The Understatement has a great post on how, and how not, to evaluate recent trends in recorded music sales, and what they might mean for the industry. The post includes many interesting charts, and an explanation as to why Bain’s recent report on the topic is deeply flawed and misleading. But the most relevant chart is this:
When measured by inflation adjusted sales per capita, “the music industry is down 64% from its peak” and “45% from where it was in 1973” at the peak of vinyl. There are quite a few ways to view this. Many blame music piracy, which certainly has contributed to the decline. Or you could take a more optimistic view, and claim a cyclical pattern.
But what about Pandora? And similar music services like it. They pay royalty fees to the RIAA, but from what I’ve read, it sounds like they don’t pay much (I assume they’re included in the red digital slice in the above chart, but I don’t have access to the underlying data).
Here’s some information I found on digitaltrends.com:
Pandora raked in $50 million in revenue in 2009, which the company hopes to double by the end of the year. Of that, it paid $30 million in royalties to the music industry as agreed to in the CRB rate settlement with performance rights organization SoundExchange.
That agreement calls for Pandora to pay either a per-stream rate for each song it plays or 25 percent of all revenue, whichever is greater. Pandora needs to generate 8 cents per user per hour to shift the royalty burden to the revenue-share model. Currently, it’s bringing in only 2 cents per user per hour.
I’m not complaining, but this really seems too good to be true. Pandora gets to pay a per stream rate or 25% of all revenue, whichever is higher. But guess what, Pandora, not the RIAA, has control over their revenue. Obviously, like all companies, they wouldn’t mind maximizing it. But they seem to have the ability to grossly undercharge for the benefits they provide, and then give a portion of what they collect (through both advertising and subscriptions) back to the RIAA. Although they’re currently paying the per-stream rate, it’s still not a lot of money compared with the amount of music that gets played by their 40 million users.
Pandora is thinking long-term here, and the company’s probably willing to sacrifice revenue in the short-term to build a very large user base that incorporates Pandora into their music listening routines (long-term revenue).
Radio used to mean an often fuzzy broadcast of music in a general genre with lots of annoying commercials and talk. With no way to skip songs. Now in a matter of minutes, I can custom tailor a few Pandora stations however I want, and be practically certain that I’ll like 90% of the songs the station plays, and I can skip the ones I don’t like. And the more I skip, the more accurate the station becomes.
Last year Pandora added commercials, which briefly annoyed me until I learned I could pay $30/year and have them removed all together. I didn’t even think about it. I used to spend much more each year buying albums.
This is cheaper, and most of the time, it’s a superior way to listen to music. You’re telling me I can create a radio station to play all of my favorite artists? And then every once in a while a song I haven’t heard before that is similar to my other musical tastes gets thrown in the mix? And this is free with commercials, and $30/year without? What’s the question again?
This seems to me to be the problem causing the trend. It doesn’t show up in the data because the data isn’t weighted by the quantity of music. When behavior changes, and people no longer need to own their music, the people who are in the business of selling music need to come up with a better way to rent it out. And $0.75 per Pandora user per year probably isn’t going to cut it.
Note: I even surprised myself when I realized I was writing a pro-RIAA post. But I’m just trying to be objective. And for once, it seems they’re getting the short end of the stick.