Why Spotify can never be profitable: The secret demands of record labels
Imagine a new hot-dog selling venture. Let’s also say there’s only one supplier to purchase hot dogs from. Instead of simply charging a fixed price for hot dogs, that supplier demands the HIGHER of the following: $1 per hot dog sold OR $2 for every customer served OR 50 percent of all revenues for anything sold in the store.In addition, the supplier requires a two-year minimum order of 300 hot dogs per day, payable all in advance. If fewer hot dogs are sold, there is no refund. If more than 300 hot dogs are sold each day, payments to the supplier are generated by calculating $2 per customer or 50 percent of total revenues, so an additional payment is due to the supplier. After the first two years, the supplier can unilaterally adjust any of the pricing terms and the shop can never switch suppliers.
Would this imaginary hot dog establishment be able to generate a profit? Never, because the economics are one-sided. The supplier will always elect the formula that captures the largest amount of money for themselves, completely disregarding the financial viability of the store. If the store miraculously managed to generate a profit, the landlord would simply raise the rates after two years.
Such economic demands may be imaginary for the hot dog business, but they are the stark reality that every digital-music subscription service such as Spotify, Rhapsody, MOG, Rdio, and others must confront. These details aren’t well-known because digital music service deals are always wrapped tightly with strict non-disclosure agreements.
For the first time, people are talking, and these previously secret demands are being made public. The specifics are even more onerous than the hot dog example cited above. Together they doom online audio companies to a life of subjugation to the labels, as you will learn below.
Here are some specific demands that digital music companies are compelled to agree to:
- General deal structure: Pay the largest of A) Pro-rata share of minimum of $X per subscriber, B) Per-play costs at $Y per play, C) Z percent of total company revenue, regardless of other business areas. As stated previously, this means labels de facto set retail price (they also regularly negotiate floors on price, giving even less wiggle room), which limits the ability of the music service to develop ancillary revenue streams that aren’t siphoned off by the labels.
- Labels receive equity stake. Not only do labels get to set the price on the service, they also get partial ownership of the company.
- Up front (and/or minimum) payments. Means large amounts of cash are necessary to even get into the game. In my experience, this further stifles innovation in services and business models.
- Detailed reporting, including monthly play counts. This seems rational enough — you would assume this information is necessary to pay artists and make other business decisions. The problem is, the labels each make additional demands, including providing additional reports unrelated to payment, including overall market share of sales in various categories. I doubt that, for example, phone manufacturers demand Best Buy provide the percentage of sales of competitors’ phones. The labels effectively offload their business analysis (and the cost of such analysis) onto the music services. I can’t think of another industry where that is standard practice.
- Data normalization. Labels all provide their data and files in different formats. That data is constantly changing as labels make available new material and make unavailable old material. This might seem trivial. It’s not. Without standard naming conventions and canonical methods for referencing artist, tracks and albums (ISRC and UPC don’t cut it), the services are left to try and match artist, track, album names provided by one label with those of another. It’s incredibly inefficient, as each service must undergo this process separately (although there are now companies that provide a service for doing this for the retailers).
- Publishing deals. Once you’ve signed deals with the labels, you then need to cut deals with the publishers. Determining ownership is a complete nightmare and there are huge holes in the licensable catalog. The data issues here are worse than with the labels. The long and short of it: Although you may have the rights to stream from labels, you sometime can’t get the rights to stream from the publisher, or worse, even find the publisher.
- Most favored nation. This is a deal term demanded by every major label that ensures the best terms provided to another label are available to it as well. This greatly constricts the ability to work out unique contractual terms and further limits business models. It is a form of collusion since each label gets the best terms the other label negotiates. It’s also why it’s easy to get one label (typically EMI) because they’ll provide low-cost terms knowing that others will demand higher rates, which EMI will then garner the benefit from.
