This article first appeared in The Edge Malaysia Weekly on October 1, 2018 - October 7, 2018

I recently attended the gala North American premiere of A Star is Born, starring Bradley Cooper and Lady Gaga. It was the first time I had attended such a star-studded event. After the screening of the movie, which will open in theatres around the world on Oct 4, Cooper, who also directed and produced it, came on stage with the other cast members and crew to talk about how he set about remaking the story of a seasoned musician who discovers — and falls in love with — a struggling artist, played by Lady Gaga. As the young singer’s career takes off, the veteran musician fights his own demons. In real life, A Star is Born marks the film debut of Lady Gaga, who is an accomplished musician, and a singing debut for Cooper, who is an award-winning actor.

Cooper may be one of the best paid actors in Hollywood these days, but Lady Gaga makes far more money as a singer. Her net worth is around US$300 million, while Cooper is worth a third of that. That is just the way entertainment economics works: Musicians get a nice slice of the total sales of their music, while actors get just a lump sum for their movie role. Over the long run, successful musicians end up earning far more money than the best paid actors because they have a recurring revenue stream. Indeed, the ongoing transformation of the global music industry is likely to hand over even more money and power to musicians than Hollywood stars.

Like other key segments of the media and entertainment industry, including print, TV and movies, the music industry has been dramatically transformed by the internet, which has helped changed the way music is distributed and the way we listen to it. Yet, unlike the print media, the music industry has painstakingly crawled out of the hole by reinventing itself, embracing a bold new business model, and could soon become far more lucrative for both performers and other stakeholders than it ever was.

Two great changes

The music industry is currently in the midst of two profound changes, notes a recent study by Citigroup. For one thing, aficionados are increasingly opting to rent — rather than buy — music. Moreover, it argues that “the demise of physical music has prompted singers and bands to tour more often, driving significant growth in concerts and festivals”, which bring musicians far more money than the release of albums or singles. Concerts also help connect musicians, from hip-hop to rock and classical, with the end consumer or their fan base, which in turn further helps drive sales of their music.

Global music revenues were up 8.1% last year, according to the International Federation of the Phonographic Industry’s Global Music Report 2018, and are forecast to grow nearly 10% this year — the fastest in more than two decades. The robust growth in music revenues comes in the wake of 15 years of significant decline as music sharing and downloading spread over the internet.

Left for dead in the aftermath of illegal file sharing or downloads from Napster and LimeWire and the subsequent arrival of paid downloading of Apple’s iTunes, the music industry has over the past few years embraced the subscription model. Spotify, Apple Music, Amazon Music and other paid music subscription services are now the principal drivers of revenue growth. Music streaming sales grew 41% last year, with digital music accounting for over 54% of total global revenues. Music download revenues, such as those from iTunes, dropped 20.5%, while revenues from physical music were down 5.4%.

MIDiA, a London-based consultancy that focuses on the intersection of media and technology, estimates there are now over 230 million users of paid music subscription accounts globally, up from 176 million as at end-2017. Total global music streaming subscriptions are forecast to top 280 million by December. The industry, whose main revenue stream from consumers used to be ownership of vinyl records, cassettes and CDs, now makes most of its money collecting subscription — anything from US$5 to US$10 a month — for access to whatever music you want to hear, whenever and wherever you want to hear. While revenues from music publishing and licensing as well as music ads (radio, YouTube and ads-based streaming services such as Pandora) have remained flat, consumer spending on music — including concert tickets and streaming services subscriptions — is the highest it has been in history.

The economics of the music industry are fairly simple. Top-selling singers such as Ed Sheeran, Drake or Taylor Swift and bands such as Imagine Dragons or Coldplay take just 12 US cents on every dollar of the total gross music industry revenues, slightly more than 10 US cents on the dollar a mass-market fiction writer like Stephen King might make on the sale of his novels. (The rest is commission paid to booksellers, distributors, cost of printing and the publisher’s cut.) Musicians  are getting a bigger slice of the pie. In the late 1990s, before the advent of Napster, musicians used to get just 7% of the total gross music industry revenues. As the balance tips towards more concerts, the slice that singers and bands get to keep is gradually growing. That is music to the ears of singers, songwriters, composers and bands.

