The Streaming Evolution: Lessons in Monetization, Opportunities, and Myths

The entertainment industry’s transformation over the last decade, driven by the rise of streaming, has illuminated three critical areas attorneys and their clients should monitor: advertising, licensing models, and content strategies. These areas represent immense opportunities for those who understand the shifting landscape.

Advertising Renaissance

Streaming platforms once touted ad-free content as their premium offering. But in recent years, the introduction of ad-supported tiers by platforms like Netflix and Disney+ has reshaped revenue models. Certain insiders claim that, contrary to early fears, ad-supported subscriptions often generate higher Average Revenue Per User (ARPU) than their ad-free counterparts, premium subscription services. This trend, combined with the advent of sophisticated targeting tools, marks the beginning of a new advertising golden age.

However, as a profit participation auditor, I am skeptical. While industry leaders point to higher Average Revenue Per User (ARPU) for ad-supported tiers than for premium subscriptions, I’ve yet to see a single case where this holds true. Premium subscriptions consistently outpace ad-supported ARPU when all factors are accounted for.

In any case, despite insider optimism, ad-supported tiers are not a guaranteed financial boon. ARPU from ad-supported services relies on robust targeting technology, a consistent influx of high-quality ads (i.e., ad inventory quality) and on advertisers paying market rates (currently Amazon is charging below-market rates as a loss leader, making it difficult for video streamers to sell advertising at market rates). 

Further, for clients producing content, ad-supported models can represent a double-edged sword. While they expand audience reach, they often necessitate stricter content guidelines to ensure “brand safety.” Navigating these constraints requires careful contract negotiations to protect creative integrity while maximizing revenue opportunities.

This and the discrepancy between insider optimism and real-world evidence demands scrutiny. Attorneys representing creators should be prepared to question ad revenue forecasts and insist on transparency in revenue-sharing agreements and prepare to negotiate both for:

1. Ad revenue shares, ensuring equitable participation in this growing segment
2. Detailed audits and data-sharing provisions to verify claims (a subject best addressed by a consultant at my firm, Boschan Corp., as there are many considerations)

The Case for Windowing

Exclusivity defined streaming’s first decade, but the pendulum is swinging back toward the traditional windowing model. Licensing content to multiple platforms has proven its value, as demonstrated by recent success stories like Suits, which found a massive new audience years after its original release.

Clients with legacy content libraries should explore licensing opportunities with ad-supported platforms or free streaming services. These platforms are hungry for proven content that can attract viewers without the development costs of original programming. Moreover, content that has outlived its exclusivity period on one platform can enjoy a second (or third) life elsewhere, creating new revenue streams.

Attorneys advising studios and production companies should prioritize flexibility in contracts, ensuring that exclusive rights revert to their clients after a reasonable time. This allows studios to pursue licensing deals that benefit from the growing appetite for library content.

Cost Control and Strategic Incentives

One of the most pressing issues in streaming today is the unchecked rise of production costs. Expensive, sprawling productions were standard when the likes of Netflix was competing to gain market share. But now that Netflix is established and the industry is going through consolidation on its path in the direction of an oligopolistic marketplace, the industry is waking up to the reality that financial sustainability requires moderation.

Attorneys should ensure that contracts reward clients who produce high-quality content within reasonable budgets. For instance, performance-based incentives tied to efficient production could foster a healthier balance between artistry and fiscal responsibility.

Moreover, the return of contingent/performance-based compensation models aligns incentives between platforms and creators. Attorneys must advocate for transparent success metrics and fair back-end deals that reward efficiency and audience impact, rather than sheer budget size.

Embracing Opportunity

The entertainment industry stands at a crossroads. Advertising is making a comeback, the windowing model is ripe for revival, and cost control is no longer optional. Attorneys have a pivotal role to play in shaping these trends, ensuring their clients navigate this evolving landscape with clarity and confidence.

By asking tough questions, negotiating strategic terms, and leveraging data-driven insights, attorneys can turn challenges into opportunities for their clients—and themselves.

What Does Pro-Rata Mean? Especially With Reference to Streaming Royalties.

Pro rata is a Latin adverb or adjective meaning a proportionate allocation.

When services calculate streaming royalties to licensors on a pro rata basis, it usually means allocating earnings to each licensor according to its share of a pool of total earnings.

However, licensors of content that attracts the most profitable per-stream users are apt to find such standard pro-rata methodology to be unfair and may favor user-centric royalty calculations instead of those that are pool-based. In a user-centric calculation, a streaming service instead pro-rates earnings from each individual user to the relevant licensors and does not first pool earnings matched to individual users.

