The verdict is in… Media Pirates are undeniably and economically irrational, just like the rest of us.

A seemingly endless stream of statistics are in play these day suggesting (or proving, in the minds of some) that so-called pirates also buy music, movies, and other forms of digital media. What few if any of these authors discuss openly, however, is the fact that this strange behavior—buying some files and downloading others through unlicensed venues—is, for lack of a better phrase, undeniably and economically irrational.

Two of these recent findings would be:

Where do music collections come from?, from the American Assembly
Downloaden neemt niet af ondanks bestrijding, from the Dutch Institution for Information Law.

First, and to be clear, neither of these studies (and very few if any prior studies) are in fact “before and after” studies. Which is to say that these studies to not sample music consumption patterns before access to pirate sources and then after such access.  Therefore, we are still in lack of the conditions for a “this causes that” conclusion. We cannot say that pirating causes purchase behavior, whether that behavior is a greater or lesser number of purchases.

Second, some of these surveys ask users about their P2P behavior and then also ask about file sharing among friends and free downloads from online. In reality, many people may not be able to distinguish these sources, and some of these sources—such as file sharing among friends—might constitute P2P in small networks.

Finally, and ultimately, we can draw only one key conclusion from these sorts of studies:

People who download media from unlicensed sources are irrational—undeniably and economically irrational.

This observation, or assertion, should probably be the biggest curiosity for researchers and industry mavens. Instead, as the coverage of the two stories above goes to show, we are still stuck in the endless debate over who buys more, and whether piracy causes this or that.

Its time to move on.

Why do people purchase some media and acquire other media through “piratic” channels?

Frankly, understanding this question is to understand why and how the industry will survive going forward.

 

 

How the first subscription-based music service was built online, and why it’s time to move on.

Nearly fifteen years ago I began hashing the plans for what would become, as far as I can tell, the first subscription-based music service online. What we built was pretty straightforward and, as a result, the initial business model was nearly identical to that model later adopted by services such as Spotify. (Aside: True old-timers will remember that Patronet would also launch, but it offered music from only one artist, Todd Rundgren—who built Patronet).

Importantly, neither technology nor copyright law were ever really the roadblock to opportunity, even back in the Web 1.0 days. What and How people—meaning artists, lawyers, owners, consumers, developers, and even policy makers—thought about these music services were the speedbumps that would prove to be large enough to block the road, even still today.

In the end, I am pretty certain the following hold true:

  • The business model of subscription music services is and should be brain dead simple.
  • No amount of “That’s not how it’s been done,” or “Are you sure this won’t cannibalize iTunes?” or “But I make more from a CD sale” is going to change the fact that adapting to this model is both required and will require change.
  • The longer any adaptation to change stalls and the higher the price for that change, the fewer the number of ecstatic fans, the fewer the number of happy customers, and smaller the pile of money that will be on the table for the music artists and owners involved.

It is time, quite frankly, to move on… regardless of the road conditions.

In the beginning…

In 1998 we launched a simple subscription-based music service online, thanks to a number of artists who were willing to experiment—way back then—with something new. That paid site would later shift to a free site, Noisebox, through which we shared ad revenue with artists and copyright owners. The business model was designed to fit within BDS (Brain Dead Simple) constraints.

The pitch to consumers, artists, and copyright owners for this way-too-early-to-be-plausible music service was pretty simple:

(1) Consumers were charged a monthly fee to stream/download music from the site. The initial price was $2.99/$3.99.

(2) Artists, and any other party with a financial interest in the recording and/or the composition/lyrics, would split the subscriber revenue based upon each song’s proportion of all songs streamed each month. The initial pool for royalties was 70-80% of revenues. The initial catalog of music came from self-released artists, which limited the complexity in who/what was in the pool.

For context: Napster had yet to be released. MP3.com was still for the most part a news site, with only a few music downloads. DimensionMusic, or dMusic, was more actively engaged than MP3.com in hosting MP3 files for artists. IUMA was still hosting MPEG2 audio files. eMusic was still for CDs, and the digital download store of the day was called NordicDMS. Neither iTunes nor the iTunes download store would exist for nearly half a decade. Spotify would not exist for a decade.

Ironically, points (1) and (2) above basically describe the subscription music service model by which services such as Spotify operate today, nearly 15 years later. Why? Because that model was and is brain dead simple.

