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Is streaming bad for artists? Yes and no. The future of music, explained.

Taylor Swift hates streaming. Here's why she's wrong.
Taylor Swift hates streaming. Here's why she's wrong.
Andreas Rentz/Getty

Just a few days after her new album dropped, Taylor Swift pulled every song she had ever performed from online streaming service Spotify. Soon after, her music disappeared from Rdio. In an exclusive interview with Yahoo!, Swift backed up her decision, using an argument you've likely heard many times before: streaming is bad for artists.

The argument, at its core, goes something like this. A single album is worth approximately $12, but a Spotify user can listen to the whole album for free, with only minimal ad interruption. (Subscribers are spared ads.)

She's not alone on this soapbox. Avicii's "Wake Me Up!" was one of the most streamed songs on Spotify, and the 13th most played song on Pandora since 2013. Yet, Aloe Blacc, who co-wrote and sang "Wake Me Up," made less than $4,000 domestically for a hit song. That's not, Blacc argued for Wired, a liveable wage. He's one of thousands of artists and songwriters whose songs, despite high play counts, aren't making them enough money to live.

Streaming certainly doesn't seem fair, but that's because it's only a tiny sliver of the complicated economics of the music industry. Swift and other artists frame streaming as a horrible thing for musicians and artists, but by doing so, they frame the argument in a way that ignores the enormous monetary potential streaming holds for artists — and the role labels play in the whole mess.

Here's everything you need to know to understand streaming:

1) Why do artists think streaming is bad for them?

To start, not all artists think streaming is bad for them. Like any massive group of people, artists have varying opinions on how good or bad streaming is. But the first thing anti-streaming artists will tell you is that album sales are down a whopping 14 percent this year. That's bad.

Also, let's not discount the role fame plays here. The most famous artists (see: Taylor Swift) have the biggest megaphones and, thus, can explain more readily why they believe streaming is bad for artists.

Here's what Swift said in her op-ed about streaming in the Wall Street Journal:

"It's my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album's price point is. I hope they don't underestimate themselves or undervalue their art."

Got that? It's about money, but it's also about art. Much of the argument against streaming hangs in that delicate balance. Music is an art form, and therefore, any song Taylor Swift creates is her song and can't be duplicated. But music is also a business, and artists want to be paid for those unique songs.

Swift's label, Big Machine, handles that business. "The facts show that the music industry was much better off before Spotify hit these shores," Scott Borchetta, CEO of Big Machine, told Time Magazine. He went on to claim that Spotify only paid Swift $500,000 dollars off of her domestic plays last year. That's slightly less than 50,000 albums sold, when Swift regularly sells millions.

2) How did Spotify respond to these claims?

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A Spotify press event (Spencer Platt/Getty)

Spotify opposes Swift's claim that she was paid only $500,000, saying it paid $2 million last year for Swift's songs and that it expects to pay $6 million this year.

Why the disparity? Both sides were cherry-picking numbers that fit their arguments. For Spotify, that was the projected payout for all Swift streams globally over the calendar year ($6 million). For Camp Swift, that number was streams in the last six months, domestically.

But this is a symptom of a larger debate about whether streaming services are cannibalizing album sales and digital downloads, and whether artists will be able to make a livable wage from their work in the future.

3) What is streaming?

In layman's terms, "streaming" often simply means listening to music on a computer, without a physical copy. But that's not how legal or revenue systems define streaming. iTunes is a very different entity from Spotify, and, thus, plays by different rules. And Pandora is very different from both.

Legally, streaming is divided into three broad categories:

  1. Online music stores: This form of streaming encompasses places like iTunes, which sell and distribute music, and work directly with record labels to determine price-points. They aren't a big part of the debate around "streaming" today, but it's important to remember that when iTunes debuted in 2002, everyone was pretty sure it was going to kill the music industry, too. All of these services have seen a drop in revenue in the past few years, and are looking to get into other forms of streaming (see: Google Play).
  2. Non-interactive services: This form of streaming functions similarly to the radio. A user tells the service what they like (country music or Taylor Swift), and an algorithm creates a playlist of songs that user will like. See: Pandora and IheartRadio.
  3. Interactive: Interactive services, like Spotify and Rdio, let users pick the songs they want to listen to in whatever order they like. This is the group that Swift's label is pushing against, perhaps because they are the easiest target. It's harder to argue against iTunes, which has a direct, per-song payout, or Pandora, which is too much like traditional radio.

The elephant in the room during any conversation about streaming is piracy. Music executives in every camp know that if they make consumers unhappy enough, they could just start stealing music quite easily.

4) Does it matter what kind of streaming we are talking about?

