnamed band, a Grammy-winning group on a major label, shared its quarterly royalty report with Berklee. It consisted of 119 pages of PDF files. 

Determining when songs are played and who should be paid is one area with plenty of room for improvement, Berklee's Panay says. Performing-rights organizations have traditionally been in charge of figuring out when, say, a radio station in Brussels or Boise, Idaho, played a song and then making sure the songwriter got paid. It's a labor-intensive process probably best handled by robots. The PROs would still cut deals through collective bargaining, for example, but such a change could affect the price they can demand for their services.

To replace this whole Rube Goldberg setup with modern technology, you'd need a system that tracks when music is played and who owns the various rights to each song, something the music industry has tried and failed to create in the past. And you'd need a way to link that to a payment method.

This is where the blockchain—the technology underlying Bitcoin—comes into play.

By keeping a public tally of each transaction that takes place, the blockchain lets people who don’t trust one another do business without fear that they’re getting ripped off. (This is why it has been so popular among drug dealers.) Such a system would automatically divide each payment into the proper piles and distribute it immediately. Like Bitcoin itself, it's clever, in theory. Still, it’s far from clear how an industry that has traditionally been less than savvy when it comes to technology would make a transition to the impenetrable world of Bitcoin. 

The initial suggestion came from Wallach of Spotify. Last December, he posted an essay on Medium called Bitcoin for Rockstars that laid out the basics of a blockchain-based royalty distribution system. Several startups are already working on early versions of the idea, says Barry Silbert, a prominent investor in Bitcoin, though none are ready for prime time. The design and consulting firm IDEO was also drawn to the idea of blockchain, and is running an incubator for startups that want to use the technology for applications in various industries, including home buying, health, and music. 

“Theres’ no reason this shouldn’t happen. You have a really archaic infrastructure that these media businesses are sitting on, and the people who really suffer are the people who create stuff,” Wallach says. 

He acknowledges that turning the idea into a reality is likely to be a years-long process—one he has no yearning to dive into. “The reason I’m not doing it," Wallach says, "is because I don’t want to spend a decade on it.” 

July 15, 10:30 am: Updates to include comment from RIAA in 10th paragraph. 

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