This model also happens to be the same one that is debated almost daily on music news and artist sites, as people try to grapple with the implications of not being paid $X for every album sold, or ¢Y for every iTunes download sold, or a guaranteed ¢Z for each stream on these sorts of services. Even though part (2) is essentially the same method through which radio royalties have been distributed (weighted by actual rather than imagined listener numbers) for decades–either as a portion of ad revenue or license monies.

Frankly, its time to move on.

And so I figured I would describe how simple that basic design truly was, and why neither technology nor copyright law were ever really the roadblock. Any roadblocks were in the minds of copyright owners, artists, developers, policy makers, and even consumers.

How does a music service work?

Technically, in the simplest of terms, you really only need three things to build a subscription-based music service:

(A) A number of music files, encoded in a streamable format (with mime type set, back then), and stored on a working storage device that is connected to the internet;

(B) A method for preventing access to those music files unless the user can present appropriate credentials (e.g., show they are a paying customer); and

(C) A means to accept some form of payment (e.g., credit cards) on a regular schedule (e.g., monthly) the result of which is the user acquiring the credentials mentioned in point 2 so they can access and stream the files mentioned in point 1.

Some copyright owners would add an additional lettered point that would require truly bullet-proof security on the files. But that point, in the end, is pointless.

Aside: Negotiating licenses is not a technical problem, its a time/effort problem. However, yes, I realize that acquiring these license can be a real challenge. But, in my opinion, the law was not the ultimate roadblock. It took us less than 30 days to license the music we were looking for in the initial experiment and the law never stopped us. Artists/owners who participated were willing to license and learn—and these were the two dimensions that mattered. The law simply gave these artists/owners the right to say, “No,” if they wanted to.

That was it, and that’s what we built through the absolutely simplest means possible via a traditional LAMP (Linux, Apache, MySQL, and Perl/PHP) setup.

All the music files were placed in a folder that was “protected” through .htaccess (those in the know will know why I used quotes). When a user paid for a subscription they were given a password. That password was added to the .htaccess list. If the user did not pay the next month, the password was removed from the list. Voila, Subscription music service in a box!

Modern services use a wider and more sophisticated range of technical means to accomplish their objectives, but the A, B, C’s listed above are ultimately “the basics” that inform any subscription service—whether in music, film, text, or otherwise.

Why it’s time to move on.

Since those early days, very little technical or legal change has intervened. Technology still provides the means to accomplish the A, B, C’s listed above—the formats and acronyms have simply changed. Copyright law still spells out the necessity of negotiating licenses with the appropriate parties. Most importantly, after years of music service licensing deals that are highly-punctuated with sophisticated protections (e.g., per stream minima) the underlying business model is returning to its origin:

(1) Consumers are charged a monthly fee to stream/store music from the site.

(2) Artists and/or those parties with a direct financial interest in the recording and the composition/lyrics, split the pool of subscriber revenue based upon each song’s proportion of all songs streamed/accessed each month.

Any substantive change that has occurred over the last decade and a half—meaning the sort of change that made this BDS business model more acceptable—has occurred in the minds of people, not the granite or silicon pillars of institutions or technology within which these minds make decisions or with which they take (virtual) action.

Change has been slow. Glacier, slow.

What I have found is that over the last 10-15 years I keep hearing the same questions, having the same conversations, and meeting with many of the same people (who simply work at different companies, have new haircuts, or wear different hats). From conferences panels to research chats to board meetings, the discussions usually leave me in a nearly perpetual state of deja vu. Bookmarked by entrenched positions at extremes. Punctuated by far too many egos (one of which is my own).

What was once thought of as “renting music,” is now thought of as “renting music.” Except, fewer consumers are freaked out about that idea. What was thought of as “the end of CD sales” is still in part “the end of CD sales,” and so what. Executives who used to think $19.99/month for music was a bargain now think $9.99 is a bargain (that’s a change), regardless of what consumer behavior suggests (that’s not a change). What was thought of as a challenging licensing market is still a challenging licensing market—except the incumbent firms now see that challenge as a barrier to competition.

