Apple May Not Be to Blame for Musicians' Streaming Anger

NEW YORK ( TheStreet) -- It seems as if musicians love to hate on Apple (AAPL) Music. But should they blame their record labels instead?

Taylor Swift's letter to Apple urging the company to pay artists during the trial period of the new service is now famous for its harsh criticism and the quick policy change it prompted from Apple. Ever since Taylor Swift pulled her music catalog from Spotify in 2014, artists have questioned whether any of the top music streaming services are in their best interests.

But streaming services may not be the source of artists' problems, says Allen Bargfrede, a professor of music business at Berklee College of Music in Boston. Artists are happy with the digital downloads model, which iTunes helped shape, and the differences between the downloads and streaming business models are small.

"The streaming services are paying out the same amount that iTunes was paying for a download sale, which was 70%," Bargfrede said in a phone interview. "Then, the labels are paying back to the artists at the same percent [as they were with iTunes.]"

Since Apple introduced iTunes in 2000 and the iPod in 2001, the music industry has been trying to determine how it best fits into the digital marketplace.

Apple, of course, reshaped the industry when its iTunes store became the leading source for music downloads. It also re-shaped the economics of the industry by establishing a 30% charge for operating the platform, leaving the remaining 70% for music labels.

With the introduction of Apple Music, the rate at which the music labels are paid has increased to 71.5%, and yet, artists have spoken out against Apple Music, and labels have urged their artists not to sign deals with the music streaming company. Apple has since remedied most of its content provider's qualms, but the artists are still not entirely happy.

The way artists get paid is complicated, Paul Verna, senior analyst at eMarketer said. Money doesn't go directly from the music streaming services to the artists. It gets paid to the music labels, which takes a large cut before paying the artists a "paltry" sum. According to Bargfrede, artists get paid only 12-20% of the income music labels receive from the streaming services.

For example, if a user pays a music streaming service $10 to be able to stream music, the average service will take $3, passing $7 on to the music labels. If an artist signed a contract with the music label for 20%, only $1.40 of the initial $10 will be paid to the artist by the label, a small sum compared to the initial $10.

Record labels charge a large percentage primarily because of the marketing they provide for their artists, Bargfrede said. Anyone can self-produce their own music and get it on Spotify, but they need the labels to really be heard.

In a contract between Sony Music Group and Spotify, made public by The Verge, more incriminating evidence was revealed. The contract, written by Sony (SNE), laid out additional payments from Spotify that were not the direct result of people streaming music.

Sony received $25 million in advances for two years of access to its music catalogue, which includes artists such as Hozier, Bob Dylan, Snoop Dogg and One Direction. The label also received over $9 million worth of ad time on Spotify, which the contract stipulated could be sold to other companies for a profit.

Both of these are revenue streams on top of the royalties Spotify pays for every stream of a song. The only money guaranteed to reach artists are the royalty payments. The Verge took the contract down from its site after Sony sent takedown notices to the site, but not before the contract was downloaded and uploaded several times across the Internet.

With contracts like these, it can be difficult for artists to understand where exactly their money is coming from, Verna said. Artists receive contracts that can be hundreds of pages long and written in hard to comprehend legal language, Verna said.

Bargfrede wondered why there wasn't an easier way for artists to see exactly how they were being paid.

"If you're an artist, you should be able to login to a backend portal and see how many streams you got on Spotify," Bargfrede said. "People in the music industry are starting to stand up and say 'Wait a minute, there are fishy things going on between the minute my listener clicks play on Spotify and the artist or writer getting a check.'"

Bargfrede suggests that to make a meaningful change in the music industry, everything must be more transparent, and music labels need to reinvestigate their old-age contracts with their artists.

"The streaming services have been made out to be the devil, and I'm not sure that they are," he said. "[The labels] are definitely being made to pay attention, and they are going to have to alter their business model over the next few years in order to be more transparent and not value the frameworks of yesterday."

Music labels have been able to operate on an old business model for a while now, but with Apple entering the streaming music game, things might have to change in order for artists to be happy.

might

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