Why artists are worried Apple’s deal could bite into earnings

Recording artist Zoe Keating only needs to look at her earnings to explain why she has misgivings about Apple buying Beats Electronics.

The cellist made $38,196 selling downloads on Apple’s iTunes last year, along with about $34,000 from three other download services. By contrast, five streaming outlets, from Spotify to Pandora Media, netted her just $6,381.

Apple’s $3 billion plan to purchase Beats Electronics and Beats Music is likely to alter that relationship, as the iPhone maker pushes further into streaming.

Apple became an ally of musicians by selling tracks and albums on iTunes, loosening piracy’s grip on the industry and giving lesser-known artists exposure.

As consumers shift away from buying, artists like Keating worry the newer subscription services will pay far less in royalties.

“Itunes downloads help me pay my monthly mortgage,” Keating said in an interview. “Unless you’re a mega-star, you can’t count on the same for streaming services. Me and a lot of my music artist friends are worried about the switch from music buyers to music listeners.”

That’s also the dilemma for the recording industry, which is finding that streaming, while growing, isn’t making up for shrinking purchases, physical and online.

Worldwide, recording industry revenue is forecast to decline over the next few years from an estimated $19.6 billion in 2014, based on data from Strategy Analytics. Mobile and online streaming, including subscription and advertising revenue, will become the second-largest revenue source, behind spending on CDs and vinyl.

"The question everyone in the industry is asking is whether spending on streaming will grow to compensate for declines in physical spending, which will never rebound, and downloads, which are flatlining," said Leika Kawasaki, an analyst at Strategy Analytics.

So far it hasn't, and that's also a problem for well-known musicians, not just Keating. Radiohead's Thom Yorke and his group Atoms for Peace pulled songs from Spotify last year, saying major labels negotiated royalty rates that leave little for performers.

Other notable holdouts with limited availability on streaming include the Black Keys and AC/DC.

How low are the royalties? Higher than conventional radio, which legally pays nothing, but not a lot either. Last June, David Lowery of indie rock band Cracker published the writing fees he received from streaming music services that played his 1993 hit song Low.

Pandora paid him $16.89 for playing the title about 1.16 million times in the last three months of 2012. The internet radio service, based in California, pays a rate set by a government agency, one that’s lower than streaming services. Stockholm-based Spotify, which played the song 116,260 times, paid him $12.05.

Damon Krukowski of the defunct rock band Galaxie 500 estimated on the website Pitchfork.com that Pandora would have to play a track 312,000 times for him to generate the same songwriting income as one LP sale. In response, Pandora pointed to a website analysis that showed it paid a total performance royalty of $1,274.90 on the plays to Lowery - and others who share the rights. In addition, the company said in an e-mail it paid more than $340 million in royalties to rights holders in 2013.

Spotify furnished $500 million in royalties last year, according to Graham James, a spokesman, citing the company's website. The company steers listeners away from piracy and platforms, like traditional radio, that provide even less to artists. It also tries to convert them to paying customers.

Apple, with a reservoir of goodwill among artists, might become the problem-solver again. The iTunes store puts Keating’s tracks on the same footing with Rihanna and U2, with web pages that feature both famous and independent artists. With physical discs on the decline, Beyonce chose iTunes to release her fifth solo studio set, while independents like rapper Macklemore have used Apple to cut out the middleman and win fame on their own.

The challenge for Apple is to deliver a discovery mechanism that gives new and emerging artists enough exposure for the industry to maintain a healthy mix of superstars and up-and- comers, said Bob Lefsetz, author of an industry blog.

Less-known artists have voiced concern there will be fewer ways to promote and sell their music on streaming services, particularly since most negotiations take place with the major music labels.

“If you’re a nobody, you’re not going to make a lot of money off streaming,” Lefsetz said. “Ultimately this is good because it eviscerates piracy, but only for the best and most popular stuff. Apple could also provide links that let interested listeners easily buy music they like, in much the same way conventional radio encouraged purchases over the years.”

Announcing the Beats deal yesterday, Eddy Cue, Apple's senior vice president of Internet and Software Services, said music was an important part of Apple's DNA.

“The addition of Beats will make our music lineup even better, from free streaming with iTunes Radio to a world- class subscription service in Beats, and of course buying music from the iTunes Store as customers have loved to do for years.’’

Apple’s involvement with Beats, based in Santa Monica, California, is no guarantee of success. Outside of the iTunes store, the company hasn’t had a breakout hit on a music product. Apple shut down the social music network Ping in 2012 after two years. Itunes Radio, created to compete with Pandora, hasn’t gained much traction, analysts say.

Still, Keating looks for a silver lining. “Something we’ve been waiting for and something we’ve been dreading is the day when Apple gets into streaming,” she said. “If they can get the fact across they care about the artist, want to get their story told and still make purchasing of tracks possible, that’s all anybody’d want.” (Bloomberg)