Attention, artists: Streaming music is the inescapable future. Embrace it

Music's bedrock business will be selling access to streams, not ownership of tunes. So what does that mean for the artists you love? It should be music to their ears.

Spotify's payments to artists have been under a microscope since record-breaking musician Taylor Swift pulled her catalog. Spotify

Eric Hutchinson long cherished his alphabetized treasury of CDs, but when he began gravitating to streaming-music sites like Pandora, he packed his music collection into four suitcases. That all fits in a pocket now, he remembers thinking, as he shoved the suitcases into a taxi to take to a secondhand CD store.

If you subscribe to the anti-Spotify gospel of Taylor Swift, Hutchinson's actions should strike fear in the hearts of artists: a music lover moving from money-making purchases to the feels-like-free universe of streaming tunes. The only wrinkle: Hutchinson is a musician himself.

A recording artist for more than a decade, Hutchinson is headlining a 30-date cross-country tour, playing theaters that can accommodate 1,000 or more people. The singer-songwriter also listens to 7 to 10 hours of streaming music a week. "The model is not perfect yet for sure, but the more people stream, it's an exciting time to be making music as a result," he said.

The rise of streaming services like Spotify and Pandora is spurring a fundamental change in how the industry makes money, from selling ownership of music to selling access to it. This shift fogs the career path for artists: Beside complicating royalties, it hasn't been around long enough to prove it can sustain careers. Plus, stars looking down from on high -- like Swift, Radiohead's Thom Yorke and The Talking Heads' David Byrne -- proclaim the model cheapens music and rips musicians off. But artists who look past the high-profile preaching will find that streaming actually levels the playing field, giving more musicians than ever a fighting chance.

492562167-1.jpg
Eric Hutchinson streams music about an hour a day. He also loves it when listeners stream his tunes as well. Bravo/NBCU Photo Bank

Maybe that's what Swift is afraid of. The pop star made herself the poster girl for the anti-streaming set this month, yanking her entire catalog off Spotify just as her album "1989" pulled off the best debut-week sales of any record in 12 years. Her life's work shouldn't be the guinea pig in an experiment that doesn't fairly compensate creators, she said.

But the streaming takeover is inevitable. In the US, streamed music accounted for 27 percent of music sales in the first half of the year, up from just 3 percent in 2007 and 15 percent in 2012, according to the Recording Industry Association of America. Streaming sales have nearly surpassed sales from physical music -- mostly CDs -- which stand at 28 percent. Digital downloads made up the biggest chunk at 41 percent of total revenue, but both downloads and physical sales are dwindling.

"Will subscription and access models be the de facto way that the majority of people will end up consuming music at some point in the future? Yes, 100 percent, I'm absolutely convinced that that will be the case," said Rob Wells, the head of global digital business at the world's biggest record-label company, Universal Music Group, who added that downloads and physical purchases aren't going away.

And being paid for sound recordings has never been how artists really make bank. Albums and singles are essential, but the boon for the musician was the merchandise, touring and sponsorships, or that 30-second snippet of song in a national commercial. Streaming actually bolsters those, but it's not easy getting people to take a leap of faith that something so different will work.

"When you've got this new system, you're asking people to learn," said Lars Murray, Pandora's head of label relations. "It's human nature to not want to reset the table."

The curse of complications

The biggest stumbling block for artists is that the streaming-music future complicates a business that's already baffling in its complexity.

For one, the blanket term "streaming music" applies to a diverse lineup of services, all of which pay musicians and songwriters differently.

There are three main models. The ad-supported product like Pandora, the Internet's biggest online radio service, pays royalties mostly determined by the US government or government-related bodies. Another category is on-demand, paid-subscription services, such as Apple's Beats Music. You pay a monthly fee for all-you-can-eat listening from a catalog of millions of songs. These services pay royalties based on confidential licensing deals with rights holders, such as labels. The third is a hybrid of the two, like Spotify, which offers a free, ad-supported option and a paid tier with privileged features like offline listening on your phone.

Other platforms defy those categorizations. SoundCloud, an audio YouTube, lets anyone upload and listen to sound files. SoundCloud hit 250 million registered users late last year, on par with Pandora.

Confused yet? Try to untangle the knot of royalties in the music world. Royalties before streaming were already dizzying, with payments for physical products differing from those for performances. Now every kind of streaming service pays different rates to different people under different circumstances in different countries -- and many of these rates aren't public.

An artist looking at the sum of her royalty checks from streaming for the year will mostly see a reflection of her contract -- not a full picture of what streaming services pay to rights holders. In addition, the royalty rates for a stream of a single song are much smaller than for the purchase of a single song. That's where people like Swift cry foul.

A leap of faith

Artists' top criticism of the streaming-music future is that it just won't pay as well. Swift's label, Big Machine, put a number to that argument Wednesday: $496,044. That's how much the label received for US streams of Swift's music in the last 12 months. That's much smaller than the $6 million a year Spotify founder and Chief Executive Daniel Ek said an artist of Swift's stature was on track to earn.

Spotify founder Daniel Ek said his company is building a "new music economy that works for artists in a way the music industry never has before." Spotify

The consensus response to this complaint: just wait until streaming goes mainstream.

