Facing the Music

Richard Kramer:  Welcome to Bubble Trouble, conversations between the economist and author, Will Page, and me, independent analyst, Richard Kramer, where we lay out some inconvenient truths about how financial markets really work. Today, facing the music, the UK Parliament has dug deep into the economics of music streaming, licensing, and what artists get paid. We'll look at what they discovered and the knock-on effect of all of this. More in a moment.

Welcome back to Bubble Trouble. I'm Richard Kramer, and I'm here with Will Page. Hi, Will.

Will Page:  Great to be here, Rich.

Richard Kramer:  Today, we are gonna have an episode talking about facing the music. And strangely enough, the august body of the UK Parliament-

Will Page:  [laughs]

Richard Kramer:  Has felt the need to dig deep and look into the economics of music streaming. Did they learn anything, Will? What do you think?

Will Page:  Uh, u- u- well, we've just come off the back of a wonderful Italy victory in the European Championships. And if I use a football analogy, the referee I think has pulled out a yellow card, maybe even a red card, but a pretty monumental day for the music industry. But also, a microcosm for the rest of media. Regulation is coming in many forms and this is gonna be a good example to work through.

Richard Kramer:  Okay. Well, you know, it is interesting that the UK Parliament has dug this deeply into a topic like the obscure world of music economics, which I know you're the expert on. And they've heard a ton of terrific artists, household names, and a lot of boring music execs testify, and they really seemed to have heard the call of thousands of starving musicians who are wondering why, when they get millions of, of listens or streams on one of the pl- major platforms, they get a check in the mail that's, that doesn't even cover a cup of coffee and a nice lunch.

So, there's a knock-on effect from this, for loads of other sectors. But what I really wanna dig into today with you, Will, is what is this all about? Who are the villains of the peace? How do we get to where we are today with this report? And who's who is, in terms of the cast of characters?

Will Page:  It is a pretty monumental day for music and for media. Um, we're all getting used to the world of streaming, be it music, be it film, be it video, be it podcasts. You know, removing friction and paying a recurring fixed fee for content is gonna raise the economic questions. It is a fixed pot of cash you have to allocate.

And I guess the, what's driving this one here is, when that cash is allocated, does the artist see enough of it? I think that's behind this one. And essentially, I think the government got tired after a decade of hearing about [laughs] labels making all this money, and artists complaining that they s- they saw none of it. And they asked two questions, is this fair? And if it's not, do I need to intervene?

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  And that's driving this inquiry. You know, it's a question of, is the model fair? And if it's not, do I need to do something to make it fairer.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  And again, it's a microcosm for every other country's music business, but also media worldwide. This type of government intervention, this type of government inquiries... This is contagion. It's a start.

Richard Kramer:  Now, the artist's lobby, they seem to have been arguing for, and seemed to have won the argument in this document for something called equitable remuneration.

Will Page:  [laughs]

Richard Kramer:  Now, we're obviously not gonna fall into that kinda jargon, but isn't this just a case that all those many, many millions of artists on these platforms, all wanna get paid more. And look at the platforms themselves and the record labels, and say, "You guys seem to be doing fine, but we can't even make ends meet."

Will Page:  Right. And you know, we've talked about this when we touch on hyper-competition. The music industry's making more money, but there are way more mouths to feed. And some basic arithmetic tells you that something's got to give there, so I'll keep this so simple for our listeners. Today, the current model, when a streaming service pays a record label a dollar, the artist can expect to see $0.20. And if they owe that label a pile of cash, albeit through an advance, they're gonna have to use that $0.20 to pay back the loan.

Richard Kramer:  This is the classic pimp/prostitute business model, where-

Will Page:  [laughs]

Richard Kramer:  The, uh, where the, where the young artist is seduced by the record label, and to sign the contract-

Will Page:  Mm-hmm [affirmative].

Richard Kramer:  So they'll make them a star.

Will Page:  Mm-hmm [affirmative].

Richard Kramer:  But they don't actually look at the fine print for how much the lawyers, and accountants, and all the other services that the label might provide are charged. And what that week in the recording studio that they needed to finalize their first album is gonna cost them.

Will Page:  Yeah.

Richard Kramer:  So presumably, by the time they finish that process, go to market, and get heavily promoted by the label, they're actually in debt.