- Non-disclosure. Every contract has strict language prohibiting the digital music company from revealing what they pay to the labels. If they speak publicly about any of the licensing terms, they jeopardize invalidating their license which would torpedo their business. Since labels license on behalf of the artists any payment to the artist comes from the labels not the digital music company. This is the main reason music services, not the labels, have been getting heat from the artist community. Music services can’t defend against accusations about low artist payments because they pay the labels who don’t disclose what they’re paying to the artists.
With most other businesses, if a supplier makes unreasonable demands, a retailer can turn to other providers. Since copyright law gives record labels and publishers a government-granted monopoly, no such option is possible with music. Digital vendors have only two options: Accept the terms or not include those songs in their offering.
The sale of EMI to other music companies means there will shortly be only three major labels. If a music service rejects terms offered by a label, then that service’s offering will have an enormous hole in their catalog of 25 percent or more of popular songs. In the business world, a monopoly leads to lopsided economics, and the subscription digital music business is a poignant illustration of that.
Final note: Online radio services such as Pandora take advantage of a government-supervised license available only to radio broadcasters thus sidestepping dealing with record labels. While the per-song fees are daunting, they bypass virtually all of the terms listed above.
A 15-year veteran of the digital music business, Michael Robertson is the founder and former CEO of MP3.com and is currently CEO of personal cloud music service MP3tunes as well as the radio recording service DAR.fm. He can be reached at michael@michaelrobertson.com. He would like to thank Paul Petrick for his contribution to this piece.
Image courtesy of Flickr user walknboston
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The thing is, since people are slowly coming around to subscription music services, if they disappear, people are more likely than ever to pirate instead of buy more music.
According to lots of ‘studies’ and ‘research’ people who pirate music also BUY more music.
Given that someone buying music rather than streaming it would net the artist more money, then piracy is better for the artist than streaming it would seem.
Source?
http://www.guardian.co.uk/music/2009/apr/21/study-finds-pirates-buy-more-music
One source…my credit card. Since I signed up for Spotify two months ago I have bought about 5 CD’s from the local Newbury Comics and downloaded another 5 albums from Amazon. I have not bought that much music so quickly since around 1986
As Stav indicates below, I think streaming music encourages purchasing music in the same way piracy does.
Regardless of how much people who pirate music also purchase music legally, it does not change the fact that piracy is theft. If the theft is of a tangible object, it is condemned, and yet for some reason consumers feel no guilt about stealing intellectual property such as music or film. Excusing pirates of their crime because they also made some purchases legally is like excusing a consumer from stealing 500 hotdogs because he happened to pay for 30 recently.
It is true that digital streaming services such Spotify are one of the most likely ways to rescue the music industry from extinction by piracy, so the record companies really ought to learn to play nice. Unfortunately piracy has created such a financial burden on these companies that they must make desperate, one sided deals to keep from going bankrupt. In an ideal world, digital music services would pay artists directly, and artist would then pay a retainer to their record companies for the promotion and support provided to the artist. Such an arrangement would require record companies to make money for the artists in order to be profitable (which isn’t so true of today’s model), but would require a complete overhaul of the structure of the recording industry.
The intellectual dishonesty or probably just plain cluelessness of the “music professionals” never ceases to amaze a poor engineer soul like me.
“Excusing pirates is like excusing someone who steals hotdogs”: no it isn’t, see http://mybroadband.co.za/photos/data/500/piracy1.png
“because they also make some purchases” which is the same as they’re your CUSTOMERS. I’m not. The little music I’ve ever pirated hasn’t prevented me from buying a single CD. Actually, I’ve never in my life even considered buying a CD, I don’t need them. They’re not food, people CAN live without them. The people you want your government to mob and imprison are your customers.
Your analogy was also completely off; downloading music and then buying it afterwards it like “stealing” hotdogs and returning to pay for them. Guilty! say MPAA and “music professionals”. Down with the internets, down with information society, down with progress of technology! Shame on you.
I’m guessing a lot of hot dogs would get stolen, and then the hot dog supplier would lobby the government to hire guards for hot dogs. If a guard saw a person eating anything that looked like it might be a hot dog, the guard could confiscate all of that person’s food, without any kind of evidence.