Different forms of streaming pay artists different amounts of money. How a company is classified legally determines how much money it has to pay artists.

Non-interactive services have a simple task here, because they are covered legally by Section 114 of the Copyright Act. What that means, in essence, is that for Pandora to play any song that has ever been written, it only has to do one major negotiation with the groups that own the rights to that music. The reason why has to do with the amount of choice the listener has. If you start a Taylor Swift station on Pandora, you will hear some Taylor Swift songs, but you can't pick which ones.

A company like Spotify has no sweeping legal protections on what it pays per song, because you can always choose what you're going to listen to next. These companies have to negotiate separately with every single label.

For Spotify, many of those negotiations didn't go ideally, and the company had to give up shares of itself to convince the three major labels to participate. Those labels are the reason that it took Spotify so long to migrate from Europe to the United States. It's estimated that the major US labels own between half and two-thirds of all music.

Spotify is also often forced to re-negotiate with any label that doesn't like how much it is getting paid, which is how Taylor Swift pulled her music. Most likely, she (or her label) wanted more money, Spotify didn't agree, and negotiations fell through.

5) Okay, so how does the money flow work?

No one single person owns a song, and no one single person is paid for a song. For every song on the market, there are a minimum of two parties who must be paid.

"Every song has two copyrights attached to it," Greg Barnes, a lawyer and the general counsel for the Digital Music Association, told me. This means that "every service makes two payments — one for composition, and one for song recording."

Here's how those sides stack up:

  • Sound recording: This is the license needed for the actual song played. This license is usually between the artist, the record label that represents them, and the company trying to play the song.
  • Musical composition: This is the license that covers everything else, including the people who wrote the song, recorded the song, and published the song. This license gets paid no matter who sings the song. So if an artist covers a song, the people who made that song possible still get paid.

For non-interactive services, payment is simple: they pay the licensing fee for the sound recording license, and they negotiate a deal with the three major Performance Rights Organizations (PROs) for the right to play pretty much every song ever written.

Interactive services have a harder time of it:

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How the money flows (data by Future of Music. Graphic by Tyson Whiting)

If that seems complicated, then you're on the right track. Because it is complicated, often incredibly so.

The money, as you can see in these charts, has to jump through several middlemen before reaching the artist. Big Machine is an indie label, so Swift would be in the third scenario, but she's also a songwriter, so her money comes from both sound recording and composition. Because her family owns her label, she also likely gets a hefty chunk of that money.

"If you’re a signed artist, you are paid whatever is in your recording contract," Casey Rae, Vice President for Policy & Education at the Future of Music Coalition, told me. "And there's not a lot of transparency there. When young artists sign with a label, they don't always realize how much of their money they are signing away."

Even an artist with a good record label and a good deal is only one part of a giant group of people who work together to get a song to listeners. And all of those people have to get paid.

6) Wait. So if you're an artist, Spotify is potentially a better deal than Pandora?

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Taylor Swift at the American Country Music Awards (Getty)

Spotify is absolutely a better deal for a major, million-sales recording artist like Taylor Swift. Listeners are more likely to click on a Swift track than one by an unknown artist, thus allowing Swift to argue her music is more valuable to the service and should be worth more. On Pandora, even though Taylor Swift gets paid for every single play of every single one of her songs, it might take a user a few hours to get through one of her albums in its entirety, because the system functions like radio.

Here is where it's important to remember that Taylor Swift is not every artist. In fact, Taylor Swift is the 1 percent of artists, and what is good for her is often not good for everyone else. Most artists don't have lucrative deals with their labels. Hell, most artists can barely negotiate with their labels because of deals made when they were up-and-coming and willing to sign anything to get in the door.

Interactive and non-interactive services function, respectively, in the most basic sense, like capitalism and socialism. Spotify, like capitalism, allows goods worth a greater commodity to be sold at a greater price to the benefit of a few. Pandora, however, pays all artists at the same rate, making it potentially a better deal for a new artist who just wants to find fans.

7) I'm tired. Can we take a break and listen to some music?

Sure.

Here is Celine Dion performing "My Heart Will Go On." Dion is a champion of music streaming.

8) What about songwriters and everyone else? Do they want more money too?

Yes, definitely.

Streaming (both interactive and non-interactive) is a much better deal for recording artists than radio airplay ever was. But it's less clear it's a better deal for songwriters. In fact, AM/FM radio still doesn't pay recording artists a dime for playing songs on air, but AM/FM radio does pay songwriters.

As Barnes told me, "The real issue here is that songwriters believe that they are not being fairly compensated by streaming services (both interactive or non-interactive) in comparison to the amount we pay for the sound recording."

