#103 - Creator Gini Coefficients
Platforms and Power Laws
Hi 👋 - The creator economy is hot right now, but the gains aren’t evenly distributed. While technology has made global distribution effortless, discovery remains challenging. Today, a look at music streaming, Gini coefficients, and platform business models. Thanks for reading.
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Distribution vs. Discovery
If the press releases are to be trusted, technology is democratizing everything1. It's never been easier for someone to start a newsletter (guilty!), podcast, or teach an online class. As they battle for attention, giants like Facebook and Spotify and startups like Circle and Substack are wooing creators and their content. Technology has made global distribution effortless. Whether anybody wants to listen or can find you is another matter.
Gini Coefficients
The creator economy is booming, according to research by Stripe. Companies like Clubhouse, Substack, and Twitter use Stripe Connect to enable ticket sales, tipping, subscriptions, and other small-scale monetization. To get a pulse on the creator economy, Stripe indexed its top fifty creator platforms. In aggregate, they’ve onboarded 670,000 creators and aggregate payouts are approaching $10 billion. In 2020, the number of users grew 48% y/y in while the number of creators earning a living wage in the US increased 41% y/y2. Great headlines, but if BuzzFeed has taught us anything, it’s that headlines can be deceiving.
Averages are misleading when it comes to the creator economy because gains aren’t widespread. Gini coefficients are a tool for thinking about this. They provide a relative measure of how income or wealth is distributed throughout a population. A Gini coefficient of zero represents perfect equality, with wealth evenly distributed. Here, 25% of the population controls 25% of the wealth, 50% of the population controls 50% of the wealth, 63% of the population controls 63% of the wealth, and so on (perfect equality, below left). The opposite extreme is a Gini coefficient of one, representing maximum inequality. Here, one person controls all of the resources (total inequality, below right). This is a theoretical maximum, but if you were to compare Jeff Bezos’s wealth to the sum total of Amazon’s one million plus warehouse workers, you’d get pretty close.
Show Me The Money?
The creator economy has a high Gini coefficient, as music streaming illustrates. In the UK, earning a living wage as a musician requires about one million streams per month3 according to analysis by the UK Intellectuality Property Office. That’s a level of success that few musicians ever obtain. Only 1,723 musicians of the 424,000 in the UK, or 0.41%, exceed one million monthly streams in 2020. Not surprisingly, the report also found that many musicians combine income from music streaming with other forms of work like performing, teaching, and making lattes (my guess).
Statistics like this are common for creators. From October 2014 through October 2020, the top 0.1% of tracks in the UK achieved over 40% of all streams, the top 1% accounted for 75-80%, and the top 10% between 95-97%. Over the same period, the top 0.1% of UK artists got 40% of streams, the top 1% accounted for 78-80%, and the top 10% for 98%. Not to discourage budding musicians, but among the top 0.1% of tracks, major labels outperform indies by a ratio of nine-to-one. For the top 10% of tracks, the ratio is slightly more balanced at three-to-one. Adding insult to injury, 65-75% of streams come from back catalogs (think: The Beatles and The Rolling Stones), leaving a smaller share for emerging artists4. Not a lot of sunlight filters all the way down to the forest floor. Music streaming is not Eden, it's more like the laissez-faire world of Upton Sinclair’s The Jungle.
High Gini coefficients in music streaming are emblematic of the broader creator economy:
Mass Media: Books, movies, and video games have the same dynamic. Like music streaming or Jeff Bezos, wealth - weeks on the New York Times bestseller list, box office receipts, and video game units sold - is highly concentrated.
Gaming: On Twitch, the top 1% of gamers generate over half of the revenue5.
Newsletters: Substack has over one million paid subscribers and its top ten writers make over $20 million per year6. Assuming a $8 average monthly subscription price (many writers charge $5-$10 per month), Substack writers are grossing about $100 million per year with the top ten writers accounting for roughly 20% of that pie.
Below Average, On Average
Lake Wobegon is a town where all the women are strong, all the men are good-looking, and all the children are above average. A place like this doesn’t exist in the creator economy. According to Clay Shirky, who studies, teaches, and writes about the economic and social impacts of the internet, that’s not a bug, it’s a feature7:
Inequality occurs in large and unconstrained social systems for the same reasons stop-and-go traffic occurs on busy roads, not because it is anyone's goal, but because it is a reliable property that emerges from the normal functioning of the system.