Will Page:  They're in debt big time. I mean, to u- use that 20% royalty model... If I was to invest 100,000 in Richard Kramer, then your album has to make me half a million before you've paid back your loan.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  So you can see the balance. And let's remind ourselves that it's an upfront investment with risk entailed.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  But here's what the protagonists of this inquiry have been arguing for, this equitable remuneration, or we just call it ER. So, under ER what happens is, when the labels got a dollar from the streaming service, they don't see that dollar anymore. They only see $0.50 because they other $0.50, the equitable half, the other $0.50, goes straight to the artist. Regardless of how much they owe their record label, they see that $0.50 from source. They are remunerated with $0.50, equitable remuneration.

Richard Kramer:  How does that split between the publisher, the person who wrote the song and owns the rights to the song, and the artist itself? And also, what's left for those streaming services that are aggregating those millions and millions of songs? But I, hey, I may only listen to one artist.

Will Page:  Right. So the publisher and the songwriter have kind of been left out of this one because they asked to. And we just do some simple math... If I have 100 in revenue, my cost of goods, the cost of the copyright for the streaming service is 70... 55 to the label and 15 to the publisher. This is a bun fight between the label and the artist. It's isolated to, how do we cut up that 55% of gross revenue?

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  How do we take that and split it between the two?

Richard Kramer:  And you're saying that the platforms won't lose out at all because what they're getting is just paying their bills... And who loses out is, the labels will get less money and more money will go straight to the artists.

Will Page:  Well, it depends on how this is gonna play out because there is one scenario in equitable remuneration, ER for short, where it could hurt the streaming services and not affect the labels. And that unfortunately for the streaming services, is the most likely of the scenarios. It's called Spanish top-up ER. Where essentially, I pay the record label 55% of all my revenues. I play the publisher 15%. Then I have to pay another top-up of a further 5%, which would go to the artist's group that collects that money and distributes it straight to them. So it's a top-up on the cost of goods, and not a reallocation of the existing cost of goods. And that scenario, because it actually functions in Spain.

So at the end of all of this, what you might find is, artists get a bit more money, labels are no worse off, and streaming services lose a bit more money. So it's, there's that great gangster or rap song called Who's Gonna Take The Weight? It's like, who's gonna take the weight in this tripartite relationship?

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  Is it gonna be the streaming services? The Spotifys? Is it gonna be [Nile Rodgers 00:07:35] and the artists? Or is it gonna be Universal and the record labels?

Richard Kramer:  Sounds like you're coming down on u- on the side that the record labels are inevitably going to be losers from this. But without getting into the vagaries of the Spanish top-up or any of the different approaches... One thing I was really fascinated by in that whole run-up was the argument made by the, the former lead singer of Abba, who said hang on a second... You know, when I think about all this money paid by all the platforms and distributed to the labels and the artists, why does that 10, of whatever unit of currency, not go simply to the artist I listen to? As opposed to this long tail of artists that are flooding the platform, and oftentimes stuffed by algorithm into playlists.

Will Page:  Right. So essentially what Björn from Abba is saying is, why can't my money go to just, and I wanna stress the word just, my music? Can you ring-fence it, please? We call that the user-centric model, and that's been another big argument in this inquiry. Can we change the allocation mechanism-

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  To make it fairer for the consumer and the creator? So it's, it's almost like a fan club. You enter a streaming platform, not to explore the 16 million songs that are there, but just to allocate your cash to just your music that you listen to.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  There's a lot of weight behind that argument.

Richard Kramer:  Mm-hmm [affirmative]. Let me go back to something that you mentioned before, and that is that someone's gotta make a call here. Someone has to decide. And effectively now, you're throwing this over to the referee, to the con- Competition and Markets Authority in the UK to say, is this market functioning properly? Or do we need some new laws to govern it?

Will Page:  So I think the real devil in the detail for this report, this 100-page report, which by the way is beautifully drafted. It's all killer no filler. I mean, parliamentary drafting in the UK is phenomenal, better than any other country. Gives you faith in democracy.

But in the drafting here, they don't want you to refer the three major record labels to the Competition and Markets Authority, the CMA. But they demand that government gives the CMA the additional resources to investigate. That's the key bit. So on this occasion you said, the majors need to be investigated and the CMA, uh, referee, as you rightly call it, needs the additional resources to do this investigation correctly.

Richard Kramer:  And the fascinating thing about this whole topic is it's something that absolutely everyone can relate to. Streaming penetration is pretty nigh on 100% of, of most developed markets. Everybody knows about the services, everybody has them available, and everybody interacts with 'em. And they all go back to find their favorite music. Typically what they listened to in high school has gotta be there because that's what really resonates, along with the new stuff, and anything else thrown up by recommendation engines.

