Rockonomic: Spotify versus iTunes, when are streams-over-time worth as much as a sale today?

The “streams versus sales” debate continues to rage. A greater number of artists are posting their payouts from streaming services (e.g., Spotify, Deezer, Rhapsody, rdio, MOG etc.). And these artists (as well as labels) continue to debate whether having their music on streaming services is “worth-less,” given download sales seem to be worth-more — at least in the short term.

Folks like myself, Mark Mulligan, Philippe Astor, and others (the list is getting long, and now spanning over years rather than months) have taken the time to compare streaming service payouts to those payouts from radio, track downloads, webcasting, and even CD sales.

In this brief report, I am hoping to take this conversation up another notch by taking into account the so-called “time value of money,” given the fact that streaming payouts will arrive over long periods of time while downloads and CD sales happen today. Using the flip-side of language I used over a year ago to describe the difference between sales and streams:

When you get paid for a download, you are being paid in advance for all subsequent listens to that track by some fan.

On a streaming service, you will be paid over time for each subsequent listen to a track by some fan.

Warning: I am treating a recording and the underlying song like assets. I believe those assets have value. Sometimes, that value is earned today (as with download sales today). At other times that value is earned over time (as with streaming services).

To be clear, if the time value of money did not matter, the value of a track stream is equal to the value of a track sale at around $0.00737 payout per stream, given only a single play during each of the 95 years of the copyright. The maths are simply $0.70 divided by 95.

If you think the useful life of a recording is only 50 years, however, and could care less about time value, then one play a year over the next 50 years equals a track sale today at around $0.014 payout per stream. The maths are simply $0.70 divided by 50.

The value of money over time most likely does matter, however. So here goes…

Time Value of Money

The time value of money is a concept from Finance that basically suggests that $5 you receive years from now is “worth less” in today’s dollars than $5 you might receive today. I won’t go into great detail here, but this concept of time value is at the core of just about any modern and functioning financial model.

Given this time value of money, we can think of a very simple “trade” that artists should consider. And, as often happens in an economic sort of example, I am about to really simplify the world in order make this trade as direct as possible:

Imagine that the world is comprised of only two possible fans, and you get to pick only one of them: One of those fans will buy a download today. The other fan will enjoy your music through a streaming service for years to come.

You would be paid $0.70 — today— from the fan who buys the download today. From the other fan, you would receive payments-per-stream at the end of each year — over time — over the life of your copyright (95 years).

At what price per stream, and number of streams per year, would the two fans — the streamer and the downloader — be paying you effectively the same amount of money in today’s dollars?

And so, I am going to (a) consider the value of streaming service payments over the life of a copyright (95 years, depending upon where you are sitting/standing right now), taking into account the time value of money, and (b) compare that value to the payment for a download today.

The Short Story:

Across the following range of payouts per stream, given the value of money over time does matter, the present value of all future payments from streaming services would equal the value of a download sale today at the associated number of streams per year. Most important to these estimates would be the appreciation for risk in these future payments.

UPDATE: I have added and additional estimate in here, at a 5% discount rate, while the original post only considered a 10% discount rate. Just so folks can see how much this “risk” component matters.

At a 5% discount rate

For example: At a payment of $0.0025 per stream, 14.1 streams per year would be the equivalent of a download sale in today’s dollars. At a payment of $0.0075 per stream (3/4 of a penny), 4.7 streams per year would be the equivalent of a download sale.

$0.0025/stream =>; 14.1 streams per year
$0.0050/stream =>; 7.1 streams per year
$0.0075/stream =>; 4.7 streams per year
$0.0100/stream =>; 3.55 streams per year
$0.0125/stream =>; 2.8 streams per year
$0.0150/stream =>; 2.35 streams per year

At a 10% discount rate

For example: In this case, at a payment of $0.0025 per stream, 28 streams per year would be the equivalent of a download sale in today’s dollars. At a payment of $0.0075 per stream (3/4 of a penny), 9.3 streams per year would be the equivalent of a download sale.

$0.0025/stream =>; 28 streams per year
$0.0050/stream =>; 14 streams per year
$0.0075/stream =>; 9.3 streams per year
$0.0100/stream =>; 7 streams per year
$0.0125/stream =>; 5.6 streams per year
$0.0150/stream =>; 4.7 streams per year

On the flip-side, across the following range of streams per year, the present value of all future payments from streaming services would equal the value of a download sale today at the associated payouts per stream.

At a 5% discount rate

For example: At an average of 12 streams a year, the streaming revenue would be equivalent (in today’s dollars) to the download revenue at $0.00295 per stream (i.e., just over 1/4-penny per stream).

01 streams per year =>; $0.03550 per stream
06 streams per year =>; $0.00590 per stream
12 streams per year =>; $0.00295 per stream
24 streams per year =>; $0.00147 per stream
36 streams per year =>; $0.00098 per stream
48 streams per year =>; $0.00074 per stream

At a 10% discount rate

For example: At an average of 12 streams a year, the streaming revenue would be equivalent (in today’s dollars) to the download revenue at $0.0058 per stream (i.e., just over a half-penny per stream).