Shirky asserts that the very act of choosing creates a power law, a relationship between two quantities where a relative change in one results in a proportional change in the other, independent of the initial size. For example, doubling the length of a square from three inches to six inches quadruples its area from nine inches squared (3^2) to thirty-six inches squared (6^2).
When people are free to choose between many options, a tiny subset ends up with a disproportionate share of the spoils, be it attention, income, or traffic8:
Diversity plus freedom of choice creates inequality, and the greater the diversity, the more extreme the inequality.
A big reason for this is that choices are not independent. People’s choices affect one another. Differences in popularity are subject to cumulative advantage, whereby tiny initial differences in popularity can snowball9. In other words, there’s a natural tendency towards the-rich-get-richer and high Gini coefficients online, as seen in the music streaming data above.
As the number of options increases, outcomes become more extreme. With the number of creator platforms expanding, we should expect more extreme outcomes. Additionally, in a power law, most elements are below average, because the curve is so heavily weighted towards top performers. This means most bloggers, gamers, and TikTok dancers will be below average. When analyzing the creator economy, or any power law, the concept of average has little value.
Help Below the Line get some cumulative advantage 🥂
Platforms, Picks and Shovels
In Las Vegas, the house always wins. In consumer tech, platforms are the house. You can think of businesses like AWS or Shopify as a collection of call options. Many of their customers will fizzle out, some will grow into medium-sized businesses, and a few will turn into giants like Airbnb, Netflix, and Snap. Their business models position them to get lucky. With each new customer, AWS gets another pull at the slot machine’s arm. The key is to keep the customers coming and let optionality work its magic. Platform business models benefit from variation and randomness. No one at Netflix knew ahead of time that Squid Game would turn out to be its most watched show, but the company was equipped to benefit from the upside.
Creator platforms are similar. They benefit from planting many seeds: many won’t germinate, some will quickly wither (how many podcasts stop after two or three episodes?), but there will be a lot of grass and a few that grow into sequoias. The high Gini coefficients that may be discouraging to an individual creator aren’t a problem for a business like Substack or Spotify. They want as many creators as possible, knowing that a handful will become the next Taylor Swift or Heather Cox Richardson, Substack’s equivalent of a rockstar. Abstract one level up, and Stripe has the same dynamic with many different ways to win: Buy Me A Coffee (tipping), Clubhouse (live audio), Nifty Gateway (NFTs), Substack (newsletters), Twitter Super Followers (tipping, kind of), and a host of others. And that’s just the company’s creator vertical.
From a business perspective, the key is being able to take advantage of hits and optionality. From a creator perspective, the challenge has shifted from distribution to discovery. If you’re looking to start a band or a Substack, do it because you enjoy it, not because you think it’ll make you rich.
If you’re finding this content valuable, consider sharing it with friends or coworkers. ❤️
For more like this once a week, consider subscribing. ❤️
More Good Reads
Clay Shirky on power laws, weblogs, and inequality. Water & Music on just how difficult it is to make a sustainable living from music streaming. Below the Line on power laws and Facebook’s creator strategy.
Disclosure: The author owns shares of Facebook, Netflix, and Shopify.
Except, of course, democracy, which is under attack. Alas, that’s outside of the scope of this newsletter.
Stripe, Indexing the creator economy, October 21, 2021.
From the report: “On the basis of the average per-stream rates we have calculated, we suggest that a sustained achievement of around one million UK streams per month may be some kind of guide to a minimum threshold for making a sustainable living out of music, at least in cases where UK streams are complemented by non-UK streams and other sources of income. For solo performers and songwriters and for those with significant access to other revenue streams, that minimum threshold figure will be lower.”
Water & Music, Just how difficult is it to make a sustainable living from streaming?, September 27, 2021.
Sara Fischer, Axios Media Trends, The creator economy is failing to spread the wealth, October 12, 2021.
On Substack, One million strong, November 15, 2021.
Clay Shirky, Power Laws, Weblogs and Inequality, 2004.
Clay Shirky, Power Laws, Weblogs and Inequality, 2004.
Duncan Watts, Is Justin Timberlake a Product of Cumulative Advantage?, April 15, 2007