Why artists make only 12% of the industry’s earnings

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There’s no way around it: the music industry is booming. Figures indicate that revenues match the prior peak, consumer outlays (such as concerts and subscriptions) are at an all-time high and companies such as Spotify and Sonos are going public. A recent report from Citigroup shows us how funds move through the American music business, and how much money the artists are paid. The results will probably surprise you.

One of the outcomes of the research is that American consumers are spending well over $20 billion a year on music. Total industry revenues such as on-demand streams, radio play and record sales have soared to about $43 billion a year. Yes, that’s 9 zeros.
On the other hand, Citigroup found that of that $43 billion, artists get only $5 billion, which is a mere 12%. But if consumer spending is at an all-time high and revenues are rising, how come the artists are paid only 12% of the industry’s earnings?

Why do artists make only 12% of the industry’s earnings?

Most of the value is leaked away by an overwhelming amount of running costs that come into play when running a vast amount of distribution platforms, such as radio and internet distributors. The value leakage is enhanced by the existing running costs of record labels. There have to be certain midpoints that have to exist to deliver music from the artist to the consumer. Ideally, artists would be able to deliver their music directly to fans and take the majority, if not all, of the profit. But the music industry is still largely using operating procedures that it used to use decades ago, when songs were sold in music stores instead of being leased online. Consequently, there’s a tremendous amount of money that gets away from the artist as others join in and help with music distribution and sales.

12% is an incredibly low figure. But the proportion captured by artists is on the rise, as it was 7% back in 2000. The main reason for this improvement isn’t because of on-demand music subscription services such as Spotify gaining popularity. Actually, it’s because of the power of concerts. Music labels function as middlemen for on-demand music subscription services, but are mostly excluded from the concert business. Therefore, growth in concert revenue is beneficial to artists.

How can the situation be improved?

Citigroup’s analysts believe there several ways the industry’s modus operandi could enter the 21st century. This would be through:

  • Vertical integration, where promoters could merge with existing distribution platforms, or;
  • Horizontal integration, where existing distribution firms could merge, or;
  • Organic form of vertical integration. This way existing web-based distribution systems would turn into music labels. This would allow artists to capture more of music’s value while allowing internet based music distributors to capture profits currently earned by the music labels.
  • The investment bank also predicts that the structure of the music industry itself will soon catch up with the digital age, with different companies merging and therefore being able to offer artists better deals. If internet music companies were to organically morph into music labels, as Citi’s research report suggests, or if concert promoters merged with streaming services, the music business would be cutting out superfluous middlemen and offering that money back to artists themselves.

    In an interview with Rolling Stone, one of Citi’s media analysts says: “The spending patterns have changed. The industry hasn’t yet reacted. That’s the next chapter.”

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    Usher songwriter copyright infringement
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