In the end, and as I said at the beginning of this post, I am pretty certain the following hold true:

  • The business model of subscription music services is and should be brain dead simple.
  • No amount of “That’s not how it’s been done,” or “Are you sure this won’t cannibalize iTunes?” or “But I make more from a CD sale” is going to change the fact that adapting to this model is both required and will require change.
  • The longer any adaptation to change stalls and the higher the price of that change, the fewer the number of ecstatic fans, the fewer the number of happy customers, and smaller the pile of money that will be on the table for the music artists and owners involved.

Frankly, it is time to move on.

The ‘Lather, Rinse, Repeat’ model for understanding the copyright licensing paradox

Since the season of “he said she said” in copyright licensing is now in full bloom, I thought it wise to reveal a model I have developed for understanding the copyright licensing paradox.

To be clear, the paradox is not that the parties involved don’t understand this model.  The paradox leads to confusion over the right wrench to throw into the machine to make the model stop.

The model:

Note: The following steps can be performed in any order.  In particular, steps One and Two are often performed in reverse order. 

Step One

One party wants to obtain a license for as small a fee as plausible, under the most flexible of terms. The other party wants to grant a license for as large a fee as plausible, under the most stringent of terms.

Step Two

One party accuses the other of benefitting from copyright infringement and holding down the work of creators. The other party accuses the one of benefiting from innovation infringement impingement and holding up the work of technologists.

Step Three

One party claims the dollars on the table are too large, but pays. The other party claims the dollars on the table are too small, but accepts payment.

Lather, rinse, repeat.

The above models plays out ad infinitum for a few very simple reasons:

(A) Both parties have different interpretations of key concepts., such as “plausible,” “flexible,” and “stringent.”

(B) Both parties are correct. Most new technologies can and do “infringe” upon copyrights.  Most licensing deals will “infringe”  “impinge” upon innovation in some way.

(C) Speaks for itself… pure paradox.

It may take 35,000,000 active users in the USA for the yearly royalties paid by Spotify to equal those paid by iTunes?

Recently at SXSW, Sean Parker apparently predicted that Spotify will overtake iTunes within the next two years—given the former’s present growth rate.  I am going to assume the active measure for comparison here is royalties paid during a year period, or revenue earned, not total number of active users or user accounts.

Let’s check the math, using some of the inputs from Glenn Peoples over at Billboard. For the moment, we will limit this little discussion to the US only. And we will hold iTunes growth at nil, essentially seeing how big Spotify would need to get to equal iTunes music revenue/royalties in 2011.  To account for growth towards 2013, just add your own growth factor to the answers I get.

I will also make two key assumptions:

(1) That 70% of the Spotify subscription price is what goes into the pool for royalties, just as 70% of the iTunes sale (in general) goes into the pool for royalties).  For example, at the $9.99 premium price, roughly $6.99 becomes the royalty pool.  This assumption is not only being made in order to make life simple, but also because this 70% payout appears to be the case (at least according to Glenn@Billboard).  Your mileage may vary.

NOTE: I know I am being a little sloppy here given it would be better to include a more appropriate accounting of mechanical royalties.  However, given that in the US these royalties can flow through the sound recording owners (my emphasis and potential sarcasm added), I am just bundling the whole problem within the 70% for simplicity.

(2) That the “effective” obligation per active FREE user is $1.99 per month, 70% of which is paid as royalties.  Just to be interesting, I will also work with $2.99 and $0.99 as the FREE user value.  In essence, I am treating FREE users as a cost to Spotify on a per subscriber basis (regardless of whether enough ad revenue is earned) and a resulting royalty payment for rightsholders.  Not a perfect treatment, but this technique will permit us to account for the fact that these users do lead to royalties—while free to the user, free users are not free for Spotify.

Glenn stated, over at Business Matters in Billboard:

Billboard estimates there was roughly $2.4 billion of consumer spending on music downloads in the U.S. in 2011, based on Nielsen SoundScan sales figures and rough estimates of per-unit prices. iTunes was assigned a 70% share of the download market, giving it estimated sales of $1.7 billion.

And so we are looking for a kitty about equal to $1.7 billion in the United State for comparison.

Now, Spotify presently claims roughly 10 million active users, 3 million of which pay for the service in some way.  Therefore, at least for the moment, let’s work with 30% of the “active user base” converting to paid users.

The firm has previously stated that about 85% of paying subscribers are at the $9.99 tier, while 15% are at the $4.99 tier. Lets move forward as if this ratio between high/low tier subscribers remains the same.

