Music 2.

0
Music 2.O Business
Business Model
Model
Which revenues are expected from digital music services for labels &
artists?
Introduction

Music 2.0 is about digital music and this study is about the impact of music 2.0 on the revenues of the music
industry players.
A new generation of digital services, which are audio streaming services, is available today to offer fans an
alternative way for enjoying music
What are the revenues expectations of the different actors of the value chain as artists, labels and digital
distributors? How can they all expect make money from downloads & audio streaming services?
The objective of this presentation is not to
study the return on investments (ROI) for labels
or independent artist. In other words, neither
the costs required for production & promotion,
nor the profits by comparing the costs and the
revenues are part of this study.
This presentation is also limited to the
potential revenues generated by audio digital
music services, all other potential revenues
obtained from ring tones, web radios, video
streaming services, live performances,
merchandizing, radio/TV broadcasts, film
synchronization, songbooks, … are excluded.
Only revenues from download & audio
streaming services are considered.
Digital music is gaining momentum

While physical music revenues based on audio CDs are decreasing for a while, digital music revenues are
increasing.
The USA are the first market of the world for revenues from digital music services. Digital music represents 40% of
the whole local music market. In South Korea & China, the revenues generated from digital music are even higher
than those generated by physical sales (source: SNEP).
If we consider the French market, 5th market of the world for music revenues, physical music revenues decreased
by 46 % in 6 years between 2004 & 2009. On the contrary, digital music revenues increased by 742 % in 6 years
between 2004 & 2009 (source: SNEP).
In France, the streaming market has got the fastest growth of the 3 flavors of digital music (downloads, ring tones
& audio streaming) with a 144% market share gain between 2008 and 2009. In 2009, its market share was 11.6%
(source: SNEP - June 2010).

Source: SNEP Source: SNEP

Artists & Publishing Contractual Agreements

Artist contract
In the artist contract, the producer typically allocates an average of 8% of his revenues to the artist. This %
depends on the nature of the artist, beginner or mature, and can be modulated by potential sales volumes.
For this study, the artist gets 8% of the revenues from the producer for each song or album downloaded or
streamed
Publishing Contract
 the typical split defined for original songs is 50% for the publisher, 25% for the author of the lyrics and 25%
for the music composer. A songwriter could get a maximum of 50% when writing both lyrics & music or even
100% when acting as an “independent” songwriter. In that case, the songwriter would have to ensure himself/
herself the promotion of his repertoire.
Note this publishing contract covers the DRM (“Droits de Reproduction Mécaniques” or “Mechanical
Rights”) and is applicable to downloads services.
For streaming services, and this is the case in France, the rights between publishers & songwriters are not
contractual and are defined by the copyright management company: the split is 1/3 for the publisher, 1/3 for
the author and 1/3 for the music composer, according to the DEP (“Droits d’Execution Publiques” or
“broadcasting rights”) defined by SACEM.
Digital Distribution Contractual Agreements

While the contractual “link” can be established directly by major producers or labels with digital music distributors like
iTunes, the situation is different for independent producers or DIY (“Do it Yourself”) artists cumulating the roles of
producers, publishers, songwriters & performers: the access to digital music distributors is only possible using digital
music aggregators, like “Zimbalam” in France
The distributor typically takes a 30% commission (source: SNEP), among which 8% is allocated for the copyright
management company (source: Wikipedia - SACEM and Deezer agreement for digital music streaming services in
France), and allocates the remaining 70% to the digital music aggregators.
The aggregators take a commission and allocate the final revenues to the producers. For instance, this commission is
10% with Zimbalam, allocating 90% of their revenues to the independent producers or DIY (“Do it Yourself”) artists
(source: Zimbalam).
The 8% allocated for the copyright management company are then distributed between the Publisher and the
songwriter according to the conditions defined in the publishing contract described above.
Revenues Split Between Digital Music Industry Players

In this study, we assume that the digital distributors are based in France and are subject to a VAT (value added
tax) of 19.6%.
We can therefore figure out the revenues split between all players for the music 2.0 business model, either based
on downloads or audio streaming services.
All those % are taken into account in our study being understood that different % could be met, depending on
 digital distributor policies & geographical locations
 digital distributor agreements with copyright management companies
 agreements between digital distributors and digital aggregators
 agreements between digital aggregators & producers
Digital Music Revenues – Download Services

An average of 0.99 euros is generally met for a song download and 9.99 euros for an album download (LP)
An artist/performer will earn 0.038 euros with one song downloaded
A songwriter will earn 0.0318 euros with one song downloaded
Digital Music Revenues – Streaming Services

The pricing for streaming is either based on free service or subscription packages with flat fees generally based on 9.99
euros a month for unlimited listening in premium quality on a PC or a mobile device like a smartphone.
We will consider a 0.0125 euros pricing level to be appropriate to build-up the business model.
An artist/performer will earn 0.038 euros with 79 streams
A songwriter will earn 0.0318 euros 59 streams; less streams are needed for a songwriter compared to the performing
artist as the publishing rights are higher for the songwriter with streaming services
Number of Downloads or Streams Required for 1 000 euros revenues

Based on the pricing parameters described in previous slides, 1000 euros revenues will require:
 2122 downloaded songs or 171 952 streams for a label (producer/publisher)
1 848 downloaded songs or 146 329 streams for an independent artist ensuring its own production & promotion.
14 277 downloaded songs or 981 984 streams for a singer/songwriter
31 409 downloaded songs or 1 865 858 streams for a songwriter
To assess the number of required LPs to reach the 1 000 euros target, those figures can be divided by 10, as a LP is
generally sold 10 times more than a single song, in the download services world. For instance, 212 downloaded LPs or 17
195 streamed LPs would be needed for a label.
Average Streams per True Fan per Artist