According to Barnes, Pandora pays out almost half of its revenue to recording artists, but only 6 percent to songwriters. For songwriters, the amount of money that 6 percent boils down to simply isn't enough to live on.

Streaming is new, and many of the laws around it are subject to change in the next 18 months. Thus, for groups that feel they aren't making enough money, streaming is an easy target. Yes, streaming often doesn't pay even a mega-selling artist like Taylor Swift what she's worth. The problem is that songwriters, label executives, producers, and everybody else feel the same way.

"The government is what can help establish rules for the market about what the future of music can be, but that means they may need to redraw the lines," Rae told me. "Why doesn’t terrestrial radio pay artists? That’s insane. It’s un-American. It puts other services at a disadvantage. It distorts the marketplace right out of the gate. Why do these guys pay under different umbrellas? Those are the kinds of questions we need to answer at a governmental level to make this system work for everyone."

9) What benefits to streaming are there that there wouldn't be with major labels in charge?

The biggest benefit in the streaming system is for consumers. Never in history have they had so much access to so much music. Instead of having to buy everything, consumers have pretty much anything they can think of at their fingertips at any time — and all for minimal cost.

"There used to just be a handful of ways to get into the marketplace. Now there are infinite ways. The earlier system still had a lot of disadvantages like limited shelf space, and fewer chances for the non-mainstream artists to get heard," Rae told me. "By the 2000s, three white men in a room could set up the hits for the calendar year."

Now, that doesn't mean that anyone can become famous. "The idea that you can put something online and your fans will magically find you is 2002. ... A label can help you achieve things that you can’t achieve on your own," Rae said. Artists no longer need labels to make their CDs (or records) and distribute them across the country, though many labels still do. But a good label can still help an artist immensely by planning tours, marketing music, running social media presences, and pairing them up with bigger bands on tour. Labels can also serve as a seasoned eye in an industry where loopholes are everywhere.

But what streaming can help with is finding fans. Even in the iTunes store, there is only so much prominent shelf space. Listeners generally buy the songs that they can find. The great thing about streaming is that consumers can find more music, support more bands, and create more diversity in popular music.

Non-interactive streaming services like Pandora can especially help direct listeners towards artists they will love, but never would have heard on the radio. Pandora recently partnered with indie-band label Merlin Records, meaning a Taylor Swift-themed station will also pull up smaller, indie- country artists like Kasey Musgraves. That's great for Musgraves, and it's also great for listeners.

Pandora also recently announced that it would share its data with artists in order to help them plan better tours and find their fan bases. Over 80 percent of the artists played on Pandora receive no traditional radio play, so that kind of data can help launch their careers.

10) Is streaming bad for artists? Or good for them?

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Screenshot from Taylor Swift's "Blank Space" (Vevo)

No. Streaming is not bad for artists. But it's also far from perfect.

When an artist compares her revenue from album sales to her revenue from streaming, streaming will end up paying out less — and sometimes quite a bit less. But that doesn't mean that streaming is bad, or that the decreased revenues are the streaming service's fault. Artists might be failed by their label or their publishing company. Their contract might have signed away their copyright, thus ensuring they receive very little payment for streaming.

"The question for average artists is, do these streaming models add up to manageable revenue?" Rae told me. "It’s about being able to do regular things like pay your electric bill." For some of them, the answer to that question is yes. But for many of them, the system as a whole still needs to change to make it possible to earn one's livelihood as a musician.

The music industry has changed drastically since iTunes debuted in 2002. Major labels are no longer the sole distributors of Top 40 music, and because artists rely less on labels to produce physical copies of their work, their importance to artists on a personal level is fading fast. For artists, the major music labels have quickly become superfluous to their work.

But they certainly are not superfluous to the way the industry functions. The three major labels control most of the industry. They own the publishing companies and PROs. They dominate the conversation when copyright battles around streaming happen in court. They often have more sway in those conversations than they maybe should.

"What we could use is a lot of disruption," Emily White, the founder of Whitesmith Entertainment, a talent management company that works with many young artists, told me. "What I would like to see is some equality. Here is the pot of money. We are going to divide it out. But no one has quite figured out how to do that yet."

The kind of disruption White is talking about — with money being redistributed and every form of music service being reevaluated — could take years and would require at least some governmental intervention. That may begin late this winter, when the Department of Justice reviews Pandora's license with the PROs.

But the big question remains: how do you keep consumers using digital services instead of pirating music, while making sure that artists (and songwriters and producers and labels) receive adequate payment?

No one has a firm answer to this question. But the clock is ticking. Streaming isn't going anywhere. How it will (or won't) become a viable revenue source for artists may determine the future of the industry.

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