"When the CD was three years old, people were complaining that you couldn't build a career on CD sales," said Charles Caldas, chief executive of Merlin, a group that represents more than 20,000 independent labels worldwide. "It took years for that format to get to scale."

While a per-song payment for a download is much higher than the per-song payment of a stream, downloads are a onetime deal. That makes streaming the gift that keeps on giving. "Revenues look small because there are relatively few subscribers," said Alex Pollock, who has handled tour accounting for bands like Coldplay, Maroon 5 and the Beastie Boys. "But if you buy into the concept that subscriber base will continue to grow, the money will grow exponentially."

Evidence is building that streaming services, particularly subscription, will pay material sums to the industry as they get bigger. Spotify, for example, will pay out more $1 billion to rights holders this year, double its payments of 2013.

"Spotify is the single biggest driver of growth in the music industry, the No. 1 source of increasing revenue, and the first or second biggest source of overall music revenue in many places," Ek wrote Tuesday.

The opportunity for the open-minded

While streaming does complicate the business side for artists, it also gives musicians unprecedented power. Streaming puts global distribution to a massive audience at the fingertips of social-savvy artists, at the same time technology made it easier to record a song on a shoestring budget.

Alina Baraz last year recorded a song on her laptop and uploaded it to SoundCloud. "I remember sitting on my couch and realizing that today is going to be the day I release my first song," she said. Over the year, she's accumulated 29,000 followers and had her most popular song played 2.8 million times. She connected with a producer in Denmark through the platform, with whom she collaborates through Skype, email and shared audio files.

"I don't know how I knew that SoundCloud would be the best opportunity for me, but I don't think anything else would have suited," she said.

Soundcloud co-founder Eric Wahlforss said streaming creates a path for more people like Baraz. "Being a musician was never easy, especially if you're doing music that doesn't appeal to a huge audience," he said. "This is a way to make it sustainable for a larger part of musicians than it has before."

457591086.jpg
Soundcloud, co-founded by Eric Wahlforss, has racked up registered users in same league as Pandora. Getty Images

True, but the 2.8 million streams of Baraz's songs are 2.8 million times she gave away her music. As painful as it may be for artists to accept that their invaluable music may not be what listeners want to pay for, the big money doesn't stem from the recordings themselves anyway -- it comes from things like concerts.

"It started off you would tour to support an album," Pollock said of legacy bands like his client Depeche Mode. "That's now shifted to putting out an album to create a reason to justify a tour."

Live performance revenue is the biggest moneymaker in the business, and it's getting bigger. Live music sales are expected to grow to 64 percent of the US music industry by 2018, from 59 percent share last year, according to PwC's entertainment and media outlook.

Another perk of streaming: it can tell artists where they'll probably pack venues. After Pandora showed Hutchinson the top 10 cities that listen to him most, he was surprised to see the list include places like Seattle, where he gets less radio play. He made sure to put it on his tour. High-priced VIP tickets sold out weeks in advance.

Streaming music platforms are also allowing artists to widen their "merch table" to include intangible experiences such as selling a one-on-one Skype chat with a fan. Smule, the music-app maker behind Sing Karaoke, has begun a program of promotional partnerships with artists. Emerging artist Todd Carey, for example, offered a contest to Smule-app users: upload a cover of his single for the chance to win an iPad. Because people ended up buying his music to practice, the business effect was immediate and obvious, said manager Jason Spiewak. Carey went from selling 100 or so singles a week to a thousand-plus, and his views on YouTube and social following jumped.

85830669.jpg
Taylor Swift pulled her music from Spotify, saying it devalues music and undercompensates artists. Getty Images

None of these forms of making money -- contests, concerts, VIP experiences -- are new for musicians, but streaming music puts them within reach of more independent and emerging artists. "Engagement is the most important thing," Spiewak said. When thousands of people interact with his client's music, "if we can convert 1 percent of those people to be ticket holders, for an independent artist like Todd, that's a win," he said.

Carey isn't a solitary case. Indie-label group Merlin surveyed a subset of its members this summer and found that nearly half saw streaming revenue increase more than 50 percent in 2013 from a year ago, while the number of those reporting sales increases in downloads fell. Though Swift argues streaming perpetuates a perception that music has no value, 73 percent of indie labels surveyed were optimistic about the future of their business as they watched their streaming sales increase.

Previously, "those with institutional money could buy the storefronts, and it was easier to herd consumers," Merlin's CEO Caldas said. The stream and the download changed that. "That's why independents perform better in a digital world."

The freedom of the streaming-music future

erichutchinson14300rt2.jpg
Eric Hutchinson used Pandora data to plan his tour. JUCO

Singer-songwriter Hutchinson, who personified today's morphing listening habits, also embodies the journey of an artist as the world shifts to streaming and subscriptions. Signed to Madonna's Maverick Records in 2005 only for the label to collapse and freeze his album in the middle of its creation, he put out his next record on his own. Its top-selling single went gold.

This year, he released his latest album, "Pure Fiction," through a label-services business that doesn't touch the master rights to his recordings -- that lets artists keep more control of their work and retain more of their royalties, including the revenue they bank from streaming services.

Now when people approach him and say they were just listening to his music on Spotify or Pandora, Hutchinson takes no notice that they didn't say they heard him on the radio, on iTunes or on CD.

"I only hear the first half of the sentence: 'I was just listening to you.'"

Featured Video