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.

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9 Comments

  1. Nice work, David. However, I do think it’s important to analyze the figures on the basis of a shorter ‘valuable life of a song’ … how realistic is it to have to wait 95 years for your song to monetize? I vote you do the analysis on a 40 year basis … let’s imagine our songwriter releases the song aged 30, and kicks the bucket at 70. Do one for 50 years as well, maybe. But more than that seems irrelevant really, don’t you think?

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    1. I reckon it depends on the song. But realized this “useful life” would be a question.

      More than happy to recalculate, after the New Year!

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  2. I think there is a huge variable here that is very hard to address, people stream songs they would never buy, so streaming puts money in your pocket from customers that would never pay the download cost. How do you factor that into the mix? I think the ONLY answer for artists, at least for now, is to be on both platforms.

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    1. James,

      I think you brought up a great point. It will likely take some time and disclosure from services, however, for artists to find out whether and how people may be listening to a wider range of music on services.

      Anecdotally, I believe your argument has weight. People are paying more money, on average, for music (e.g., $120/year versus $30-40/year) for the right to listen to a wider range of music than they might buy.

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