I could write out some fancy equation right now, but I won’t. Suffice it to say we are looking to find out how many Active users it will take to result in $1.7 billion in pre-royalty revenue (or ~$1.2 billion in post-royalty), given that (a) of these Active Users, 30% will pay for a subscription and (b) 85% of those who pay will pay at the High tier ($9.99) while 15% will pay at the Low tier ($4.99).

Whew.

Alternate Answer #1: 30,000,000 Active Users if Free users are effectively worth/cost $2.99 each month.

A top-line number that would lead to:

30,000,000 Free users -> $753,480,000 in yearly “revenue” pre-royalty
9,000,000   Paid users -> $997,920,000 in yearly revenue pre-royalty

if Free users are effectively worth/cost $2.99 each month.

Alternate answer #2: 35,000,000 Active Users if Free users are effectively worth/cost $1.99 each month.

A top-line number that would lead to:

24,500,000 Free users -> $558,600,000 in yearly “revenue” pre-royalty
10,500,000 Paid users -> $1,164,240,000 in yearly revenue pre-royalty

Alternate answer #3: 42,000,000 Active Users if Free users are effectively worth/cost $0.99 each month.

A top-line number that would lead to:
(number below are corrected from earlier post)

29,400,000 Free users -> $349,272,000 in yearly “revenue” pre-royalty
12,600,000 Paid users -> $1,397,088,000 in yearly revenue pre-royalty

Offering the obvious: Google adds downloads to Google Music (locker)

Google tends to refer to a wide variety of music-related products as “Google Music.” When the bits hit the hard drive, however, you buy tracks from the Android Market, upload tracks to Google Music (locker), watch music videos on YouTube, and… you get the picture.
And so, even though Google Music is one of the few products launched by the Mountain View behemoth that shifted out of beta within moments, this whole music thing on Google is clearly a work-in-progress.
Recently, Google announced two changes to its products that directly impact not only music rightsholders, but also music consumers.
Most importantly, it should be said that one of these new features offers up the obvious by adding a feature to Google Music accounts that should have been there from the start, while the other obviates the obvious by withholding  from account holders functionality that should have been there from the start.
Google Music (locker) accounts are now setup to permit files uploaded to the locker to be downloaded from the locker. In other words, your Googe Music locker now does what it should have done from the beginning!
While the gut reaction of many industry pundits was to compare music lockers to interactive music services (like Spotify), many consumers saw a more basic challenge: backup. For these consumers, lockers are seen as a place to store music collections, collections that in most case have grown to tens-of-gigabytes in size.
Furthermore, while Google liked to present the challenge of moving music from your computer to your Android device as a piece of cake, few cakes (or only the best cakes) involve behaviour as graphic as Mounting other things. Instructing customers to “mount” their mobile phone just did not resonate with the masses. And so Google has tried to simplify the experience.
This new download “feature” simply:
(a) permits the Google locker to match an aspect of Apple’s iCloud (aka, iTunes Match) offering and
(b) enables a locker to to operate like any normal storage device would. Files uploaded to the cloud can be not only accessed but also obtained from that cloud.
If you are domiciled in a country wherein these sorts of copies of copies (of copies) are covered by fair use protections or private copying exemptions or similar, your best course of action is a bottle of scotch.
If, however, you operate in country without such protections or exemptions you probably are hearing the sound of little pennies (or pence) hitting your bank account with each new copy made for each upload to and download from the Google Music Locker.
Without this basic feature, however, Google Music is a less compelling service. So choosing to not license “the download” will deflate the value of “the performance.”

US Radio versus Music Services: A comparison of the value of spins versus streams

UPDATE: An updated version of this post, employing inputs and estimates for 2014, can be found at Rockonomic.com.

Following on a estimate of the music industry collections from UK Radio stations, I have done my best to estimate effective per spin per listener rates collected from US Radio stations. [NOTE: these estimates date back to 2011]

Importantly, the goal here was to estimate the effective value of each radio spin *per listener* so that rate can be compared to not only that rate being observed for the effective value of a stream on music services (e.g., Rdio, Rhapsody, or Spotify) per listener, but also those rates applicable to webcasting streams.