The rise and rise of streaming

Initially, the internet was bad for music because consumers could freely download or share music files, depriving copyright holders of any revenue. The arrival of smartphones has clearly changed the dynamics. Powered by mobile internet, a smartphone doubles as a music player in our pockets. Music fans are all too happy to pay up to US$10 a month for a subscription of unlimited music streaming rather than pay thousands of dollars over a lifetime to own the music they want to listen to.

Three dominant players own the largest recording labels and music publishers — Sony Music Entertainment, French media conglomerate Vivendi’s Universal Music Group and Warner Music Group, now part of privately held Access Industries. (The rest are independent, or indie, labels.) The dominant players in the concerts and tours business are Live Nation Entertainment and AEG Presents. Another big music industry player is Amsterdam-based licensing agency Merlin Network, which represents about 20,000 independent labels around the world. That song you listened to on the radio was probably licensed to the broadcaster by Merlin.

Streaming is dominated by two giants  — Spotify, with nearly 83 million paid subscribers, or a 36% market share, and Apple Music, with 50 million paid subscribers, or a 22% market share. But Apple is growing faster and is now bigger in the US, the world’s largest music market. Still, Spotify has a formidable lead in Europe. Close on their heels are players such as Amazon Music, which has an 11% share of global streaming subscribers, and China’s soon-to-be-listed Tencent Music Entertainment, which has an 8% share. Google’s YouTube Music, once considered a niche player, has been growing its subscriber base aggressively.

On Sept 24, satellite radio firm Sirius XM Holdings announced that it was buying 85% of beleaguered music streaming firm Pandora Media that it did not already own for US$3.5 billion through a share swap. Pandora, regarded as the granddaddy of internet-based music, started out as an ad-based service. Its free service has 71 million monthly active listeners. In recent years, it added a premium paid service, but its hybrid model meant that it never really took off. Its six million paid subscribers could not match Spotify’s or Apple Music’s and Pandora’s stock fell 76% from its peak in 2004. The merger with Sirius, whose satellite radios are packaged with most cars sold in North America, will give Pandora a new lease of life.

China is the future

The future of global music depends on how music is distributed and consumed in China. Until recently, enthusiasts in China spent very little on music and piracy was rampant. Radio and ad-based free streaming services accounted for most of the music. Over the past three years, fee-based providers have emerged, the biggest of which is Tencent Music Entertainment, with 20 million paying subscribers. Tencent Music is expected to generate US$2.8 billion in revenues this year, or less than half of Spotify’s estimated 2018 sales of US$6 billion. Yet, while Spotify is still loss-making, Tencent Music had a net income of US$290 million last year, owing to cheap rights deals with music labels. Payments to record labels are the single biggest cost for streaming companies. Music giants Sony Music Entertainment, Universal Music Group and Warner Music Group have less leverage in China because consumers are not used to paying for music.

Investors are betting that Tencent Music will be able to convert more listeners of its free services into subscribers. It operates QQ Music, a streaming service, and karaoke and live-streaming music apps KuGou and Kuwo as well as karaoke app WeSing. The four services have 700 million monthly users. Tencent Holdings has a 7.5% stake in Spotify, which in turn has a 9% stake in Tencent Music, which is raising US$2 billion in an initial public offering in New York in October.

The internet has disrupted an array of industries in which middlemen traditionally took a big chunk of the profits. Musicians’ biggest grouse is that publishers, labels, distributors and royalty collection firms take too big a cut, leaving the real creators of value with just 12% of gross revenues. Spotify has recently begun signing on artists directly, rather than going through music labels. The bigger the streaming companies become, the less utility there is likely to be of music labels. The raison d’être of music labels was finding new talent and then making, marketing and distributing records or CDs for that talent. Apple Music and Spotify can do that, cut out the labels and just pay bands and singers more.

The music industry’s ongoing restructuring could evolve in several ways. For starters, the music business could see more vertical integration. Concert promoters could merge with an existing distribution platform such as a streaming company. There could be more horizontal integration with distribution firms consolidating, as witnessed by the recent merger between Sirius XM and Pandora. Lastly, more internet distributors could morph into music labels by targeting younger, less established artists the way Spotify is attempting to do. That would help musicians capture more of music’s value while also allowing internet-based music distributors to partake in a larger slice of profits.

Assif Shameen is a technology writer based in North America

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