So with that, let's close out Part One of, uh, Bubble Trouble, Facing the Music. We'll be back to s- see if Will has some ideas to how we sort out the music industry. Back in a moment. [silence]

We're back for Part Two of Bubble Trouble, looking at the music industry facing the music after a major UK Parliamentary inquiry over many months into streaming, artist remuneration, and the role of the record labels. Now Will, I think as an expert in this field, you know there's going to be a lot of intended and unintended consequences that fall out of this set of documents and decisions. Can you talk us through what's on the table here?

You mentioned before about squeezing the sponge and which way it could fall. And obviously, all those starving artists are hoping they get a few more drops of that money that f- sloshes through the system. But clearly, the streaming platforms and the labels have their business models to defend. How do you unbundle this mess and make sure that more of the money that consumers pay to listen to music actually flows straight through to the artists?

Will Page:  Uh, I think the mess has one permanent stain here, which is that the labels do not come out of all of this looking good. And that won't change for many months to come, while we have a regulatory body like the CMA overlooking their business. So their image has been tarnished, but you do end up scratching your head, Richard, and asking yourself who is gonna take on the investment risk?

I think what we've got is two counter-veiling forces here. On one side, the heart of the inquiry, the heart of the past nine months of fighting and arguing in public and debating inside Parliament, is a trickle-down dilemma. All this money is leaving the streaming services. It's going to an intermediary, be it a record label, an aggregator, a middle man if you like, and not enough of that money is making its way through to the artist. That's trickle-down economics, so we wanna solve that.

And you gotta remember that if an, an artist today goes to DistroKid, the deal is you pay $20 a year, you own 100% of your copyright, and you see 100% of your money. It's not tricky to solve that. You can solve it that way, and lots of people are solving it that way. But the other side is when you have so much choice, such a long, skinny tail, so much noise in a market, you need additional investment to stand above the noise. And this is the catch 22, which is you can go with a loan if you want, but how are you gonna stand above the noise when we're looking at 75,000 songs being ingested every single day on the streaming services? Something that you've raised a couple of times on our podcast, Richard, is hyper-competition.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  I s- think the unintended consequence to this whole inquiry is it puts hyper-competition back in the spotlight.

Richard Kramer:  But again, you still have the question of taking a pie and re-carving it. And can, is the CMA or the UK government the best arbiter of that process? And indeed, how are the labels going to react if they're the villains of the peace? They're the ones who stand to lose. You have the largest of them planning to do an IPO in the autumn... How are they going to contend with this major risk factor hanging over their heads?

Will Page:  Well, uh, I guess the answer depends on where you stand in this tripartite relationship of labels, streaming services, and artists. But remember who brought the complaint. Who was it who complained to the referee? It was the artist's lobby.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  So clearly, they think that they can't do it through the market mechanism, so you'd need the referee to come in, pull out their yellow card, and take some action.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  So I think they'll be fairly happy with it. But as you rightly point out, we have Warner Music, you know, which has intentions for going to market. We have Universal with an IPO lined up in late-September, early-October. We have Sony which is headquartered in Japan, has many other interests that it can invest in other than music. So there are, in terms of thinking like a CFO and what's the return on your investment-side calculations, this does create risk for the record labels for future investments.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  So this may solve the problem in period one, but stoke up an even bigger problem of how do you invest in this business in period two when there's so much regulatory risk? So much alterations to the value chain, but that's life, right? This is disruption. It's disruption happening through the regulator, as opposed to through technology on this occasion.

Richard Kramer:  And you can imagine that every single one of those 600 plus UK Parliamentarians is much more interested in meeting there boyhood or girlhood idol, singer-

Will Page:  [laughs]

Richard Kramer:  The, the Adeles, or the Paul McCartneys, or the Coldplays, or whomever, and, and appearing with them on a stage, then they care about those record bosses.

Will Page:  You're right. And I mean, w- I, you watched the hearings, you saw a lot of that. Like when Nile Rodgers was being questioned, the first question was what was your favorite, you know, record that you ever recorded? And [inaudible 00:15:28] was on there. The first question from the parliamentarian was, here's my favorite [Gomez 00:15:32] album that I got when I was at university. So you know, music is a sexy subject.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  It's a small part of the economy. I think that's one of the reasons why we obsess about our artists. It's fandom, if you like, and it, it means more than it's worth. And that's art. That's art for you, really.

Richard Kramer:  Yeah.