First, a quick clarification: Most chatter about radio royalties hinges on the value of a spin, and yet the chatter about music service royalties hinges on the value of a stream. However, this comparison between spins and streams is not usually/always equivalent. Why?

The usual “spin” value often refers to a radio play on a station or syndicated show that was experienced by a large audience (sometimes millions of people).

A stream payment usually refers to a play/stream by a music service experienced by a single listener (or at least a single subscriber account).

Therefore, I am trying to compare spins and streams on equal terms by converting this spin-to-millions value from Radio to a value per listener, as is the case for music services. Please scroll to the end of this post for an explanation of the per spin/stream per listener comparison in the context of licenses based upon percentages of revenue or blanket fees and advances.

Now for the numbers…

The Short Story:

Just the calculated rates and none of the overly numerical explanations…

Important: In the US, radio stations pay royalties for only those performance rights carried by the Musical Work (the lyrics/composition), and do not pay for performing rights to the stakeholders of the sound recording. As a result, effective rates below are estimates of amounts paid only to publishers, songwriters, and lyricists—the various stakeholders in a Musical Work.

Taking a stand:

$0.000186 to $0.000372 <- per spin per listener
or
$186.00 to $372.00      <- per 1,000,000 listeners in the radio audience
Not taking a stand:

$0.0002977923 <- Estimated effective rate per spin per listener*
$0.0000992641 to $0.0005955847 <-Range**
at 15 songs per hour

$0.0003722404 <- Estimated effective rate per spin per listener*
$0.0001240801 to $0.0007444808 <-Range**
at 12 songs per hour

$0.0004963206 <- Estimated effective rate per spin per listener*
$0.0001654402 to $0.0009926411 <-Range**
at 9 songs per hour

$0.0013 <- Effective rate per stream per listener on music services
$0.000300 to $0.0015 <- Range
estimated through songwriter reports, musical work only

The Long Story (with the Inputs):

The effective rates paid by radio and music services in the US are less directly comparable to those rates paid in the UK. Unlike in the UK, radio broadcasters in the USA pay royalties to only one set of music rightsholders: those with an interest in the musical work [the publisher(s), lyricist(s), and songwriter(s)]. Music services in both countries, on the other hand, are paying both sets of rightsholders.

I will begin with the total Dollars collected from Radio by the three performance rights collectives in the US: ASCAP, BMI, and SESAC. While ASCAP openly discloses its domestic collections from Radio, BMI only discloses these values indirectly (in its annual report)—reporting the proportion of total collections that are not international, and that proportion of domestic collections that are from Radio. I had to estimate SESAC’s collections. Being a private company, SESAC does not publicly disclose its collections.

I will then break down this total value of collected Dollars on a daily, hourly, and finally per spin basis (for the set of music tracks hitting the ears of listeners at any moment in time in the US across all music radio stations).

Since not all radio stations are playing music (predominantly or exclusively), I have chosen to follow the royalty dollars to the radio-listening audience, through the tracks plausibly heard by only this audience.

Finally, I arrive at an effective range of the per spin per listener value through a set of estimates of the average size of only the music radio listening audience during the day in the US.

The overly numerical banter:

(A) $230,881,000 <- Dollars collected from Radio by ASCAP (pdf)

(B) $198,303,000 <- Dollars collected from Radio by BMI (imputed)

(C) $42,918,400   <- Dollars collected from Radio by SESAC (estimated)

(A)+(B)+(C)          <- Dollars collected from Radio by the Collectives
equals
$472,102,400       <- Estimate of Total Dollars collected from Radio in the US

/ 365 <- Number of days in the year, resulting in per day payments
/ 24   <- Number of hours in the day, resulting in per hour payments
equals
$53,892.97 <- Dollars collected per hour from US Music Radio

So, if music royalties were measured like a taxi meter, the meter would rack up royalties at a rate $53,892.97 per hour.

/ 12 <- Number of songs played per hour, resulting in per song payments
equals
$4,491.08 <- Dollars collected per simultaneous spins across entire US Music Radio

The meaning of this $4491.08 is simple.  PROs collect royalties from the performance of about X songs per hour (where X might be 12, or 15, or 9) across all music radio stations.  $4,491 is simply the Collections per Hour divided by X, if X were 12 songs per hour.

