Why Stem Changed Its Business Model

Last week Friday, Stem—one of the most popular music distribution services for indie artists—made a drastic change to its business model. A number of its existing users will have to leave the service, much to their frustration.

From Stem’s press release:

With that, we are excited to launch Stem Direct, a concierge member service to support our top talent. Moving forward, all artists and their teams that use Stem will have a dedicated account representative who they can call, text or email. The account representative will offer strategic playlisting advice, support pitching new content to streaming services, provide in-depth quarterly business reviews, surface data-informed recommendations and suggest proactive next steps, and share access to new features.

As Stem evolves to super-serve our clients, we will adjust the Stem fee from 5% to 10% for all new users as of July 1, 2019. Current users will continue to pay 5% on existing content distributed by Stem and a discounted rate of 8% for new releases. This fee update is the result of in-depth research of the marketplace, as well as direct conversations with artists and managers to understand their needs and willingness to pay.

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For creators who don’t qualify for Stem Direct, we have integrated with TuneCore to help ensure a seamless transition to a new service.

Stem Direct is now in direct competition with UnitedMasters, EMPIRE, AWAL, and others that focus on rising stars and take a 10-20% (or higher) revenue share in exchange for support.

But this shouldn’t come as a surprise. Music writer Cherie Hu wrote about the costs associated with this model in a recent Billboard article:

"Several distribution executives tell Billboard that their biggest expenses are customer service departments that offer artist support; some also invest in teams to assess fraud and handle complicated payment and rights data. Done right, digital distribution is less like the traditional music business than fintech, which happens to deal with artists.”

Customer service is a fixed cost. It increases as the number of users increases, but it doesn’t necessarily track with output or revenue. In fact, it might do the opposite. Artists who require the most help might never get to the next level. It’s tough to justify support with a mere 5% cut from artists who don’t generate much revenue.

Stem had two options. Lower its customer service levels for the “5% tier” and created other value-add services for its best customers, like Amuse. Or, increase customer service levels for artists who generate meaningful revenue or have the potential to do so. It chose the latter.

“While we’d love to build relationships with every single current Stem user, providing best-in-class service to tens of thousands of artists simply isn’t realistic,” Stem co-founder and CEO Milana Rabkin said last week in a Billboard interview.

I expect more distribution services to increase their rates. Don’t be surprised if UnitedMasters bumps up from its current 10% cut. The company is VC-backed, continues to hire talent from tech companies, and appears to be following the traditional model: price the service low to gain market share and build its customer base. Once the company gains traction, prices will likely rise too.