Saturday, June 11, 2011

The Digital Domain: 1's and 0's or just zeros?

In the last several posts we've looked at how many recordings an Indie musician would have to sell to make a couple of economic target goals: the U.S. minimum wage, and rent, specifically mine, which is a little more than $1,300. Up till now we've only looked at physical product, CD's, comparing sales on an artist's website, at a gig, and through retail stores. We have seen that the farther away the artist got from the customer the more units they have to sell to make our target goals. For example, if an artist sold a CD at a gig for $15 they would be able to apply more of the income from that sale to their rent than if their recording was sold through a retail store via a distributor, both of whom would take their cut.

Below is what this looks like on a graph.

The Musical Disconnect: CD Sales
Click image to enlarge

Now we're going to enter the mysterious world of digital downloads. I use the word "mysterious" because some of the of the definitions of that word, such as "difficult or impossible to understand", "having an atmosphere of strangeness or secrecy" and "deliberately enigmatic" are perfectly suited to the digital download world.

Before we delve into this strange and forbidding landscape I should explain that one of the reasons I decided to start my own label and publishing company were the horror stories I heard from fellow musicians that had deals with record labels. Without going into too much detail or naming names I met two recording artists (separately), each of whom had record deals with a well known, but comparatively small, label. They both had recordings that had at one time been at the top of the Billboard New Age charts and when I asked how much something like paid, they both said, in disgust, almost the same thing, "I haven't seen a dime..."

A quick glance through any book about the music industry will give you an idea why this is. Simply put, from the moment you sign a deal with a label you are in debt to them. Any money they give you as an advance in order to make and promote your recording they get back by taking it out of the royalties (income) you earn from your sales until they say you've paid them back. Most of the time, however, it seemed like the artists never sold enough to pay back the money.

Once upon a time, in the beginning of the internet, there was a golden age when artists working in a small genre (like New Age) could start their own label, sell CDs on their website, through and small New Age stores. They didn't have to deal with record labels and their fuzzy bookkeeping. The artist controlled the costs of running the label, knew where the product was going, and how much they were owed for it, and most important, when they sold a CD how much gross income they were going to make.

However, with the rise of digital downloaded music, Indie artists lost all that control.

In the early part of the last decade Napster was ravaging the sales of the major record labels by making it possible for people to download music, illegally, for free. The major record labels reacted to Napster like a deer in the headlights and did nothing but whine and stomp their feet. Then Apple came along with an offer that was going to save the music industry. During this time Apple was launching their iPod and the main reason to buy an iPod was to listen to music. So Apple bought an App called Sound Jam and turned it into iTunes and then the iTunes store. Since the major labels couldn't get their act together to save their own industry by legally selling digital downloads, Apple convinced the labels to sign an agreement with them allowing Apple to sell digital download (DD) albums on their iTunes store for $9.99 and individual songs for $0.99. This agreement was supposed to save the music industry but now it's beginning to look like it just made it's death legitimate and legal.

At first glance Apple's plan seems reasonable, but over time it is has proven to be anything but. For one thing the agreement took away from the record labels the ability to decide what amount to sell their products for and how it would be packaged. It was all decided by Apple, the retailer. For Apple the iTunes store has been a huge success. In a recent report from the NPD Group, Apple sells 25% of all music in the U.S. and 69% of all digital music (1). Quick on the heels of iTunes came, who soon after entered the digital download game. Since Apple already had the lion's share of the market, tried to lure buyers to them by selling digital albums for less than iTunes, $8.99. That might work for amazon (although it doesn't look like it has), but for the artist it's DOA.

So just how does this all affect the Indie artist? First off, Indie artists have even less clout than the major labels, so if the big guys reach a deal with Apple and Amazon the rest of us pretty much have to go along with that. This means that in the digital world we don't determine the price that our work is sold for, the retailer does. When a sale is made the retailer (Apple or Amazon) gives us a percentage of the price they've set. If you are selling an album on iTunes this at least is somewhat fixed. The vast majority of digital albums are priced at $9.99. However I've seen's prices for digital albums vary from more than $8.99 to less than $2.99! They decide based on some undisclosed formula and the artist has no say in the matter. Zero. Remember, the artist is being paid a percentage of the price the retailer dictates. So if Amazon decides to lower the price of a particular digital album the artist ends up making less money.