Note: That figure—$4,491.08—is not the value of a spin on a single station or show, like Jack FM. It is an estimate of the average total value of all spins across all music stations in the US given some number of songs played per hour.  A source like Jack FM would be one of the shows/stations playing music at any time. If, however, I reckoned that any station/network were 10% of the listening audience at some point in time, the value of that spin on that single station might be around $449.11.

Some might disagree with the rate of 12 tracks per hour (or about 36 minutes of music). And so I also ran estimates asserting 15 tracks per hour (about 45 minutes of music) and 9 tracks per hour (24 minutes of music).

We need to divide $4,491.08, however, by the average size of the US radio audience throughout the day that is listening to music radio to get an estimate of the value of each spin per listener. Essentially, if I could flip a switch and know how many people were listening to music on the radio at any moment, how many people (on average) would I find to be listening?

Unfortunately, such a switch does not exist. But a variation exists in the form of Arbitron’s estimates of the radio audience.

In the US, Arbitron estimated that during the most recent quarter approximately 241,300,000 people over the age of 12 listened to the radio at some time. This estimate is not the same as an estimate of the average size of the listening audience, however. In particular, it is not that portion of the audience that is listening to music (on the) radio at moments in time.

Arbitron estimates Hour-by-Hour listening as a proportion of its quarterly radio audience. In their 2010 Radio Today report (page 89), these ratings throughout the day range from a high of approximately 17% of quarterly listeners to a low of around 1% of quarterly listeners. The average across the 24-hour period appears to be in vicinity of 9.5%.

241,300,000 <- Arbitron estimate of quarterly radio listening audience, Q3 2011

$4,491.08      <- Dollars collected per spin if across entire US Radio audience

/ 6,032,500   <- approximately 2.5% of the quarterly radio audience
or
/ 12,065,000 <- approximately 5% of the quarterly radio audience
or
/ 24,130,000 <- approximately 10% of the quarterly radio audience
or
/ 36,195,000 <- approximately 15% of the quarterly radio audience

—————————-

Dollars collected per spin per listener for Radio in the US for various estimates of the average listening audience:

At 15 songs per hour
$0.0005955847 <- if the average listening audience is 6,032,500 people
$0.0002977923 <- if the average listening audience is 12,065,000 people
$0.0001488962 <- if the average listening audience is 24,130,000 people
$0.0000992641 <- if the average listening audience is 36,195,000 people

At 12 songs per hour
$0.0007444808 <- if the average listening audience is 6,032,500 people
$0.0003722404 <- if the average listening audience is 12,065,000 people
$0.0001861202 <- if the average listening audience is 24,130,000 people
$0.0001240801 <- if the average listening audience is 36,195,000 people

At 9 songs per hour
$0.0009926411 <- if the average listening audience is 6,032,500 people
$0.0004963206 <- if the average listening audience is 12,065,000 people
$0.0002481603 <- if the average listening audience is 24,130,000 people
$0.0001654402 <- if the average listening audience is 36,195,000 people

Finally, and importantly, I realize that Radio stations in the US do not pay royalties on a per spin (and per listener) basis. Instead, these Radio royalties are calculated by such means as a percentage of revenue, or as a result of a negotiation over a blanket fee.

I also realize that music services—such as MOG, Rdio, Rhapsody, and Spotify—are not—by default—paying royalties on a per stream (per listener) basis. Instead, these royalties may be calculated through a number of means, none of which can be openly discussed due to the joys of non-disclosure clauses.

However, the resulting pool of money from Radio can be and has been counted. And various sources have reported online their payments from music services. As a result, nerds like me can try to estimate some effective rate given the size of the pools, the rough number of tracks played, and the number of listeners.

*
The estimates above are a function of considering the average music radio listening audience (across moments in the day) to be 5% of the estimated quarterly radio audience as reported by Arbitron. For comparison, Arbitron estimates the average size of US Radio (all formats) audience to be approximately 9.5% of the quarterly audience. I worked below this number given (a) not all stations are music stations and (b) Arbitron may be overestimating the size of the Radio audience.

**
The ranges above are a function of considering the average music radio listening audience (across moments in the day) to be 2.5%, 5%, 10%, and 15% of the estimated quarterly radio audience as reported by Arbitron. For clarity, the smallest assumed listening audience will lead to the highest estimated rate per stream per listener in the ranges.