Will Page:  So it's just been fascinating, watching the parliamentarians kind of drop their guard in awe of their favorite musicians, but raise their guard when it came to bashing the labels invested in them.

Richard Kramer:  Yeah, and it's absolutely fascinating to look at, from a global perspective, how tiny the recorded music industry actually is in streaming, physical, et cetera. Compared to video games, video content... This is a tiny industry, but it's one that everybody seems to have a passionate opinion about.

Will Page:  Right. I would calculate that the gaming industry is doing more business in one month then the global music streaming industry is doing in one calendar year.

Richard Kramer:  Mm-hmm [affirmative]. Exactly.

Will Page:  That the gap is that big.

Richard Kramer:  Yep.

Will Page:  And it's getting bigger.

Richard Kramer:  So-

Will Page:  It's getting bigger. I mean, streaming is growing, but gaming is just going through the roof right now. So we need context on the size of this pie. $20 billion is not a lot of money, especially the companies that you do analysis of. It is no great shakes.

Richard Kramer:  So, Will, let's, let's round this up by talking through a couple of the smoke signals. You're sitting here from the outside looking at this parliamentary inquiry into the music industry-

Will Page:  [laughs]

Richard Kramer:  And the economics. And trying to figure out what are the implications? How do I think about that? Is this a bubble for one or another of the businesses because there's gonna be a change? What are the couple things you're gonna look for that really tip you off? Saying, okay, th- a bubble might be bursting here, or something material is gonna change.

Will Page:  Well, u- when I come to smoke signals, I often think about a conversation I had with Peter [inaudible 00:17:16], which was like the realization that the internet needs to regulated, in some form, some way. People are coming to terms with the idea that this thing called the internet needs some sort of referee. So you're seeing that percolate it's way through the world of Facebook and social media.

I think now what you're beginning to see is that same acceptance of regulation percolate its way through music and media. So the two smoke signals I would call out for is, one, contagion, and two, incompetence.

Richard Kramer:  [laughs]

Will Page:  Let me break that down for you.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  Contagion, so I think that now the UK's wrapped up this inquiry. It's pulled out this yellow card. It's sent an industry off to the regulator. It's threatening to alter a value chain radically... Now that's done and dusted, watch every other country follow what the UK has done. I guarantee you. I bet my bottom dollar that French, the Germans, the Canadians, especially the Canadians, the Americans too, will be queuing up to have their own parliamentary inquiry into music streaming as well. So this is the end of the beginning, not the beginning of the end.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  That I, I-

Richard Kramer:  Are you certain about that? Because the US seems like everything is so locked up in, in a legal system that has 10 times the per capita of lawyers that you've got in the UK.

Will Page:  [laughs]

Richard Kramer:  And are they-

Will Page:  There's more students-

Richard Kramer:  Haven't they-

Will Page:  Studying law than there are lawyers practicing law in America. I hate that-

Richard Kramer:  Ha-

Will Page:  Statistic.

Richard Kramer:  Have they simply l- litigated this into obscurity? Such that they'll never have this kind of straight, down the line, w- things need to change inquiry that has an outcome that, that divides up the pie different from thereafter.

Will Page:  Not at all. I think e- America will be number one on my list to follow through, and you can actually see it happening. E- we talked in the first half, Richard, about treating streaming like it's radio, so artists get paid from streaming like they get paid from radio. Like BBC Radio 2 pays artists and record labels. You know there's four countries in the world, four countries, where radio stations don't pay record labels? Do you know which ones they are?

Richard Kramer:  Tell me, Will.

Will Page:  The Democratic Republic of Congo, Zimbabwe, North Korea, and the United States of America.

Richard Kramer:  [laughs]

Will Page:  And that's an example... [laughs] You're in good company, Richard.

Richard Kramer:  Yeah.

Will Page:  You should be proud. And that's an example of just an area of regulation in America where the record labels and the music industry's been saying, "For Christ's sake..." We have radio worth 17 billion in America, s- you know, FM and AM radio is worth as much as the global music industry is. N- so why can't they pay a share of that to the record labels and the artists who recorded those songs that they keep on playing? Like Journey and Foreigner, who get played on American radio all the friggin' time.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  And the argument there is quite interesting from a political stance because the record labels lobby really hard. Then, the radio stations turn around to the congressmen and women and say, "Well, who gets you reelected?" And guess what? That bill just gets buried away again.

So America is going through that argument again. And I think what's happened in the UK will be a catalyst for accentuating the debate that's happening in America right now around music industry.

