How the Music Industry Is Changing Its Tune

2 trends in the music industry include:

1. New opportunities for monetization.

Tech advancements and the digitization of industries will further increase the pervasiveness of music and create new monetization opportunities for music rights-holders. New licensing revenues from short-form videos, connected fitness, gaming and podcasts grew significantly in recent years, now contributing an estimated 6% of global recorded music revenues in 2022 (from 5% in 2021).   

There is more music than ever now and more ways to consume it, yet the monetization of music content has significantly lagged consumption. New monetization efforts can happen via:

Price increases: Over the last 12 months, standard subscription plans increased their prices for the first time in over a decade.

Better market segmentation: The current streaming model charges users the same flat monthly fee regardless of their level of engagement with the platform and its artists. Goldman Sachs Research analysts believe there is an opportunity for the industry to improve monetization by segmenting its user base.

Superfans: Goldman Sachs Research estimates 20% of paid streaming subscribers can be defined as superfans who spend double on music what the average individual does. As such, the superfan addressable market opportunity could be worth up to 26% upside to their current 2024 paid streaming revenue estimates.

2. Desire for an updated streaming payment model.

Updating the streaming payment model will help address fraud and realign payouts with the value created by an artist or a song for the platforms.

Pro rata is problematic. Currently, labels are paid on the ‘pro rata’ model, based on the share of overall streams by all users for its artists, with one stream representing any song played for 30 seconds or more. However, this model is problematic, given the ever-increasing number of songs uploaded on streaming platforms, the rise of fraudulent/artificial streams and propensity of algorithms to push lower royalty content.

All streams should not be treated equally. The current economic model counts each stream equally in its market share calculations. For example, a 30-second song by an independent artist, a full three-minute song by a popular artist or five minutes of a rain sound are all treated equally. 

We need more collaboration to purge fake streams. The current economic model that incentivizes artists on the highest number of streams played has led to a well-documented increase in streaming fraud and manipulation. For example, there are many options available online to purchase ‘fake’ streams. As a result, the analysts take a view that a low-single-digit percentage of the royalty pool is lost to streaming fraud every year. They believe the technology required to detect artificial streaming broadly exists across the industry, and that digital service providers (DSPs) and labels will work more actively together to identify and remove bad agents.

Algorithms push less expensive content. DSPs have developed sophisticated algorithms that generate song/playlist recommendations to users. Because a passive stream pushed through by algorithms and an active stream that a user curated are paid the same way, Goldman Sachs Research analysts believe there is a propensity for algorithms to push lower royalty content to users (and reduce majors’ market share).

There are alternative options to pro rata:

• The User-Centric Model distributes the payout from each user’s subscription directly based on the user’s listening. For example, if User A spent 90% of the time listening to Artist X and 10% to Artist Y in a month, then 90% of the User A’s monthly subscription value would go to Artist X and 10% to Artist Y, whereas the ‘pro rata’ model calculates market share after pooling the overall number of streams from all users on the platform.

• The Artist-Centric Model is a more flexible system that seeks to distribute payouts based on the value an artist creates and provides for a platform. As such, the model may differ between platforms, depending on what they consider as ‘value.’