A royalty statement from Tidal supposedly leaked last week, and it showed payments that were roughly double the average paid by competitors like Spotify. Reached for comment, Tidal said this statement was false, and that it actually pays closer to four times the royalty rate of its largest competitor, paying $0.024 to $0.028 per stream compared with the $0.006 to $0.0084 Spotify doles out.
Is the free ride about to end?
All that sounds like salvation for the music industry, and it's part of a larger trend. As we reported yesterday, the labels have been in talks with Apple about trying to kill Spotify’s free tier. That would significantly increase the average royalty payment from the world’s largest streaming service, although Apple's tactics have drawn scrutiny from the DOJ as potentially anti-competitive behavior. But is cutting out a free tier really the best way to bring in more money?
"My view has been, and the data shows, you will sell more music with a lower price, because it's an elastic market," says David Pakman, a tech investor and former digital music entrepreneur. He crunched the numbers across more than a decade of music sales — from the pre-Napster peak of 1999 to the streaming era of 2012 — and found that the average consumer is willing to spend between $45-65 a year on music. When you average out what Spotify’s 60 million users pay, it comes out to just $30 a year.
The labels' insistence on $120 as the base rate for paid streaming services prices most consumers out. "If you really want to generate more revenue, find a price between $0 and $120," says Pakman. This was reportedly the route Apple wanted to go, aiming for a price point between $5 and $8 a month. But the labels nixed this plan. So Apple fell back on the playbook it used when trying to elbow its way into the ebook market against Amazon.
Apple has taken this approach before against Amazon
Apple is "in a market share battle, not looking for profit," says Pakman. Just as Apple appealed to publishers by offering to help undercut Amazon's market power, it is now coaxing labels to nix the free tier for Spotify and YouTube, offering to eat the cost and deliver higher paying customers instead.
"It might be good for Apple, and it might be good for the label, but is it good for consumers? I don’t think so," says Pakman. "And I don’t think it's the best business model in the long run." In a world where streaming music is available for $10 a month or not at all, Pakman predicts a renewed surge of piracy from the hundreds of millions who currently rely on Spotify and YouTube to get their music for free, supported by advertising.
Is Tidal's end goal something entirely different?
Of course, Tidal’s end goal here may be very different from Apple. It’s owned by artists, and its new Discovery feature is trying to cut out the major labels entirely, helping to market and promote unsigned acts directly to fans. By paying a far more generous rate, Tidal may be heading in the opposite direction from Apple, ignoring market share and attempting to force streaming services and the labels to cut artists a bigger slice of the pie instead.