Monday, 23 November 2015

Streams aren't drowning music sales

A couple of weeks back I wrote a post about digital music sales, specifically about Radiohead's short-lived free offering of their album In Rainbows, and how it didn't impact on their digital music sales. A broader question, that we discuss in ECON110, is how new business models are affecting more traditional revenue streams in the media markets. Take the example of streaming music (or streaming video), which has exploded in popularity in recent years (although not everyone believes this is necessarily an example of a new industry - witness the notorious views on Spotify of Radiohead's Thom Yorke).

The important question, from the point of view of the artists, is does streaming pay off? Does it cannibalise music sales (digital or otherwise)? A recent paper (ungated version here) by Luis Aguiar (Institute for Prospective Technological Studies in Spain) and Joel Waldfogel (University of Minnesota) looks specifically at this question.

There are third main possibilities with digital streaming. First, they might cannibalise music sales, because listeners find streaming cheaper or more convenient than owning their own catalogue of music. Second, they might stimulate music sales, perhaps because they allow people to sample music they otherwise would not have heard. Third, they might increase revenues despite having little effect on music sales, because consumers who previously downloaded the music from illegitimate sources instead decide to stream the music. Or some combination of these.

The biggest problem with looking at this econometrically is that if you simply run a regression with music sales and streaming, you are likely to observe a positive relationship, simply because more popular music tracks will attract both more music sales and more streaming. You can tell a similar story about pirating of music. Indeed, when Aguiar and Waldfogel look at song-level data, they observe positive relationships.

So, instead they move to looking at aggregated data, which will be less vulnerable to song-level popularity effects. Specifically, they use weekly data on song-level digital sales in each of 21 countries for 2012-2013, artist-level piracy via torrents, both aggregated to the country level, and a country-level index of Spotify use. They find several important results:
First, when we use aggregate data, we find sales and piracy displacement by Spotify. Second, when we use data on the US covering the period of substantial change in Spotify use, we find smaller sales displacement than when we use 2013 data. Third, the coefficients relating Spotify use to recorded music sales differ by format. The coefficients for digital track sales are generally higher than the coefficients for albums, but many of the album coefficients are also negative and significant. Our best estimate indicates than an additional 137 streams displaces one track sale.
Now, that isn't the end of the story. Artists should be less worried about the degree of cannibalisation per se than what it does to their revenue. Streaming adds to artist revenue, while lost sales obviously reduce revenue. What is happening to revenue overall? Aguiar and Waldfogel show that, based on reasonable assumptions about revenue per stream, that Spotify is essentially revenue-neutral for artists.

Finally, there are a few reasons to be wary of these results. First, as Andrew Flowers has noted, the per-stream artist revenue that Spotify claims is contested. So, perhaps it is lower and leads to net decreases in artist revenue. Second, the results are based on data from streams of top-50 songs, which are extrapolated to all streams. There is no way to know whether this extrapolation is reasonable without access to Spotify's proprietary data (and they're not volunteering it - if I was cynical, I might point out that this is awfully convenient!). Third, as Andrew Flowers points out, we don't know about the distribution of artist revenue. It's likely to be concentrated among a few high-profile artists, with the little guys getting very little. So, streaming might be net positive for the big artists and net negative for the little artists (or the other way around), and net neutral overall. Again, this is something we couldn't evaluate without more disaggregated Spotify data (and a good identification strategy to overcome the issues noted above).

[HT: Marginal Revolution]

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