Also, since backpacks were often used to hide stolen hot dogs, the government would be asked to charge an annual fee to everyone who used a backpack, so that the money could be given to the hot dog supplier to cover the cost of stolen hot dogs. Even vegetarians, who never eat hot dogs, would have to pay the annual fee.
@ KenG
You deserve some kinda medal for that comment. Perfect analogy.
Why is that a perfect analogy?
Thanks, Daniel, I appreciate the comment.
Mark, the music industry originally created the situation where the only way to get digital music easily was to steal it. Fortunately for them, Apple created itunes and demonstrated how music could be sold over the internet. however, this isn’t good enough for the entertainment industry, as they constantly ask for laws that would cripple computers, because computers are used to share music. They also have suggested taxes on internet service, that would be distributed among the music industry, to compensate them for their “losses”.
But possibly the most egregious demand is the SOPA legislation currently being considered by Congress. It would allow media companies to force ISPs to shut down websites they believe are infringing their copyrights, without proving their case in court. They just have to say a specific site is violating their copyright protection, and boom, the alleged infringer gets locked out.
I liked your comment.thanks for making laugh
Not entirely accurate. A better analogy would be suppliers also require consumers to only consume the hotdogs in places they specify. Consumers annoyed at these restrictions find a way to duplicate the hotdogs (not steal them) for next to nothing.
First the suppliers try to sue anyone they see eating a hotdog for 5000% of the cost of the hotdog. When this strategy fails as it costs them more to engage the lawyers than the money they receive from suing consumers, the supplier then lobbies the government to step in and introduce laws that allow them to shut down any form of hot dog consumption anywhere in the world due to the threat of ‘counterfeit’ foreign hotdogs.
Compulsory licensing, which makes broadcast music and services such as Pandora possible, isn’t an ideal solution, but it may be the only one. The current label-by-label licensing is hideously inefficient for rights holders and the services alike.
However, competition between record labels over high-profile artists for their contracts is probably one of the major components in creating “star power” in the music industry. Whatever the precise outcome, leveling the playing field with a fixed compulsory licensing rate would surely have significant destabilizing impact on what it means to be a talented/famous/amateur musician.
That sounds awesome, can we do that now please?
Spotify can easily solve the problem by simply publishing and producing music themselves. According to this article that is dead easy and risk free as you get given a ‘monopoly’.
This is exactly why the record labels (and by extension RIAA) are fighting a losing battle. Their greed will do them in. Why should any artist sign with a record label anymore in light of the fact that they can sell direct to the public via iTunes, Amazon, etc.?
It takes money to record and promote a record. Thats why artists sign with record labels. Plus they have experience selling music..Records labels arent ad greedy as people think everyone wants to play music but no one wants to pay for it
Which the record producers are only too willing to charge back to the artist against any sort of advance and production, marketing, stocking and promotion fees.
Ever why so may bands are “one hit wonders”?
It’s because they are starting with the odds stacked against them. They have to carry all the freight right off the bat and they’re paying or all of the promo, the distribution deals, (all at the record company;s rates of course,) and then they have to pay every hanger-on that comes asking for settlement of their ridiculously inflated bill (some of which the record company is getting a kick-back on as ‘fees’.)
The record companies are so corrupt that they make the drug cartels look tame.
It is a myth people pirate music because they don’t want to pay for it. It has been proven over and over that given a convenient way to get music online people will pay for it.
1) Can’t advertise/promote your music if you don’t have money
2) Can’t tour (promote your music) if you don’t have money
3) Can’t get on the radio (promote your music) without the support of a label
4) Can’t produce decent quality recordings of your music if you don’t have money
5) Can’t pay rent and buy food to live if you don’t have money
6) etc. etc.
The unfortunate reality is that the record labels have as much power as they do for many more reasons than just the ability to mint and distribute CDs.
Just because streaming and digital distribution services exist now, doesn’t mean there is a sudden utopia for musicians where they can be successful all on their own.
