Please ensure Javascript is enabled for purposes of website accessibility

Is the Music Industry Recovering? Maybe if Your Name’s Justin Timberlake

By Jeff Colchamiro – Mar 10, 2014 at 11:51AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The music business shows signs of live, but who's making money as streaming services take over?

The decline of the music business over the past 15 years has been well documented. First there were the illegal downloads that freaked out major labels (back when there were more than three major labels to freak out). Then Napster went the way of Better Than Ezra, and Apple (AAPL -1.23%) ushered in the era of legal downloads. Fast forward to 2013, when download sales decreased for the first time as streaming became the latest trend—and a very crowded marketplace with Apple and possibly joining Google (GOOGL -2.83%), Spotify, Beats, Pandora (P), and others.

According to a new report from MIDiA Consulting's Mark Mulligan, artist income from recorded music was $2.8 billion in 2013, up slightly from 2012, and artists' share of total income has grown from 14% in 2000 to 17% in 2013. Sounds like encouraging news for musicians, right? Maybe for those named Justin Timberlake, Jay-Z, and Blake Shelton. As the report, The Death of the Long Tail, explains, the top 1% of artists account for 77% of income related to recordings.

So much music, so little space

For years, we've been hearing about how the Internet would create a level playing field. Artists would be free of the shackles of major labels and could gain not only creative freedom by releasing their own music, but also control over marketing, distribution and, best of all, royalties.

So, how did digital music services actually contribute to the "superstar economy" trend they were supposed to kill?

"The democratization of access to music distribution has delivered great benefits for artists but has contributed to even greater confusion for fans," Mulligan writes in the report. In other words, there's more music out there but finding it is another story.

"The problem lies not with digital's catalogue expanse – which we have already seen can actually hinder discovery," he continues, "but the small amounts of visual display space digital services have. A digital store or service has a home page that often has to squeeze onto a few square inches of smartphone screen, while a high street store has dozens of square feet of window space and then hundreds of square feet of front-of-store display space through the doors."

The long tail was a tall tale

The idea behind the long tail theory was that consumers would engage with niche content across digital services because of ease of access and discovery tools. Whether or not it ever happened for music is open to debate.

"The long tail never really existed," says Will Simon, general manager for Michael Hausman Artist Management and Aimee Mann's SuperEgo Records. "If it did, why did Tower Records and all the chains go down in flames? Even in the CD heyday, the bulk of the industry revenue was driven by a handful of multi-Platinum artists. Now there are fewer multi-Platinum artists. And the music gatekeepers are more fragmented; there's no MTV and very little national marketing, so very few artists reach critical mass."

Independents swim upstream

As streaming services increase their share of the overall market, their royalty payments have come under scrutiny from artists and record labels.

Spotify said it paid out about $500 million in royalties in 2013, according to numbers it released in December. The company likes to focus on that big number instead of how it breaks down: .6 to .84 cents every time a song is played. It doesn't pay a set amount per stream, but uses a more complicated formula based on what percentage of Spotify's total monthly streams an artist represents.

The company cites an example of a "global hit album" earning $425,000 in a month, but that's for a top seller. A mid-level artist could do tens of thousands of streams in a month and maybe see a few hundred bucks for it. Mulligan's report notes that some independent artists do crack that 1%, but it's not easy.

No danger for major labels

The numbers tell different stories here: the rise of streaming and increase in total artist income sound like music to musicians' ears. But if they're not in the 1%, they may be singing the blues the next time they open their royalty checks.

On the other hand, the major labels, Universal Music Group, Sony (SONY -1.02%) and Warner Music Group, don't appear to be in danger of losing their market share as downloads decrease and more users turn to streaming.

Jeff Colchamiro has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Pandora Media. The Motley Fool owns shares of Apple, Google, and Pandora Media. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.