01 streams per year =>; $0.07 per stream
06 streams per year =>; $0.0116 per stream
12 streams per year =>; $0.0058 per stream
24 streams per year =>; $0.0029 per stream
36 streams per year =>; $0.00195 per stream
48 streams per year =>; $0.00145 per stream

NOTE: In future versions of this analysis I plan on altering (alongside other authors) the conditions to take into account things like: (a) a shorter valuable life of a song, (b) the changing shape of streams over time (high demand early, less demand later), and (c) the implications for different sorts of artist careers (e.g., one-hit wonders versus late-bloomers).

The Untold Story

For those who are familiar with time value, or net present value, the numbers above are a function of (really) only a single outside input: the discount rate. The rest of the inputs are presented in the prior section.

Since the “risk” in the project (the recording) is actually captured by the volatility of expectations for the number of plays on streaming services and the prices per play on those services, I could (if I wanted to)make use of only the risk free rate in the discounting.

However, since not everyone learns this “the risk is in the model” approach described above, I have applied a discount rate anyway. That discount rate is, frankly, arbitrary: 10%. Discuss.

With this discount rate in place, the model really boils down to two versions, each of which simply solves for the mix of payouts and plays that leads to a $0.70 present value: (1) a stream of payments at the pre-determined payouts per stream mentioned, and (2) a stream of plays per year at the pre-determined counts listed above.

The two 6×6 tables follow:

Table One, solves for number of plays given a set range of payouts per stream. On the left is a preset range of values for payouts per stream. Across the top are the streams per year that result in a set of payout-play pairings that would hit $0.70 in present value.

Streams versus Downloads, given range of stream payout values

Table Two, solves for payouts per stream given a set range of plays per year. Across the top is a present range of streams per year. On the left are the payouts per stream that result in a set of payout-play pairings that would hit $0.70 in present value.

Streams versus Sales, given a range of streams per year

Rock on, right up to and through the New Year.

Rockonomic: £0.000073 ($0.00012), the value to labels/artists/performers of a spin per Radio listener in the UK

This report is part of a continuing “Rockonomics” series investigating the value of the use of music across a range of experiences — webcasting, radio, streaming services, and CD sales.

In this case, I will estimate the value of a single radio play to a single listener in the UK for only that portion of the royalties that are paid to record labels, featured artists, and performing artists (aka, the neighbouring rights stakeholders).

This estimate is based on inputs including PPL collections from both commercial and BBC radio in the UK, as well as RAJAR estimates of the UK Radio listening audience (i.e., the same estimates used to sell radio advertising in the UK).

Note, while the controversy over streaming services and webcasting usually hinges on the value of a “stream,” the way in which this value is calculated can be quite different from the way in which artists/labels calculate the value of a “spin” on the radio. To re-iterate this difference from a report of mine long ago:

The “spin” value often refers to a radio play experienced by a large audience (sometimes millions of people).

A stream payment usually refers to a play experienced by a single listener online.

Therefore, the goal in this series of “Rockonomics” reports is to estimate the value of a play on the radio according to a similar metric as that applied to online sources, such as streaming services and webcasting.

The Short Story

I estimate the value of a single radio “spin” to a single listener in the UK to be £0.000073 (or $0.00012). Alternatively stated, the value of a “spin” to an audience of 1,000,000 listeners is about £73 (or $120).

Note that if I estimate this “spin per listener” value according to an alternative method I have employed in the past, I get £0.000076 (or $0.00012), a convergence between methods that quite frankly freaks me out.

This estimate is a function of three primary ingredients:

  1. the total 2011 Broadcast and Online collections of PPL, adjusted for that proportion of those collections that likely derives from Radio rather than TV, Cable, Satellite, or Internet sources;
  2. RAJAR’s measures for the size of the radio listening audience in the UK, adjusted for that proportion of the audience likely focused on Talk radio; and
  3. an assumption of approximately 12 songs being played per hour on music radio in the UK.

For comparison, I believe the value estimated above is 1/36th the rate reported by Zoe Keating ($0.0042) for her receipts from streaming music services (e.g., Spotify), 1/10th the rate ($0.0011) paid by Pureplay Webcasters in the US (e.g., Pandora), and 1/18th the CRB-established default Webcaster rate ($0.0021) in the US.

The Long Story

[coming soon]

 

 

Why the music industry should be very worried that Spotify has only 5 million subscribers, worldwide.

Today, in an event in New York, Spotify announced its most recent stats. The high notes in these statistics were the claims of 5 million paying subscribers, 1 million of which are in the US.

I believe it is time for the music industry to look at these numbers and feel very real concern, rather than moderate celebration.

Let’s focus just on the 1 million music service subscriber number for the US of A. And add to this number approximately 2.5 million subscribers across Rhapsody (1 million), MUVE (700,000), Rdio(?), Slacker (500,000), and MOG(?). That’s a total of approximately 3.5 million subscribers to subscription music services in the United States.

First, the US has had subscription music services since as early as 2002. And a grand total of 3.5 million subscribers in 2012 suggests that, quite frankly, the market for these services in the US is growing at a miniscule rate — which is why most modern services try to license and launch in as many countries as possible.

Second, 3.5 million account amounts to 1.1% of the total number of US mobile phone subscriber accounts.

So after a decade of music services being offered to customers with mobile devices here in the US, we have found service characteristics and a price point that appeals to 1.1% of the market.

How big might this market actually be, were the industry willing to shift its expectations for the characteristics and pricing points at which it is willing to license?

In other words, how much money might this industry be willingly leaving on the table, only to save the lives of a few CDs?