Economics of the Music Industry


Jack Israel and Joie Evar

As the digital revolution has swept the globe, it has revolutionized the way everyone consumes music as it promoted streaming platforms. This creation has caused the music industry to undergo some significant changes over the past few decades that have also transformed the way in which music is monetized. Before streaming platforms, music was either bought as physical entities (e.g. CDs, records, etc.), downloaded (e.g. iTunes), or downloaded illegally through piracy. However, now, the game is completely different. Every day teenagers walk around unable to imagine other means of music besides playing them instantly on their devices. 

Here’s how money is made on streaming platforms. This process is way more complicated than one may anticipate as making music involves many different bodies to ensure that the music reaches the ears of a listener. To start, when an artist creates music, it does not just magically appear on an individual’s screen at their disposal. Instead, most artists are connected to a record label that deals with the distribution and the means of putting the artist’s music on the streaming platform. When an artist works with a record label, the label owns the right to the recording. Accordingly, when the artist’s music is streamed, the record label collects royalties from the streaming platforms and then pays the artist. In simple terms, a royalty is a payment that is made to someone for the continuing use of their property. In the process of paying an artist for their music, it is payment for the ongoing streams or use of their music asset which helps to generate the streaming platform money. For example, When John Mayer released his song “Gravity” in 2011, he worked with his record label, Universal, who helped him produce his music and also owned the rights to his music. 

This way of streaming platforms paying artists for their music is called the revenue-sharing model. This model has been used by most of the top streaming platforms including Spotify, Apple Music, Amazon Music, etc. When consumers purchase their subscriptions, these companies generate revenue. The revenue that is generated from the music streaming platforms to their artists is in the form of royalties. It is a known secret that around 60-70% of revenues are distributed as royalties. This is done proportionally to the corresponding artists’ total streams. Only once the record label receives these royalties can the record labels distribute these revenues to all of the people involved in the production of the song. 

However, this revenue-sharing model has caused a rise in controversies. Since many people are paid the revenue that the record label collects from the streaming platforms, many artists have grown enraged after seeing that their final payment for their songs is so low. They claimed that the traditional means of consuming music with CDs and downloads awarded them more money. In 2014, Taylor Swift boycotted Spotify as a result of removing all of her music from the service. Adele did the same in 2015. Although both artists ended up resuming sharing their music on the app, the issue of subscription-based models not paying artists enough was highlighted. According to New Atlas, Spotify pays as little as US $0.0038 per play. While Apple Music and Tidal pay slightly higher, they are also reporting annual losses. 

Nevertheless, there are some positives to the advent of streaming platforms. For one, streaming platforms reduce piracy and make listening to music very accessible. This is because, in the past, piracy has been a very large issue in the music industry. In addition, the digitization of music on streaming platforms has also helped supply artists with comprehensive data to help provide valuable insights into the performance of their music. Streaming services track the number of streams for all songs and other statistics record labels and artists deem useful. This yields further benefits as musicians can use this information to make their music better, thereby making their listeners more satisfied, and eventually helping to make artists even more money. 

The economics of the music industry is often overlooked and is something interesting to learn about—especially because we stream music every day! Streaming platforms definitely have their pros and cons, but hopefully, in the future, there will be a more fair model to support artists and their careers.