One of my favorite DJ's, Cozmic Debris, has a great blog. He recently wrote a great post on the economics of the music industry & particularly he discusses how streaming royalties are paid. This is very timely with the recent progress on passing the Music Modernization Act. Here's a piece of his latest blog post. For the whole thing go to https://cozmicdebris.net/2018/09/18/nothing-in-life-is-free/.
In America, you cannot avoid advertisements for the cellphone industry. They are everywhere. For many years, those ads promised free phones if you signed up with the particular carrier that was showing you what a great deal it had. The truth is there was nothing free about the transaction. The company paid the manufacturer for the phones they ‘gave away’, and the cost was passed along to the consumer in the price paid for the actual service. The customer did end up paying for the phone without even realizing it. But the one thing they did not pay was sales tax- because the phone was sold at a $0.00 cost, no taxes were added to the transaction.
Enter a number of state governments who realized they were missing out on a major revenue source in this (then) growing market. In most states, the cost of the service itself is not covered by Sales Tax law, but the sale of a physical product (the phone) is. Eventually, states started passing legislation requiring the collection of Sales Tax on all cell phone purchases and required that tax be based on the MSRP (Manufacturer’s Suggested Retail Price) of the phone being purchased. If the manufacturer listed the phone as an $800 product, tax was to be collected based on that $800 price tag regardless of the actual cost to the consumer. Sell the phone for half price, collect the full tax. Give the phone away for free, collect the full tax. Pay the customer $300 to take the phone, collect the full tax. Government created a new revenue source and changed the landscape of the American cellphone market forever.
You may be wondering why the hell I’m talking about cell phones on a music blog. Hopefully, you’ll get the correlation by the end of this article. We live in a society where getting things for ‘free’ has become an expectation of the consumer. As different segments of the world economy have become hyper-competitive and the reach of any business has taken on a global playing field, companies have been forced to rethink their marketing strategies, in an attempt to gain visibility with the consumer market. “Free” is a commonplace word in advertising, and as a result, the average consumer does not recognize the negative economic effect the word can have when used in the wrong places. After all, they are getting something for nothing.
Enter Spotify with their free tier of music streaming service. The consumer pays nothing to listen to as many songs as they wish for as long as they want. It is no wonder that this service has become wildly popular...