1. Give some or all of your music for free, and your music will market you.
2. Save some money until you can tour.
3. Not true.
4. Not true.
5. Keep your day job.
@gubatron: “Keep your day job” is a really, really moronic stance about all this.
Breaking news: making good, let alone great music is an extremely demanding and taxing job. No matter how talented and dedicated, an artist who’s forced to have a day job is doomed as far as said day-job will exhaust the intellectual, mental and physical energy it takes not to sound amateur-ish.
I’m not defending the labels, here, I really wish some thing different emerges than the current ways of doing music-business. But if you think “Keep your day-job” is the answer, you are terribly deluded.
Actually gubatron’s “keep your day job” is absolutely awesome. You know who makes good music? People who aren’t doing it for the money. Music isn’t a product, it’s art. There’s way too much mediocre music clogging up the world. If you’re not passionate enough to do it in addition to making a living do us all a favor and don’t bother.
OK – I come at this as a musician who has spent most of the last 2 years and most of my income in a serious band – we self-published, we had everything for sale on iTunes and Amazon, we paid for our own recording and production, we paid for PR (which worked, we got played on national radio in the UK and in the Republic of Ireland), we toured across the UK and Ireland and Spain.
We have a fanbase and do everything to a very, very tight budget, everything accounted for properly, we did everything we possibly could for ourselves, only hiring people in to do things we actually couldn’t do (recording, mixing and mastering because they had equipment we didn’t have, PR because they had contacts and relationships we didn’t have). We toured and gigged constantly, despite having to hold down jobs to earn money – we averaged 10 – 12 gigs / month including 7 tours of Ireland.
It cost us a small fortune.
I am no longer in the band (I wish them well, my departure was not acrymonious, they’re here: http://www.myspace.com/yngve)
Despite doing EVERYTHING we could to keep costs to a minimum we couldn’t cover costs. Arguably if we had some investment from a smaller independent label to help cover more PR and some radio plugging we could have covered our costs and got them paid back but apparently the industry is on its arse and no-one wants to invest in new music unless the money is already there.
There’s absolutely no bitterness on my part, it was a wonderful experience BUT it does highlight the reasons why artists sign to labels – the investment to break through is vital and that is missing from those artists who self-publish without the lifeblood of a publicity budget.
The problem here is that you are competing against other artists, both “old” and “new” music, who have the backing of labels. If it was a more level playing field, assuming that your music has quality, you would have succeeded much more likely. So this is a vicious cycle that can only be broken after some particular threshold of the market escapes from control of labels.
I understand your situation, but if a record label had given you an advance and distributed your album, there is no guarantee your band would have done better. Hip-hop is about the only musical genre paying the bills right now. And after taking the record company money, your band may have had to break up after a year. If the record company dumped you after your first CD (which happens in most cases), and you had a three-album deal (usually the standard), the record company would assess so many expenses to your “account” that no other record label would be able to afford to buy out your contract and you would have been in record company limbo. The end result would be that the band would be forced to break up and its members join or create other bands. And if two or more of the lead musicians decided to stay together, it could risk being sued by the record company under the claim that the band didn’t really break up. So the outcome might have been the same or worse.
At what point does a playlist become a radio station?
I’m guessing it’s at the point where the end user has no control over his or her experience what-so-ever.
Because otherwise they might not listen to the ‘right’ songs, you see?
Not exactly sure what your questions is but I’ll try to answer anyway. Technically, if audio is streamed over the internet it will never qualify as a traditional radio station. Who, by the way, are required to pay the arts anything. If you questions is about qualifying for a compulsory license, a playlist must be at least 30min long.
There a number of regulations around this, and a lot of them have to do with how often certain songs are played. For example, from the DMCA:
* no more than 2 songs in a row from the same album
* no more than 3 songs from an album in a 3 hour period
* no more than 3 different songs in a row by the same artist
* no more than 4 songs by the same artist in a 3 hour period
Somebody would be so kind to explain why or how iTunes made it? I have always heard they are profitable, is it something I am missing? Thanx for your answer.