Now how many subscribers, or true fans, are needed to generate 1 000 euros of revenues? Why? Because a subscriber can
listen several times the same song, or the same LP.
Whereas the download of a song or a LP will be unique and done once for all, the listening of a song or a LP will be done
several times by “true fans” who are the subscribers fan of the artist. Logically, this factor will strongly decrease the number of
“true fans” needed.
 We had to establish an average per “true fan” and we came-up with around 40 streams a month during the 1st year meaning
that over 480 streams will be done by the ‘true fan” with the content of the EPs or LP during the whole year.
The 2nd year, we assume that the level of streams will be reduced by 50% leading to 240 streams.
The 3rd year will generate 75% less streams with an estimated figure of 120. During this 3rd year, the artist will release new
EPs & LPs leading to new streams, mostly done for the new songs and partly done for the older materials
If we limit our study on a 3 years timeslot, 840 streams can be generated for any songs part of the first LP of the artist by a
single “true fan”, hence an average closer to 23 streams a month per “true fan” per artist.

Average: 23 Streams / month

Revenues Expectations From Download Services

What are the expected revenues from download services for each player based on a fixed true fan base?
Our analysis shows the revenue evolution per range of true fans (1 000, 5 000 & 10 000) downloading a LP.
10 000 downloaded LPs, or the equivalent of 100 000 songs, will generate the following revenues:
 47 121 euros for a label
54 125 euros for an independent artist
7 004 euros for a singer/songwriter
 3 184 euros for a songwriter
In this model, 10 000 « true fans » are required, each of them downloading the equivalent of a one LP. Once downloaded, the LP
belongs to the true fan and will be listened with no limits without any additional cost.
If the true fan base is limited to 10 000, those revenues are ultimate.
Revenues Expectations From Streaming Services

Concerning the expected revenues from paid

streaming services for each player, our analysis
shows the evolution of the revenues with a true fan
base listening to an average of 2.3 LP of the same
artist each month, or the equivalent of 23 songs
10 000 subscribers, true fans, will generate the
following monthly revenues:
1 338 euros for a label
1 572 euros for an independent artist
234 euros for a singer/songwriter
123 euros for a songwriter
In 3 years, the revenues will be
48 153 euros revenues for a label
56 585 euros revenues for an independent
artist
8 432 euros revenues for a
singer/songwriter
4 438 euros revenues for a songwriter
In this model, each stream will regularly generate
revenues, like revenues obtained with radio plays.
Revenues Expectations Comparaison

By comparing downloads & streaming services with the same true fan base, we come-up with the conclusion that the
revenues generated are equivalent after 3 years.
The following graph shows an example based on a 10 000 true fan base.
Digital winds of change

There are ongoing debates in France and probably elsewhere concerning the digital music revenue distribution. Those
debates are initiated by the “Zelnik mission”:
For streaming services, SACEM is asking for a revision of the current rules and requests to apply a 10,5 % rate, instead of
the 8%, with a secured minimum of
 0,005 € per stream in case of advertisement financed only streaming service (ie free streaming service for the
public)
0,35 € per month per subscriber in case of fixed access paid package (excluding mobile service).This amount would
be raised by a minimum of 0,005 € per stream beyond 110 streams per month consumption.
0,70 € per month per subscriber in case of mobile access paid package. This amount would be raised by a minimum
of 0,005 € per stream beyond 220 streams per month consumption.
On its side, the ADAMI, collective administration of performers’ rights company in France, is requesting for more revenues
from digital services; a better split between producers and artists would challenge the artists contracts and artists could
benefit between 10% and 15% royalties rates instead of the average of 8%, figure taken into account in our study.

Those SACEM & ADAMI recommendations would naturally benefit to publishers, songwriters & artists that could increase
their revenue levels for music 2.0 services.

This study also described the VAT debate that would also impact the revenues of the distributors
Conclusion

The revenues generated by audio streaming paid services are far from being negligible and are a real complementary
revenue opportunity offered to the music industry.

In this study, based on the current rules and several assumptions, 3 years would be needed with the same true fan base to
come-up with similar revenues, comparing both download & audio streaming digital services.

10 000 true fans either consuming an average of 23 streams (or plays) a month based on a 0.0125 euros cost per stream
or downloading one 9.99 euro LP, will generate in 3 years around
48 000 euros revenues for a label
55 000 euros revenues for an independent artist
7000 / 8 000 euros revenues for a singer/songwriter
3000 / 4000 euros revenues for a songwriter

Those revenues will be obtained in one shot using a download service or will require 3 years of regular plays using a
streaming paid package service.

Of course, 3 key factors will influence the amount of the revenues:
The pricing policies of the digital distributors offering audio streaming services
The music usage of the true fans: how many times will they listen to their favourite songs or LPs?
The new policies redefining the rules & shares between all players; those new policies, real “digital winds of
change”, are likely to modify the balance between distributors, producers, publishers, artists & songwriters and are still
to be defined and finalized.

We can also foresee a new trend favoring more regular attraction to artists to sustain the monthly plays, in case of
streaming services, with EP strategies offering regular new materials for the fans thus stimulating their desire to play the
artist.
About the Author

Chris de Palmer is a songwriter and SACEM member and is also acting as a Director of Marketing in a multi-national
company.

Chris has been involved in pre-sales & marketing international activities for more than 20 years and directly contributed to
industry awards wins in trade show events and multi-million euro contracts wins with customers worldwide.

He also contributed to increase CO2 emissions by over 200 tons because of his flights and travels in 60 countries.

The white paper of this study is available on http://palmrocksongs.wordpress.com/publications/

Chris is also on http://www.facebook.com/

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. To view a
copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171
Second Street, Suite 300, San Francisco, California, 94105, USA
 Thank You!
Music 2.O Business
Model