Music's Past & Future: A Conversation with Michael Pelczynski

During his time at SoundCloud, Michael Pelczynski helped conceive of a new way to pay artists. Now, he is looking for more ways to improve the music industry.

The most frequent complaint I hear about streaming services is that they don’t pay artists fairly. Michael Pelczynski, the former Vice President of Strategy at SoundCloud, took that complaint personally. Over his five years with the streaming service, he helped conceive and implement a novel payment scheme that received much praise.

In an hour-long conversation, Michael and I spoke about fairer ways to pay artists, the future of artificial intelligence in music, why he thinks streaming services should be hiring musicians, and so much more. If you want to hear more from Michael, check out his new music consultancy, Forms + Shapes.

A Conversation with Michael Pelczynski

Your career in the music industry began as an intern at Atlantic Records in the early 2000s, not long after the industry was turned on its head by Napster and digital music. You would later be heavily involved in royalties and rights administration at Warner Music and soon after at SoundCloud. Before we get into the specifics of your work, I want to start with a few broad questions about how streaming has affected various sides of the industry. First, do you think streaming has been good for listeners?

I’d say yes from a general perspective. I think it was beneficial. Everyone always touts the counter it created to piracy, and I think it did it by convenience. Even piracy became inconvenient. Piracy might have gotten you every song you wanted, but you had to juggle around hardware, software, and various pieces of equipment to access it.

Were you dealing with piracy in those early years at Warner?

Yup. One of my first jobs was at Atlantic Records working in new media business development. One of the key things in that department at that time was working with interdiction firms. These firms would put bogus content on piracy sites, broken files and the like. There was all this crazy anti-piracy stuff going on. Streaming brought convenience. After the first few years, you had all of the content on streaming sites. This eventually brought discovery.

What do you mean by discovery?

Previously, I’d go crate-digging at record stores or talk to friends who were DJs or songwriters to find music and influences that were outside the mainstream of the genres I lived in. Streaming helped bring those people together. Crate-diggers became digital crate-diggers. Aficionados and songwriters began conversing with these digital crate-diggers asking to be sent stuff that they were obsessed with.

I started seeing my friends and songwriter buddies comparing notes like, “Did you check out this Yugoslavian guitarist from 1967 who did these really killer guitar instrumentals, but he was using these electric pedals that made it really ambient?” Super weird, niche stuff, but it would inspire new music people were making.

If I recall correctly, music industry revenue in the U.S. began to crater around 2000. There were some intermediary steps, but we really don’t see industry revenue recover until streaming is ubiquitous, right?

Yeah, it saved parts of the industry. That 2000 to 2010 decade was a rough era. Most of that decade, I was between two different jobs at Warner Music in New York. One side of the industry in that area had its foundation pulled from under it. On the other side, you had the crazy genesis of that Lower-East-Side-indie-rock-Strokes-and-Interpol resurgence. So, as the money started dwindling in the industry at large, these less mainstream styles were very much alive. Everything almost felt bigger and better than it used to be if you were in that scene.

It was really interesting. You felt this shift between scenes on the ground while the topline of the industry was tanking. So, you didn’t really know what was going on. Then around 2006, people started discovering early streaming platforms, like Rdio. It was a very strange transition period.

I remember Edgar Broffman, Jr. at Warner bringing everyone together at this big company meeting in New York to address what was going on very directly. It was clear to everyone at the company how serious this was.

I once heard it described that for about 100 years, the music industry was a product business. They were selling vinyl, cassettes, CDs, and devices to play those things. Then very suddenly the industry had to switch to a service-centric business. In a way, that was funny because if you go back even further, music only existed as a service, other than sheet music. It was like the clock was turning back.

It’s interesting you put it that way. When music was focused on products, you could flex those products in many ways to sell to all different classes of people. Go back a few hundred years and music was a service, but much of that service was focused on the upper classes. Now, you are sort of combining both of those. Anybody can buy the service. The issue that many call out is that people are making de minimis amounts off of that service.

So, we touched on how streaming was generally beneficial to listeners and labels, but what you said leads to the third group. Was streaming beneficial for artists?

Let’s think about the period of 2010 to 2013. You still had a balanced portfolio as an artist. You had people heavily engaged in streaming, and you had people heavily buying physical product. Then gradually everyone started shifting to the convenience of streaming.

Streaming is guided by an ebb-and-flow economic principle. It doesn’t necessarily matter what you do as an artist as much as if the pond you are swimming in is expanding or contracting and how many other artists you are sharing the pond with. The streaming business has been obsessed with growing the size of that pond. Over the years, as listeners have flocked to streaming services, there has been more money to share with artists from advertisers and subscribers, but there are almost exponentially more artists.

What that ebb-and-flow means is that supply will always outpace demand. Thus, there’s less money for artists. Even though the pie of revenue grows, you have to slice it more and more.

Of those artists that I mentioned earlier - that indie rock scene that was just coming up and starting to bloom - it would be really difficult for them to get big today. What happens now when there’s a scene like that is it’s small and has diehard fans but the volume from that scene in relation to all others is nothing.

For the people reading along, I want to make clear how the current payout system on most streaming services work. It’s a pro rata system. Do you want to briefly describe how the pro rata system currently works?

The status quo is that there’s a sum of money raised from advertisers and subscribers. Every artist’s plays are then dumped into a pot. Pro rata means that all artists (1) are competing against each other for a share of that sum of money and (2) the amount of volume of plays that you as an artist have against all other plays determines how much you make.

That’s what I meant earlier by ebb-and-flow. Everything that ebbs-and-flows, whether that be listeners, advertisers, subscribers, macro conditions, will affect the overall sum of money and what artists can get paid.

An illustration of pro rata. Each slice of the pie is an artist’s payout.

It’s interesting you tie that to making it harder for smaller scenes to come up. Say there is a new scene rising in the Midwest, maybe 5-10 bands starting to pop off. In terms of streaming revenue, they are competing with the Drakes and Taylor Swifts of the world, which will likely drown out any substantial revenue for them. Is that right?

Exactly. Here’s a thought experiment. Imagine in the Midwest we are talking about revenue from local venues. First show, you have 5 people show up. Those 5 introduce another 5. Then you get to 50, 100, and so on. All of a sudden you have a 200-person venue sold out.

If live revenues were divvied pro rata, it would mean that your cut of live revenue would be shared among all other artists playing live. You’d have to compete against the artists playing arenas and stadiums. So, even though you and that venue had 200 people avidly supporting you, pro rata means most of your fans’ money would not be going to you.

This is of course not the only way. At SoundCloud you helped conceive and implement the user-centric payment scheme, which you consider a better alternative. Why don’t you tell us a bit about that?