Apple doesn’t make money on iTunes. iTunes is a loss leader for Apple’s hardware (which they sell a ton of). Which is why it doesn’t make a difference if iTunes makes money.
<>
I’ve heard this before and believe you, but do you have any data/links to back this up?
http://allthingsd.com/20100225/apple-billions-of-songs-billions-of-apps-not-much-profit/
Thanks Jeremy and Jesse for the link. I was misinformed.
How can you isolate iTunes music revenues from apps, movies, tv shows, etc revenues ? If we can’t than we can’t really compare spotify and iTunes profitability-wise right ?
Apple has said that it keeps about 10 cents a song. That means the record companies receive 90% of the money. If you think about the cost of bandwidth, servers, employees, credit card processing fees and so forth, the the $1 billion it’s made would probably be at about the break-even mark.
If Robertson’s first point is accurate, it absolutely makes sense why Apple hasn’t adopted a streaming model to date. Steve didn’t even want Sony to get a per-device royalty in exchange for access to their catalogue (Sony was the one label pressing the issue when iTMS was being negotiated). The terms that Robertson is describing here are way more onerous: a renevue share across all of Apple’s divisions (PowerBooks and iPads) and an equity stake on top of it? Out-bloody-rageous.
The music industry is allows a tough place to crack a profit. To many hands are out for every penny.
If musicians are paid so little I suggest they do a different job. Face it, recorded music as an income is fading away. I give it 10 yrs before all music will be free. Live music and licensed music for secondary media like movies/ads etc is the only way forward.
look at you, all gleeful over giving people who actually create something a hard time.
I look forward to your world when everything’s covered in ads and the only people who can afford to tour (that’s almost no one, by the way) are the very very top tier of earners.
“the worth of everything and the value of nothing”
I will enjoy it while I can…
you’re lumping old school major labels in with indies. it’s not reasonably to tar the whole industry with the same evil brush.
wow newsflash. companies don’t exist to fund other companies.
“it’s just business” – you heard that before?
The record labels will disintermediate themselves out of the market as social platforms and others will be able to host music using the Amazon/Apple model of shared revenue splits. It will be about discovery and ease of purchase, letting the marketplace determine winners and losers. Mass marketing campaigns and distribution deals will become less and less popular as discerning consumers cherry pick the good material and eschew the mediocre. Best of albums (or can we even use that term anymore)will be best of collections. The only remaining issue may be tour sponsorship. But considering the advantages of artist-ownership of IP, this might be a good thing for music.
that’s right, time is running out for them. If they aren’t building their own amazon/iTunes/spotify service, the balance of power will soon be on Amazon and iTunes (not sure about spotify since it’s so little right now and it seems to be getting pwned)
Once those CD sales go below 2% of their income, they’re probably going to end up owning Spotify 100% as a way to save themselves and compete agaisnt iTunes/Amazon.
Im not so sure of your analysis cause you forgot one thing: labels need this online vendors to success cause they sell no more CDs
hateraide
“Digital vendors have only two options” So shortsighted. If the business life of a supplier is so great, then digital vendors have a third option: get into the supplier business.
Come to think of it, digital vendors have a fourth option: don’t be in the digital vending business. Nobody owes you assurance that a business model which is not feasible becomes feasible.
There you go: we’ve just doubled Spotify’s options.
Unfortunately I’m not sure you understand how copyright works. One can’t “get into” the business of licensing back catalog. Those works are owned by the labels who have a monopoly. If you want U2, Michael Jackson, Aerosmith, whatever – your only option is to agree to the license terms – no matter how crazy.
Excellent info…the more people know about this stuff, the more they are likely to write Congress to get laws changed.
The music biz is steeped in this mentality.
soundcloud
Unlike hotdogs (i.e. food) music (i.e. entertainment) is a luxury. If the sheeple want to take back control of their entertainment they need to grow a pair and boycott the current overloads by not buying a single product for a few weeks/months/how-ever-long-it-takes. Until the sheeple show some backbone, the overloads will gladly herd them for all they’re worth.
