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When YouTube approached the popular cellist Zoë Keating with their new music streaming service earlier this year, they delivered an ultimatum: sign the contract, or your artist channel will be blocked.

The move sparked a wave of outrage among musicians when Zoë wrote about her experience. Independent labels had already negotiated with YouTube’s Music Key service for months but hadn’t reached a workable agreement. YouTube’s terms are certainly harsher than those of other streaming services, but the truth is that streaming services on the whole are a bad bet for successful independent artists — if you want to earn a living selling your music.

Still, streaming services grow in double-digits year after year. We’re reaching a point in which most music listeners will be using at least one of them. The situation hands artists a dilemma: do you accept the low rates paid by streaming services in exchange for exposure? Or do you eschew the services and risk losing part of your audience?

Your answer to this question depends on how you make a living as an artist right now. If most of your income is from music sales, like Zoë Keating, then putting your music on a streaming service is probably a bad idea. On the other hand, if most of your income comes from other sources, like live performance, then streaming may still be worth it for the access to listeners.

Streaming Sites Aren’t On Your Side (Even If They Want to Be)

The CEO of Spotify, Daniel Ek, believes that streaming is a powerful force for good in the music industry revenue. He argues that streaming services recapture money which was previously disappearing into pirate sites and that these services open up a new way to make money as an artist. Many of the points Ek makes are compelling but apply to massive pop, rap, and rock artists. For independent artists, these services don’t open up a viable new revenue stream. Instead, they reduce the income you can make through music sales online.

There are two ways that the economics of the Internet work for businesses or artists selling music. The first way is to use the efficient distribution methods possible online to reach a massive audience, and then to earn a little bit of money from each person. This is what companies like Google, Facebook, and Spotify do. It’s also why they have to work so hard to be accessible to everyone. When you’re making pennies per user, you need as many users as you can get. But there’s a second way to earn a livable income online, and that’s the niche model.

The same efficiencies of the Internet can help an artist reach a small, highly-engaged audience for nearly nothing. Then, that artist can earn tens or hundreds of dollars from each person by giving them real value.

Spotify and YouTube are businesses of scale. Their entire model is predicated on building a user base of millions or even billions, and then earning a little bit of money per user through advertising or subscriptions. This makes complete sense for these businesses. It also works well for the pop, rap, and rock artists who dominate mainstream radio.

But it’s a terrible business model for any artist without exceptional popular appeal or lots of marketing dollars. For nearly every non-radio artist, the best way to earn a living is through the niche business model. Truly, every artist needs to engage their best fans; the fans who live and breathe their music, the ones who wake up to your single and fall asleep with your album playing in their headphones.

But independent artists rely on these fans for most of their income, while popular artists do not. These fans are willing to spend more than a few pennies to buy your music and support you.

This is where the disconnect appears between artists and music streaming websites. No matter how much your fans love you, Spotify and Music Key only allow you to earn fractions of a penny per stream. Your best fan pays the same as a passing, casual listener – though that fan would support you with much more if they had the opportunity.

That lack of opportunity is exactly the problem with streaming services. When you put your music into a buffet-style streaming service, it becomes devalued. Your music becomes worth the same as the other millions of songs cycled through Spotify’s catalog. Once this happens, you lose the ability to ask your fans to buy your album elsewhere. Why would they buy something they already own?

If you earn a living selling your music, this is the opposite of what you want. Widely-accessible pop artists can succeed with the streaming model, but independent artists aren’t able to achieve the massive numbers required for a livable income. Your value comes precisely from the fact that you are different. That you resonate at a deeper level with your fans. In other words, the key to success in the niche business model is to be differentiated.

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How Do You Earn Money When Music is Free?

As we’ve seen, there are two ways the economics of the Internet help artists sell music. The first is to become a pop artist with mass appeal and earn money from a huge audience. Almost all of your audience will be casual listeners and will listen for free or on an ad-supported site. The best way to grow your income is to reach as many listeners as possible, which often means becoming safe and accessible.

The second is to focus on your unique strengths and make a deep, fulfilling connection with a smaller group of fans. Most of your audience will be dedicated listeners, who are willing to buy your music for more than pennies.

Image Source: Ben Thompson at

Between these possibilities is the middle: artists who are not widely popular, nor highly-differentiated. Unless you’re a pop star, this where streaming services put you. It’s a terrible position to be in if you want to sell music.

To understand why it’s important to know how pricing works for a product as abundant as music. As Ben Thompson explains, pricing is set by three factors: supply, demand, and the additional cost of producing another copy of the product. The original cost to create the song doesn’t matter – it’s a sunk cost.

Online, the supply of music is close to infinite, and the cost to make a copy of a song is nearly $0. This is terrible news for undifferentiated music because it means the price of music trends to $0. This is exactly what’s happened online. It’s also why Daniel Ek believes Spotify is doing a great service to musicians. After all, they are transforming that $0 into actual income for artists. But that $0 floor only applies for the artists who are undifferentiated.

It’s through differentiation that prices rise above their natural level. That’s how companies like Apple can charge prices 2x their cost. Smartphones get cheaper to make every year, and yet Apple’s price tags remain sky-high. While other companies are forced to reduce their prices each year to compete, Apple continues to sell out iPhones despite the price tag. There’s simply no other company that makes smartphones like Apple.

The same principle is at work in music. Even though the price of music trends towards $0 online, artists can continue to make money by connecting with their best fans. It’s an idea that Taylor Swift captured eloquently in her Wall Street Journal op-ed last July. Soon after, she went on to sell a million copies of 1989 in its first week, and 4 million by the end of 2014.

“Some artists will be like finding “the one.” We will cherish every album they put out until they retire and we will play their music for our children and grandchildren. As an artist, this is the dream bond we hope to establish with our fans. I think the future still holds the possibility for this kind of bond, the one my father has with the Beach Boys and the one my mother has with Carly Simon.”

Let’s return to Zoë Keating, the cellist who received YouTube’s ultimatum. She’s a great example of a differentiated artist who connects with a small, focused fan base with great results. In 2013, she revealed that 92% of her income came from music sales that year (about $75,000). Only $6380 came in through all the streaming services combined, including Pandora and Spotify.

Artists who live on income from music sales can’t just replace that income with music streaming. The disparity is just too great.

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Leave streaming behind – for the time being.

For now, the problems with streaming services outweigh the benefits. As an independent artist, your best move is to leave the services entirely, or only put up a sampling of music for marketing purposes.

Staying out of streaming services doesn’t just help you maintain value. It also makes it possible for you to earn more income from fans who are willing to invest in you. Streaming services don’t give you an avenue to sell merchandise or exclusive content. But if fans come to you on sites like Bandcamp, or your personal website, then you have an opportunity to offer more than a few streams.

And don’t worry that your fans will abandon you once you’re off streaming sites. They won’t have to change their listening habits at all (unless they’re on YouTube). Spotify has always supported local files in their service, iTunes has iTunes Match, and the other major services provide ways to import your music from other sources.

The truth is that fans WANT to support artists. But they can only do that if you provide them with a reasonable opportunity. Providing your music to a premium streaming service, and then asking fans to buy that same music from you for $10, is unreasonable. Give your fans a justifiable way to support you with their dollars, and they’ll do it.

But this recommendation is not for forever. It’s true that both CD sales and paid downloads continue to decline. At some point, the benefits of abstaining from streaming services will also decline. But for the time being, the difference between streaming and sales can be as large as 92% of your income, if you’re an artist like Zoë Keating.

So say goodbye to streaming — for now.

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