Streaming Sites To Slash Artist Dollars

31 May 2013 | 3:51 pm | Scott Fitzsimons

New report urges companies to reduce royalty payments

Music streaming services may look to cut down their royalty payments to labels and musicians in a bid to become profitable after a new report indicated that the current business model is not sustainable.

The report from Australian-based Venture Consulting argues that while services like Pandora, Spotify and Deezer are “the closest to reaching profitability” none have demonstrated the ability to generate sustainable profits. It warns investors away from the sector, calling it high risk and speculative. Once market leaders emerge the companies will be in a position to negotiate lower royalty payments, it argues.

Currently the services pay between 60 percent and 75 percent of their revenues to the labels, but they should be looking at lowering that to 50 percent.

The findings will not be music to the ears of labels, who have long argued that music royalty payments aren't high enough.

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In a recent case, Apple's yet-to-launch streaming radio service was reportedly trying to negotiate a royalty of six cents per 100 streams. At that rate an Australian musician would need to have over 101,000 streams a week to make minimum wage of $606 a week, not including the cuts that would be taken by the label or management. The rate proved a stumbling block and royalty negotiations are ongoing. Pandora is believed to pay approximately 12.5 cents per 100 streams.

Industry experts have speculated that once streaming services become profitable labels will be in a position to offer artists a greater royalty, contradicting the report's recommendations that the labels should identify the role streaming services play in the industry and agree to cut their rates.

“Music streaming services are becoming a substantial part of the music industry, accounting for an estimated six percent of the worldwide music market, and growing rapidly,” it reads. “The music industry is still coming to understand the potential in the space and how it fits into the overall music economy, but early indications are that it is having a net positive impact.”

The report also suggests providing higher price-points for heavy users and limiting the free usage models as well as strengthening their advertising sales and reducing subscriptions costs through partnerships.

The Australian streaming services market has exploded in the past 18 months, with companies including Spotify, Deezer, Mog/Daisy, Rdio, rara, JB Hi-Fi Now, Songl and more, launching in the territory. A Google service and locally-based Vu are expected to launch this year as well.

Australia is the sixth biggest music market in the world, with revenues of US$507,400,000 in 2012.