I think Spotify can/will generate more profits to artists once traditional radio dies. All the ad revenue generated by them will be transfered to spotify and with that more money to go to the artists. as of now radios arent paying a penny to the artist to play their work! (they only paying the songwriters which doenst make any sense)
Here is an excellent article that discusses the cost of creating a hit song, by the awesome NPR Planet Money crew. While creating good music is a financially risky business, I agree w/ the author that music labels to chock the artists. However, the labels offer efficiencies that individual artists are unable to bring to the “business” of producing and marketing music.
http://www.npr.org/blogs/money/2011/07/05/137530847/how-much-does-it-cost-to-make-a-hit-song
says there are 1,000 comments on this where are they?
Data normalization and reporting issues are spot on. Each label CMS has it’s own internal ids and foreign-keys and their bloated metadata is weighed towards the sellable unit (album or single) with very little useful/correct info listed for the artist. Sometimes they don’t even bother to spell artist names consistently (e.g. accent marks, “the” bands), making simple string comparisons difficult. And the XML schema changes every few months.
There is an iTunes data format, but most labels refuse to make it available to other companies.
Source audio file quality and format are also inconsistent.
If you’re trying to launch internationally, the whole process has to be repeated for each country, working with different sales associations and label subsidiaries of various levels of competence and ethics, sometimes with little legal protection (e.g. un-enforceable contracts).
And the different int’l orgs fight with each other, so launching in one country could hurt your terms in others.
If you attempt to create a white-label solution, every new client triggers automatic renegotiation. The labels demand to know the terms of your private deal and cater new pricing to the financial heft of your client, even if the deal was already agreed to.
Even playing entirely by the rules (Pandora U.S. radio licensing, no user uploads, etc.) doesn’t protect you from controversy. Individual artists, despite all label and publisher assurances, will still request takedowns. And labels still reserve the right to audit your business and sue at any time, especially if you try to do something innovative with the definition of “radio”, like user-generated playlists (ala muxtape, 8tracks, turntable, rolling, etc). Even if the lawsuits are completely baseless, a seed-stage startup still has to spend to defend itself.
If we don’t get a handle on this we’ll never move forward as a society. The medium has changed. When I buy a song, I buy that version of the music, not a particular format. The system is broken. Beyond repair? I don’t think so. But there has to be a less Orwellian solution than the RIAA and the label monopolies. It’s time to allow market forces to shape the regulations and stop trying to fight evolution.
artists should deal directly with the digital media platforms and cut out the labels
You can’t stream a hot dog. ‘Nuff said…
Record labels don’t own “monopolies.” They own “products.” I can’t sell iPhones at my coffee shop because Apple won’t allow it. That’s not because they have “monopoly power” over iPhones, it’s because they have the PERFECTLY APPROPRIATE right to control how and where their products are sold. Likewise record labels.
If Spotify wants to circumvent this control, all they have to do is *SIGN ARTISTS* and create their own catalog of music. Oh, wait. That’s actually really hard, isn’t it Michael – you tried that yourself, and it turns out that MP3.com was full of really bad music that people really didn’t want to listen to.
It turns out that it is really difficult to create, curate and promote a catalog of truly noteworthy music. While record labels suck in many ways, they still perform a very valuable “curation” function and have every right to demand maximum compensation for their efforts and the quality of their product.
Spotify can turn a profit of they change their business scheme. Instead of streaming artist, they should stream independent radio shows such as mine and have links to purchase music heard on shows. Be like a radio station that also sells music. That way they pay for a blanket license and a selling setup like a distribution streaming service. So a label would get a flat rate for every song sold which is set by Spotify not the label, like itunes and blanket license would cover the streaming radio/internet show. It would save Spotify more money in the long run.
The links to DAR.fm, MP3tunes etc dont work
Thanks for pointing that out, M. We’ve fixed the links.
