Apple, Taylor Swift Were Fighting Over Fractions Of Pennies

NEW YORK (TheStreet) -- Taylor Swift railed publicly against Apple (AAPL) Music, and Apple blinked -- but the troubles that the pop star and many other musicians have with streaming music platforms go well beyond the newest service.

When Apple changed course and agreed to pay royalties to artists for the songs it streams to customers during their three-month free trials of its new streaming platform, it was hailed as a success for all musicians, not just Swift. But the stakes in the showdown between the 25-year-old singer and the world's largest company by market cap equate to fractions of pennies per streamed song.

Even as streaming services have grown into a $6.9 billion digital music industry, musicians are still rely on CD sales and touring to get by -- and CD sales are steadily declining, largely thanks to the growth of online options.

"[The money] basically trickles down," Paul Verna, senior analyst at eMarketer.com said. "What's pretty clear across the streaming services, is that the amounts that artists are getting is paltry."

The streaming music business is relatively young, and companies in the industry have yet to nail down the perfect business model. Pandora  (P), the only publicly traded company in the streaming music space -- until Apple enters the market later this month -- has had trouble finding profits. Musicians share the pain of the streaming services when they don't earn enough to make a living off their art.

At the heart of this struggle is an ongoing, three-way price war between the streaming services, music labels and artists. The money paid to a streaming service passes through several choke points -- where various entities take their cut -- before any of it lands in the artist's pocket. The amount taken off the top at each stage depends on both the service being used and the contract between the music label and the artist. 

Spotify, for example, says it passes about 70% of its subscription and advertising revenues along to the music labels. Apple has said it will pay a higher than average rate of 71.5%, according to Re/Code. Payouts are not calculated on a strict, per-stream basis, but after the label gets its cut, Spotify says artists reap between 0.6 cents and 0.84 cents per-stream on average, according to their website.

This means that a song has to be listened to between 119 times and 167 times to make the musician a single dollar.

Cupertino, Calif.-based Apple will be offering users a free three-month trial of Apple Music. During those three months, the original plan was not to pay any royalties for music, because the company would not be bringing in subscription dollars from its users during that period. This led to Swift's now-infamous open letter to Apple.

"Three months is a long time to go unpaid, and it is unfair to ask anyone to work for nothing," Swift said in her letter. "I hope that soon I can join them in the progression towards a streaming model that seems fair to those who create this music. I think this could be the platform that gets it right."

To get it right, Apple may have to convince a record-breaking number of people to sign up for its new service, according to Mark Mulligan, a music industry blogger.

"Until [the streaming music services] have north of 100 million subscribers, most artists will see digital revenue paying them less than downloads," Mulligan said. "[Streaming] is something where you could see a long term income, but you need scale."

Apple eventually backed away from their initial plan, announcing they would pay royalties during the free trial, albeit at a lower rate, according to an Eddy Cue, senior vice president of software and services at Apple, interview with Re/code.

This move may lure some of the indie music labels Apple is currently lacking to its streaming service. But even if it does, those artists may not receive the levels of payments they are accustomed to. Spotify paid $425,000 in monthly royalties for an unnamed "global hit album" in June, 2013 and it predicts a monthly payout of $2.1 million after reaching 40 million paying subscribers. The company currently sits at 20 million paying subscribers.

For a smaller "niche indie album" Spotify paid only $3,300 in June 2013, and predicts that when it hits 40 million subscribers, a similar album would bring its creators a monthly payout of $17,000.

Taylor Swift currently has a net worth of around $200 million, according to Forbes, most of which comes from touring, as she pointed out in her letter to Apple. This is because record labels often don't pay artists royalties until they recoup their advances. Artists are getting paid that fraction of a penny per stream only after they earn back their advances.

This is why Taylor took to the internet to fight for herself and her compatriots. The major indie labels Beggars Group and American Association of Independent Music have encouraged their artists not to sign agreements with Apple Music, and have not changed their tune following the Eddy Cue announcement. They also denied a request for comment regarding any changed plans.

To truly realize the potential of the music streaming service business model, cooperation and transparency will be key, according to Verna.

"Two things would have to happen. One, is a lot more scale," Verna said. "The other is, labels being more transparent and less greedy with the revenue. I think they are still not really being fair to artists. I'm definitely not holding my breath for that to change."

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