Richard Kramer:  So in the same way as people are constantly complaining about big tech and, and big everything in America, people will be complaining about big radio, which is a very concentrated space.

Will Page:  Yeah.

Richard Kramer:  And the big record labels, where there are literally three global record labels that control 80% of the recorded music in the world.

Will Page:  Yeah. And the only person who is really brave enough to have a shot at getting radio to pay for music was Frank Sinatra, but that might have been because he had the Mafia backing him up. [laughs]

Richard Kramer:  So the two smoke signals, the one big one you said and we talked about it, is contagion. You think that this UK inquiry is gonna be something that gets picked up, and goes 'round the world, and clearly would impact the valuations of the listed music labels and the streaming services because they would be seen as having to pay out more of the spoils.

Will Page:  Yeah, and let's face it. Which politician around the world wouldn't want to grill Nile Rodgers inside their parliamentary building? Come on.

Richard Kramer:  Yep.

Will Page:  [laughs]

Richard Kramer:  Yep. Or any of the, name your favorite artist, and, uh... I'm certain there's a, a lot of very attractive ones you'd wanna bring in for hearings. And w-

Will Page:  [laughs]

Richard Kramer:  Your second smoke signal, again? You mentioned incompetence, but, uh, you haven't proved it to me yet.

Will Page:  All right. So you've taught me a lot about how the government or how regulation fails to understand ad tech, and that's worrying because you can see all sorts of policies being drafted which may not do anything to solve the problem. In fact, they may make the problem worse.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  That's the risk when you have incompetent, uh, policymakers trying to under-turn the business that quite frankly they have no idea th- how it truly functions. So credit to you for what you've done in ad tech, if I can try and build on that here with what could happen here is you've already seen the French government demand quotes on French language content being consumed on Netflix. I mean, come on, it's on-demand content. You know, the consumer's in control.

And it's very interesting when you think about how on-demand content, be it Spotify, be it Netflix, just empower the consumer... Yet the government feels compelled to regulate the platform. I think that's a worrying area of incompetence. So I can see a lot of rather bizarre policies which just don't function, don't solve a problem, or still could make the problem worse-

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  Happening through incompetence.

Richard Kramer:  So does that manifest itself by saying you have a quota on the number of European artists on European streaming platforms? Or how would that incompetence come to, to quelch this reform. Which, to me, seems a fairly clear-cut case of let's redistribute some of the money that's going to one group of companies, very concentrated group of companies, and send it over to a long list of... I mean, none of these artists are gonna be happy that they're not instant millionaires. But send it in a more transparent way to a long list of potentially worth recipients.

Will Page:  Well, if you were to change the redistribution... Let's say you were to say, instead of the record label seeing all of the cash at source, now they only see half.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  Well, that's gonna hurt all record labels large and small.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  But back to economies of scale, something you've talked about many times in our podcasts, it seemed to hurt the smaller ones more than the bigger ones. So as you intervene in the market, what you actually do, is you concentrate wealth amongst the larger even more so because the smaller companies are unable to cope with this adjustment to the market conditions.

The key point there is, in terms of who's getting played... Just an acceptance of the long tail is real, which is not all artists have talent. In fact, very few have talent, and very few of them deserve to rise to the top. Only a few people are worth listening to, and only a few of them will actually make it, and that's just the nature of the beast.

Now I would be worried about people assuming it's of minimum income for artists type model should exist, when truth is, not all artists are good. And very few of them are really good. And very few of them are exceptionally good and merit our attention. You know, that's how talent works.

Richard Kramer:  Mm-hmm [affirmative].

Will Page:  So I think there's a whole can of worms I could open up here in terms of incompetence policies. Hopefully we don't get there, but with contagion, my first smoke signal... If it doesn't happen here, it could happen elsewhere.

Richard Kramer:  All right. It's been a fascinating subject, and it's one I think every one of our listeners will have an opinion on or a personal view about. And I think this is something that'll spin on, and on, and on because I don't imagine that the record labels will go softly into that goodnight and gently surrender any incredible, profitable business models that they've got.

With that, I'd like to thank Will Page, rock-onomist and my co-host, and bring to a close another episode of Bubble Trouble. Thanks for listening. [silence]

If you're new to Bubble Trouble, we'd encourage you to follow the podcast wherever you listen. Bubble Trouble is produced by Eric Nuzum and Jesse Baker at Magnificent Noise. You can learn more at bubbletroublepodcast.com. See you next time. [silence]