Another restaurant cliaimed to use fresh mozz arella cheese,where it’s dishes were actually made with economy cheddar.the “fresh pasta”advertieshed on another meau tumed out to be frozen.–Agedate. c0m –a nice and free place for younger women and older men,or older women and younger men,to interact with each other.
Written by a rather biased individual. A pioneer of digital music sales yes, but keep in mind where his arguments come from; the opposite end of the spectrum and still another person looking to make money off of artists / musicians. With music being purchased far less than in previous years, people still need to make a living. I’ve seen the royalty statements and it’s not all that much. iTunes takes a tremendous cut and has essentially cornered the market for digital downloads, but with bandwidth no longer being an issue and so many devices to choose from it’s only a matter of time before downloads become a thing of the past and music is purely subscription (cloud) based. No storage required, not even tethered downloads… nothing but on-demand music for reasonable fees. Think of it in terms of how we pay for cable. It may not be spotify, but this model WILL survive once the kinks get worked out. There are still a few more lawsuits to be had before a good system is worked out that benefits everyone equally.
If you’re unable to make money in the streaming world, blame your business models. I’m not defending labels, either. They have been rightfully demonized, but we need to consider all the players in the game before wagging fingers.
Maybe the hot-dog selling venture can sell other stuff to make money on? He could sell his clientele to facebook?
Michael, your piece is a bit topsy-turvy.
There’s a reason why there’s no need for compulsory contracting and such in the hot dog industry: buns, condiments, and even the wieners are a commodities.
Songs and compositions are not. They are individual assets.
Sure, data normalization and such are nice demands. But hey: who says that contracting parties have to make life easier for anybody? And, what if the music industry stifles innovation? Shooting yourself in your own foot is neither clever nor illegal (as long as you keep it metaphorically).
The collusional black box equity deals look a bit different. They distort the market in favor of the big players. They are likely to harm all artists, independent labels, and new service providers as well.
Knowing how safe it is to dis Big Music… what a lot of net music venturers should take into account is that no matter how much, how badly, or how entitled they feel the right to developing a business, they simply do not create the basic content at all, and that is not a strong position to start with. It must seem unfair when you have this great music business idea, and then realise the one thing you’re missing is the actual music.
A rather one-sided view. Spotify won’t make a profit as much because google, ISPs, locker sites, and PayPal make a good deal of money out of ‘free’ music, as it is because labels charge too much for the licensing. This is the elephant in the room that anti- label bloggers never talk about. All that ‘free’ content needs pipes and sub payments to pirates to get it round the system, and those who supply the system are doing very nicely out of it.
You can’t expect any business to thrive when it’s product is available for free, if illegally, Yes, diehard music ‘sharers’ probably do buy a lot of music, but the ‘casuals’ don’t. For every diehard I know, there are 10 people who regularly listen to music but haven’t paid for any in years.
Given the times, it’s not surprising, and if it really was ‘free’ I wouldn’t mind so much. But a lot of big companies are making a lot of money out of our content, even if the labels are making less- and the artists, often, nothing. Spotify- and the labels- are operating in a market skewed against them, and that’s why it won’t make a profit.
It’s got nothing to do with hotdogs,
Interesting article considering the record labels argue they receive negligible monies from services such as Spotify.
Except that you can switch suppliers, and over time more and more musicians are going to jump ship from their record labels, because guess what – they’re getting a lousy deal too, and the record companies aren’t a required part of the ecosystem any more.
The big bet with music services has to be that traditional record labels will become irrelevant over time. Then the artists and services can turn a profit. Until then, no wonder the labels are kicking and screaming.
Depends. If you think you have mass market appeal, no amount of social networking will replace the £250,000 a label can plough into your promo. Without it, you’ll never get there, and you’ll need at least £80,000 just to promo your act to the point where you can make reasonable cash from gigs and maybe merch.
If (like me) you know your material is more ‘specialist’ then it makes sense to go DIY. Just don’t expect to ever make a living from it. And that means it has to be low priority- and for me, that means writing media music instead. So while I do get fans asking ‘when’s the next ?’ (it’s 10 years since my last album) the answer is ‘not any time soon’.