Just like working with distributors to sell into retail stores, Indie artists have to use a distributor, in this case a digital distributor, to get their music on iTunes or The two digital biggest distributors are Tune Core and CD Baby. (Just for the record, I use CD Baby). So the retailer sets the price and then takes their cut. Then they pay the digital distributor who takes their cut and the artist (or label) gets the rest. So how much is this?

If I sell a digital download of one of my albums on iTunes, after everyone takes their cut I receive $6.37. Depending on the price that Amazon decides to sell my digital download albums for, I have received either $5.92 or $4.46. Again they don't say how they determine their prices. As I said, this is a mysterious world.

Let's see how this all stacks up compared to selling physical CDs based on the target goal of my rent. I have removed all costs for manufacturing, shipping and credit card processing, but I have not removed the one time fee CD Baby charges to process each CD.

Type of Sale # of Albums (CD/DD)
Concert $15 CD 92
Artist Website CD 112
Artist website Members CD 131
Concert CD (2 for $10) 134
Artist Website DD Album 153
iTunes DD Album 204
Amazon Hi DD Album 220
Distributor to Retail CD 236
Amazon Low DD Album 291
Let's look at this in graphic form

The Musical Disconnect: CD Sales
Click image to enlarge

The first thing I notice is that I have to sell 222% more albums through iTunes to make my rent, and at's lower payout 316% more. What's also interesting, and a little depressing, is that the number of physical CDs sold at wholesale is stuck way down between's two different prices. With this information you could say that digital download sales of albums are on par with selling physical CDs.

The problem is that albums are not what's selling when it comes to digital music purchases. Songs are.

Songs account for most of the sales of digital music. This is true for all artists. iTunes policy requires that all songs be made available separately, regardless of what the artist's intent was when making an album. In a recent Wall Street Journal article Aram Sinnreich, a media professor an NYU, stated that the ability to buy individual songs "is a last gasp for the album format". The same article noted that Katy Perry sold 2.2 million downloads of her song "I Kissed a Girl" in the U.S. compared to only 282,000 copies of the album that had the song. According to Nieleson SoundScan data, the Rolling Stones sold 6 million individual songs digitally verses only 1.8 million albums between 2006-08 (2).

Not to compare myself with these major acts, but my sales through iTunes also reflect this trend: 89% of my sales through iTunes have been individual songs.

How does this affect my ability to pay my rent? Songs on iTunes and cost $0.99. Once Apple and CD Baby take their shares, Indie artists, me included, received $0.64. That means I would have to sell 2,031 each month just to pay my rent! To pay my rent for a year I'd have to sell 24,372 songs every year.

Some artists are deciding not to sell their music through iTunes for this very reason. Some of those acts include Kid Rock, Estelle, AC/DC, and The Eagles, a band whom Steve Jobs personally appealed to for their participation in the launch of the iTunes store, telling their manager, Irving Azoff, "he couldn't imagine launching a music store without his favorite rock group." The Eagles now feel that their royalties have been far lower than expected (2). Once again I don't want to put myself in the same league as these artists, but it is my intention to not release my next recording digitally on iTunes or The ROI does not seem to justify it.

Let's stack this up again. To see this better we'll look at the three main types of sale: a CD sold by the artist at a concert, a DD album on iTunes, or a song on iTunes

Type of Sale # of Albums or Songs
Concert $15 CD 92
iTunes DD Album 204
iTunes DD Song 2,031
When displayed as a graph you can clearly see the jump from albums to songs needed to be sold is exponential to make our rent payment!