UK Radio versus Spotify: A comparison of the value of spins versus streams.

In the context of a great deal of debate over the value of streams on new music services, Spotify in particular, I have been working on some back-of-the-napkin (or serviette) estimates of the value of not only listens per listener to purchased tracks, but also spins per listener on major radio broadcasters. This week, I focused on radio broadcasters in the UK, such as the BBC.

Below I try to calculate the effective value of a radio spin *per listener* so that rate can be compared to the rate being observed for the effective value of a music service stream per listener.

First, a quick clarification: Most chatter about radio royalties hinges on the value of a spin, and yet the chatter about music service royalties hinges on the value of a stream. However, this comparison between spins and streams is not usually/always equivalent. Why?

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/stream by a music service experienced by a single listener (or at least a single subscriber account).

Therefore, I am trying to convert this spin-to-millions value from Radio to a value per listener, as is the case for music services. Please scroll to the end of this post for an explanation of the per spin/stream per listener comparison in the context of licenses based upon percentages of revenue or blanket fees and advances.

Warning: I end up with a rather small number as the estimate of the value of a UK Radio spin per listener. Fortunately, and importantly, the radio audience in the UK is quite large overall, leading to a total pool of royalty monies that is large enough for most labels, artists, songwriters, and publishers to take notice.

Were the pool of money flowing from music services in the UK, such as Spotify, as large as that flowing from Radio, we might not be having these sorts of discussions. Maybe someday both of these pools will be large. The bigger question than these present rates, therefore, is whether we should and how we might get to that version of someday.

The Short Story:

just the calculated rates and none of the overly numerical banter…

£0.0002992992 <- Estimated effective rate per spin per listener
£0.0000998 to £0.0005985 £0.0002993 <-Range
at 15 songs per hour

£0.0003741240 <- Estimated effective rate per spin per listener
£0.0001247 to £0.0007482 £0.0003741 <-Range
at 12 songs per hour

£0.0004988320 <- Estimated effective rate per spin per listener
£0.0001662 to £0.0009976 <-Range
at 9 songs per hour

The estimates above are a function of considering the average music radio listening audience (across moments in the day) to be 5% of the estimated quarterly radio audience as reported by RAJAR. The ranges above are a function of considering the average music radio listening audience (across moments in the day) to be 2.5%, 5%, 10%, and 15% of the estimated quarterly radio audience as reported by RAJAR. For clarity, the smallest assumed listening audience will lead to the highest estimated rate per stream per listener in the ranges.

£0.0005000 to £0.005000 <- Music Services effective rate per stream per listener (estimated)

The Long Story (with the Inputs):

The effective rates paid by radio and music services in the UK are more directly comparable as compared—no pun intended— to those rates paid in the US. Unlike in the US, radio broadcasters in the UK pay royalties for both sets of music rightsholders: (a) those with an interest in the sound recording [aka, the neighbouring rights; the owner(s) of the recording, as well as the featured and performing artist(s)] and (b) those with an interest in the musical work [the publisher(s), lyricist(s), and songwriter(s)]. Music services are paying both sets of rightsholders as well.

I will begin with the total Pounds collected from Radio by the two core performance/performing rights collectives in the UK: PRS for Music and PPL.

I will then break down this total value of collected Pounds per day, per hour, and finally per spin (for the set of music tracks hitting the ears of listeners at any moment in time in the UK across all radio stations).

Since not all radio stations are playing music (predominantly or exclusively), I have chosen to follow the royalty dollars to the radio-listening audience, through the tracks plausibly heard by only this audience.

Finally, I arrive at an effective range of the per spin per listener value through a set of estimates of the average size of only the music radio listening audience in the UK during the day.

The overly numerical banter:

(A) £49,500,000 <- Pounds (2010) collected from Radio by PRS (pdf)

£61,700,000 <- Pounds (2010) collected from Broadcast/Online by PPL
x 70% <- Rough approximation of % of PPL B/O from Radio**
equals
(B) £43,190,000 <- Estimate of Pounds collected for Master Performance

(A) + (B) <- Pounds collected from Radio by PPL and PRS
equals
£92,690,000 <- Estimate of Total Pounds collected from Radio in the UK

/ 365 <- Number of days in the year, resulting in per day payments
/ 24 <- Number of hours in the day, resulting in per hour payments
equals
£10,581.05 <- Pounds collected per hour from UK Music Radio

So, if music royalties were measured like a taxi meter, the meter would rack up royalties at a rate £10,581.05 per hour.