Pro rata calculations can be used to determine the proportionate shares of any given whole and it is often used in business finance.

Visualizing Decimated Revenue in the Record Business

Since 1999, the old "record business" (i.e., of manufacturing and distributing physical consumer products) has dropped over 70%.  See charts below based on RIAA data:

Record companies collectively lost control of music distribution, albums unbundled into tracks, and downloads have had their day (note: downloads are declining in market share at this point). 

A small number of digital music services have seized control of music distribution; YouTube, Spotify, Amazon and Pandora compete with Apple to offer consumers better, faster and/or cheaper experiences, making streaming one of few recorded music market segments with strong growth.

Losing control of distribution to digital companies has weighed heavily on music license fees, resulting in controversially low royalty rates, which are often based on subscriber or ad revenues. See Boschan Corp.’s estimates below of roughly how many digital downloads or streams are required to achieve $1 Million in US recorded music revenue on many of the popular services:

Note that actual rates do vary based on the services deals with record companies and/or SoundExchange as well as the type of exploitation (e.g., subscriptions vs. ad-supported).

Also, it is important to note that while recorded music revenues have dropped, so have costs (e.g., for physical product), and that record companies have a multitude of other income streams that they classify as "investment" or other types of income or offsets to costs.  As a result of these and other factors, the profitability picture is not quite as grim as it appears when we focus solely on revenues of the recorded music sector.

Top Tweets YTD from the Auditrix 2015 Twitter Feed

Below are the popular tweets from the Auditrix twitter feed, which focuses on music economics and royalties, during 2015 YTD:

• Duff McKagan on royalty audit of Geffen: "Well, they didn't pay us on something like 6 million records."
• YouTube Music Key Drew Criticism from Indies
• Apple spent up to $50 million for a music data company 
• Swedish songwriters called for more clarity and fairness over digital royalty distribution
• Sly Stone testified in royalties lawsuit against his former manager and won   
• Katy Perry's lawyers demanded takedown of 3D printable Left Shark and filed a trademark claim for Left Shark
• Federal District Courts "have been improperly applying a quantitative and not qualitative #copyright analysis... "
• Elvis Presley Turns 80: What Is the King's Legacy Worth?
• Sony's Lynton said: No Plans to Sell Music Publishing Business
• The Best Time to Release Your Album: A Month by Month Guide
• The U.S. Copyright Office Embraced Big Shake-Up to Music Licensing Regime 

Best Unfinished Twitter Conversation with Glenn Peoples @ Billboard and John Strohm @ Loeb

• Jas Prince Sued Birdman For Drake Royalties
• Tony Braxton's Ex-Husband Auctioned Off Royalties To Pay Back Child Support
• Kiplingers: Shouldn't Music Streaming Sites Pay Higher Royalties?
• Medium: Why Do All Records Sound the Same? 

All the Ways One Can "Buy a Record"

My favorite octogenarian attorney recently asked me:

"Please give me a list of all the ways someone can buy a record."

I came up with the following and included uses that may not strictly constitute sales or phonorecords under the U.S. Copyright Act:

1 – Consumers can purchase permanent copies of recordings in various configurations, such as:

a.      From retailers (online like Amazon.com or brick and mortar like Target and Walmart) or directly from an artists’ website or at a concert (e.g., together with merchandise):

i.      Vinyl Record

ii.     Compact Disc

iii.    DVD

iv.    Embodied on video games

b.     Permanent downloads from music services (e.g., from iTunes and Amazon.com) and video game console manufacturers (e.g., Sony’s PlayStation network and Microsoft’s Xbox store)

2 – Also, consumers pay for access to listen to recordings by subscribing to a music service such as the following:

a.   Interactive services like Spotify and Beats (where users can stream on demand)

b.  So-called "non-interactive" services like Pandora and Sirius XM (which offer users less control over programming)

3 – Alternately, companies pay to advertise to listeners or viewers of free programming on services like YouTube, Vevo, MTV and the services mentioned in #2 above.  In this case, access to the recording is “free” to the consumer because the advertiser subsidizes the cost, but the consumer must watch or listen to ads in exchange for such free access.

4 – Finally, consumers who purchase electronics devices such as a Samsung phone or iPhone may find that music has been bundled with the device by the hardware seller, which pays the music rights holders for the right to do this (and thusly must build in the music cost in the device's price).

What ways to buy a record did I forget?

Please tell me what I failed to mention below!