The Musical Disconnect: CD Sales
Click image to enlarge

Just when you thought it couldn't be any weirder we enter the world of streaming. If you don't know what streaming is, think of it as a juke-box on your computer. You pay a subscription fee to a streaming company and in exchange get to listen to songs on demand through a player. Theoretically you never get a copy of the song on your computer. Each time the listener plays a specific song the streaming company charts a stream payment for that artist. When they go to pay they first take their cut, then the digital distributor takes their cut and the Indie artist gets the rest. How much is that? That's a good question...and not an easy one to answer.

Here are some of the numbers I've pulled from my statements. Remember a stream equals one song play, and yes, the numbers are real.

Streaming Service $ Amount per Stream
Rhapsody $0.0091 $0.0000318500
...or $0.0009271962
...or $0.0000391300
...or $0.0000163800

These amounts were all paid to me for the same song, off an album that won a major award. Why are they different? I have no clue. Who knows? (Seriously, does anyone know?)

Lala $0.000115570009
...or $0.000179270000
...or $0.006370000000

Lala, is a streaming company that Apple now owns. Similar to the payment, these payments were for the same song.

Napster $0.01853445

That's right, Napster, the company that started the slippery slope of illegal peer-to-peer file
stealing but was forced to go legit, pays the most revenue per stream.

Even at Napster's rate, I would have to receive 58,000 streams of my songs each month to pay my rent. On Rhapsody I would have to have 116,000 streams each month, just to pay my rent! As for and Lala, the numbers are so small I'm not sure how to do the math...

Now let's compare how many sales are needed to pay our monthly rent example of $1,300.

Type of Sale # of Sale
CDs at Concert ($15) 92
Albums iTunes 204
Songs iTunes 2,031
Streams Napster 70,139
Streams Rhapsody 142,857
Let's look at this in graphic form below. Notice how on this graph the 92 CDs sold for $15 looks like zero due to the ginormous leap to 142,857 streams needed each month to pay the rent. That's over 155,279% more in sales!

The Musical Disconnect: CD Sales
Click image to enlarge

Aside from the absurd idea that an Indie artist can make a living off from this, what kind of numbers are $0.0000391300 or $0.0000163800 anyway? Does anyone at any of these streaming companies really think an artist can make a living this way? Do the labels? I assume most artists don't even think about it... I would hope that if they did think about it they might consider a streaming boycott.

(Like many artists and labels I've requested my digital distributor to remove me from all streaming sites. As the 149 streams from the month of December 2009 shown below illustrate, I could barely take the money I make and buy something at Starbucks.)

The Musical Disconnect: CD Sales
Click image to enlarge

Like all companies I keep a database with all my transactions to track the financials of my business. But these numbers are so small I can't even enter them into my database. They end up being displayed like this: 5.7863e-4 and won't conform with the rest of the data. In truth I really have no idea what I'm getting paid per stream or if the payments accurately reflect the correct number of streams that my music receives. I get statements, but how do I track these sales? (Or any digital sales for that matter, streams or downloads.) The companies state what they have sold, usually months before, and I have no way of verifying the sales or not. I assume the statements are true, but how would I know otherwise? On top of that, the amounts that are paid per stream change randomly. I warned you it was mysterious.

It seems that for those of us who started our own labels to avoid the troubles of weird accounting by a record label, we've now run into the same issues with downloading companies. They call the shots and they dictate the price and the terms. They tell us if our products have sold (or not), and we have to blindly believe them since they generate copies of the product on demand. We, the creators, are not involved.

The bottom line is that when it comes to the world of digital downloads, if people bought albums instead of songs, artists might be able to struggle along. But that's not what's happening and in the end song-only purchases and streaming will kill music. Both for the artists and the fans.

So what got us to this place..?

If you want to look at all of this from another POV I highly recommend you read The Paradise That Should Have Been from The Cynical Musician blog. His numbers are even more bleak than mine. Personally I think you should read all of his posts. They are thoughtful, well written and inspiring.



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© The Musical Disconnect. (TMD)

1 comment:

  1. This all sounds so familiar to what I've experienced. Thanks for sharing this.