/ 15 <- Number of songs played per hour, resulting in per song payments
equals
£705.40 <- Pounds collected per spin across entire UK Music Radio

Note: That figure—£705.40—is not the value of a spin on a single station, like BBC Radio 1. It is an estimate of the average value of all spins across all music stations in the UK at a moment in time, one station of which would be the BBC’s Radio 1. If, however, I reckoned that BBC Radio 1 were 10% of the listening audience at some point in time, the value of that spin on that single station might be around £70.54.

Some might disagree with the rate of 15 tracks per hour (or about 45 minutes of music). And so I also ran estimates asserting 12 tracks per hour (about 36 minutes of music) and 9 tracks per hour (24 minutes of music).

We need to divide £705.40, however, by the average size of the UK radio audience throughout the day that is listening to music radio to get an estimate of the value of each spin per listener. Essentially, if I could flip a switch and know how many people were listening to music on the radio at any moment, how many people (on average) would I find to be listening?

Unfortunately, such a switch does not exist. And so, now is that uncomfortable time when assumptions, guesstimates, and hopefully well-reasoned estimates are made.

In the UK, RAJAR estimated that during the most recent quarter approximately 47,137,000 people over the age of 15 listened to the radio at some time. This estimate is not the same as an estimate of the average size of the listening audience, however. In particular, it is not that portion of the audience that is listening to music (on the) radio at moments in time.

Below, I will calculate an estimate of the value per spin per listener at three guesstimates of the average size of the music radio listening audience during the day in the UK, given the peak/trough variation in this audience. Please feel free to share your thoughts/insights as to what other inputs I could/should use here.

Added: In the US, Arbitron estimates Hour-by-Hour listening as proportion of its quarterly radio audience. In their 2010 Radio Today report (page 89), these ratings throughout the day range from a high of approximately 17% of quarterly listeners to a low of around 1% of quarterly listeners. The average across the 24-hour period appears to be in the 8-10% range.

47,137,000 <- RAJAR estimate of quarterly radio listening audience, Q3 2011

£705.40 <- Pounds collected per spin if across entire UK Radio audience
/ 2,356,850 <- approximately 5% of the quarterly radio audience
/ 4,713,700 <- approximately 10% of the quarterly radio audience
/ 7,070,550 <- approximately 15% of the quarterly radio audience

—————————-

Pounds paid per spin per listener for Radio in the UK for various estimates of the average listening audience:

At 15 songs per hour
£0.0002993 <- if the average listening audience is 2,356,850 people
£0.0001496 <- if the average listening audience is 4,713,700 people
£0.0000998 <- if the average listening audience is 7,070,550 people

At 12 songs per hour
£0.0003741 <- if the average listening audience is 2,356,850 people
£0.0001870 <- if the average listening audience is 4,713,700 people
£0.0001247 <- if the average listening audience is 7,070,550 people

At 9 songs per hour
£0.0004988 <- if the average listening audience is 2,356,850 people
£0.0002494 <- if the average listening audience is 4,713,700 people
£0.0001662 <- if the average listening audience is 7,070,550 people

Finally, and importantly, I realize (realise) that Radio stations in the UK do not pay royalties on a per spin (and per listener) basis. Instead, these Radio royalties are calculated by such means as a percentage of revenue, or as a result of a negotiation over a blanket fee.

I also realize (realise) that music services, such as Spotify, are not—by default—paying royalties on a per stream (per listener) basis. Instead, these royalties may be calculated through a number of means, none of which can be openly discussed due to the joys of non-disclosure clauses.

However, the resulting pool of money from Radio can be and has been counted. And various sources have reported online their payments from music services such as Spotify. As a result, nerds like me can try to estimate some effective rate given the size of the pools, the rough number of tracks played, and the number of listeners.

** As far as I could tell, PPL does not breakdown its Broadcast and Online revenue further in its Annual Report. There was not direct comparable for this estimate of the proportion of PPL collections that are derived from UK Radio royalties. I erred on the side of too large a proportion rather than too small. Any guidance on this figure would be appreciated