Economics of Music Wien 2017-09-13

The Economic Problem with Music –
And How Music Streaming Could Solve it
Prof. Dr. Peter Tschmuck

Department of Cultural Management and Gender Studies (IKM)
University of Music and Performing Arts Vienna
Anton-von-Webern-Platz 1
1030 Vienna, Austria
Tel.: ++43-1-71155-3415
email: Tschmuck@mdw.ac.at
webpage: http://musicbusinessresearch.wordpress.com/
Contents
 Music as an economic good
 The challenges of the music streaming business model
 The revenue streams for Austrian indie labels
The Economics of Music Streaming

Music as an
economic good

Music as a public good (Samuelson 1954)
Private goods
Excludability in consumption
Rivalry in consumption
Public goods
Non-excludability in consumption
Non-rivalry in consumption
=> „Free-riding“ problem

Music as a club/toll good (Buchanan 1965)
When introducing a price mechanism – think of a toll road – a club good

becomes excludable in consumption, but it is still non-rival.
All music events with an access system – e.g. concerts and opera houses as
well as music festivals – can therefore be defined as club/toll goods.
The ticket price makes them excludable in consumption, but listening to the
performances is still non-rival.
In a concert, an individual appropriates the entire benefit from listening to the

music despite the presence of other music lovers.

Music as an information good (Shapiro & Varian 1998)
Originally, music was a public good (e.g. as music in the liturgy and as a
public court entertainment).
In the 18th century impresarios turned music into a club good by staging
operas and concerts and collecting entrance fees.
Music printing and later sound recording transformed music into a private
good with a price mechanism constituting excludability and rivalry in
consumption.
Commercial broadcasting turned music into a public good financed by
either commercials (private radio) or fees (public radio)
In the course of digitization, the public good characteristics of music
became even more relevant => P2P file-sharing.

How to solve the public good’s problem with music?
1. Broadcasting business model: ad-supported and/or public fees
2. Record business model: privatization of consumption
3. Subscription-based music streaming: club/toll good

The challenges of the
music streaming
business model

Who benefits from music streaming?
The artists?

Subscriber pays
The split of a monthly premium EUR 9.99
subscription of EUR 9.99 of a music
streaming service in France
EUR 2.08 (20,8%) EUR 1.67 (16.7%) go
remain with Spotify to the tax authority
EUR 5.24 are channelled EUR 1.00 (10%) are channelled

to the record labels for to the collecting societies for
further distribution. They for distribution to composers,
pocket EUR 4.56 (45.5%) authors and publishers
EUR 0.68 (6.8%) are

distributed to all Source: SNEP-Ernst &
Young study, February 2015
performers for their music
streamed

The artists?
Answer: not really

The streaming services?

Spotify‘s revenue and cost of revenue, 2012-2016
3.500.000
3.000.000
2.500.000
in 1,000 EUR
2.000.000
1.500.000
1.000.000
500.000
0
2012 2013 2014 2015 2016
Subscriptions 374.600 677.890 978.565 1.744.393 2.638.493
Advertising 55.500 68.157 98.823 195.843 295.011
Cost of revenue 386.498 614.523 876.089 1.623.624 2.482.973

Spotify‘s annual operating loss, 2012-2016
0
-50.000
-100.000
-150.000
in 1,000 EUR
-200.000
-250.000
-300.000
-350.000
-400.000
2010 2011 2012 2013 2014 2015 2016
Operating loss -37.556 -59.136 -76.876 -91.178 -165.180 -184.490 -349.412

Spotify‘s cost structure, 2012-2016
3.500.000
3.000.000
in 1,000 EUR
2.500.000
2.000.000
1.500.000
1.000.000
500.000
0
2012 2013 2014 2015 2016
General and administrative 28.614 39.965 76.678 116.405 175.179
Sales and marketing 54.099 110.825 173.013 246.486 417.911
Research & development 37.946 72.723 121.030 143.307 206.853
Cost of revenue 386.498 614.523 876.089 1.623.624 2.482.973
Cost of revenue Research & development Sales and marketing General and administrative

SoudCloud‘s revenue and net loss, 2010-2015
30.000.000
20.000.000
10.000.000
-10.000.000
-20.000.000
-30.000.000
-40.000.000
-50.000.000
-60.000.000
2010 2011 2012 2013 2014 2015
Revenue 1.370.000 4.330.000 8.040.000 11.280.000 17.350.000 21.100.000
Net loss -1.550.000 -4.460.000 -12.430.000 -23.110.000 -39.140.000 -51.220.000

Music streaming services that failed

The streaming services?
Answer: NO

The recording companies?

Universal Music Group‘s revenue growth, 2015-2017
Source: Vivendi, First Half 2017 results, August 31, 2017, p.5.

Universal Music Group‘s first half year 2017 results
Source: Vivendi, First Half 2017 results, August 31, 2017, p.25.

Source: Music Business Worldwide, “Sony recorded music sales fall 6%, hampered by strength of Yen”, April 28, 2017

Source: Music Business
Worldwide, “Warner Music
just joined the $1bn
streaming record company
club”, February 7, 2017

MERLIN‘s member survey 2017
Key findings
Annual revenue distributions increased 52% to $353m.
64% of Merlin members report that audio streaming accounts for the
majority of their digital revenues (2016: 46%).
67% of Merlin members stated that digital income accounted for over half
their overall business revenues.
42% of members report that services such as YouTube account for less than
5% of their digital revenues

The recording companies?
Answer: YES, …
but just the majors and a few indies

Music streaming revenue of Austrian indie companies
from digital music distributor Rebeat in 2013-2016
6.000.000
5.000.000
4.000.000
in Euro
3.000.000
2.000.000
1.000.000
0
2013 2014 2015 2016
Streaming 274.067 458.955 564.877 5.214.375
Download 1.276.704 1.283.945 2.450.744 3.774.554

Music streaming revenue of indie companies in Austria
from digital music distributor Rebeat in 2013 and 2016
160.000
140.000
120.000
100.000
in Euro
80.000
60.000
40.000
20.000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

and of course …
the music consumers

The Economic Problem with Music –
And How Music Streaming Could Solve it
Prof. Dr. Peter Tschmuck

Department of Cultural Management and Gender Studies (IKM)
University of Music and Performing Arts Vienna
Anton-von-Webern-Platz 1
1030 Vienna, Austria
Tel.: ++43-1-71155-3415
email: Tschmuck@mdw.ac.at
webpage: http://musicbusinessresearch.wordpress.com/

Economics of Music Wien 2017-09-13

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The Economic Problem with Music –

And How Music Streaming Could Solve it

Prof. Dr. Peter Tschmuck

The Economics of Music Streaming

The Economics of Music Streaming

=> „Free-riding“ problem

The Economics of Music Streaming

When introducing a price mechanism – think of a toll road – a club good

In a concert, an individual appropriates the entire benefit from listening to the

The Economics of Music Streaming

The Economics of Music Streaming

1. Broadcasting business model: ad-supported and/or public fees

2. Record business model: privatization of consumption

3. Subscription-based music streaming: club/toll good

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

EUR 5.24 are channelled EUR 1.00 (10%) are channelled

EUR 0.68 (6.8%) are

The Economics of Music Streaming

Answer: not really

The Economics of Music Streaming

The streaming services?

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

The streaming services?

The Economics of Music Streaming

The recording companies?

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

Annual revenue distributions increased 52% to $353m.

The Economics of Music Streaming

The recording companies?

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

The Economics of Music Streaming

Prof. Dr. Peter Tschmuck

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