I don’t have the money to spend six months, not getting paid, to write music most people won’t pay for, even if they like it… And spend £10,000 on making it and promoting it. It’s just not feasible. And that’s the real result of ‘free’ music. If you have dependants, as I have, you can’t take risk, and the music doesn’t get made.
Not because no one wants it, but because not enough pay for it.
Buy a file server. Put your music files on it. Sell *directly* to the public. Use every avenue there is to advertise, from local “news” programs to alt.music newsgroups. Tell us you are nothing to do with RIAA or the labels and we *will* pay a few credits for every download. If you don’t give a damn about how many of us “share” your files without paying you, a direct-to-buyer model will make money. No lawyers, no labels, no copyright wars just you and your audience. No, you won’t make multi-millions and you will never be able to buy your own jet or “Neverland” ranch, but this model could make a living. Band together with a few friends to share the ISP and fileserver costs and you make even more profit. Not more money, just fewer costs.
It’s not the musicians we don’t want to pay, its herds of lawyers who own judges and Senators and cops and entire Parliaments. True or not, that is the impression they give when they buy laws like the DMCA and UKland’s latest Acts.
Sell your music direct to us and we’ll buy it.
We always have.
Wandering minstrels made a living for millennia before the record labels existed. Not a great living and none of them were able to buy countries, but many musicians thrived.
*Use* the Internet, don’t strangle it.
And, with any luck, you’ll drive the labels into extinction.
Of course that beautiful dream would take the co-operation of the famous groups like “The Who” and Mr. Bowie and all the others, which is never going to happen, but if you could get them on your side instead of having them sucking off the teat of the corporate gangsters you could create an environment where *anyone* could make a living with music. So long as he had talent enough.
The good ones might even be famous worldwide.
Yes, it’s an idealistic dream, but the Internet makes it possible. All it takes is a little effort and unanimous boycotting of the record labels by every musician on the planet.
Hmmm. I think I see a small flaw…
Oh, written by the CEO of http://www.mp3tunes.com/ > this totally doesn’t make it biased at all.
Very nice 90s design BTW.
It’s interesting that music labels work so closely together to retain a set level of price control, in any other industry that would surely be considered anti-competitive?
I have discussed this topic with Michael many times in the past and we are in full agreement about the limits that the record companies are putting on their own industry and artists through these types of agreements.
To take this further, even services like Pandora that uses the government enabled licensing the rate increases year over year well into the future making a working deal unworkable in the future.
If the internet technology providers work together and form an internet version of the original BMI there is some hope. The threat of competition is what will enable the market to normalize around a better solution. With many new popular artists like OK-Go doing their own recording and promotion the future of music is not with the record companies. It will take some time but I believe this change is inevitable.
Taking a Hollywood metaphor, if there’s an A, B, C, and D list of music relating to the bands’ or musicians’ relative popularity, with revenue somewhat following along, I think that the past few years have completely decimated the B & C musicians.
OTOH, C and D musicians probably reach an audience a few orders of magnitude larger than before the Internet was ubiquitous. So the really competent, rather talented, working, musician can’t really make a (comfortable) career of his/her work anymore.
In some senses that’s a shame, but for me, someone whose #1 pastime and love is music, the trade off for easy access to more and higher quality music is completely worth it.
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Yep. Trying to build a profitable business on the back of licensed content – especially music – is incredibly hard. And unless you’re doing it for the lifestyle, or out of passion (both of which I understand), it’s usually not a great idea. From a business POV, I mean.
Incredible! The digital music services are pressed, but the artists are even more so!!! They are the creators of the product!
This is a great article to summarize the fundamental issues facing online music services that build their user experience upon negotiated licensing from the music labels.
Unfortunately, this summary highlights that the major labels have yet to prove that they can provide viable terms for these licensees, which will lead to a successful, healthy ecosystem (good for artists, good for labels and good for distribution platforms).
This is not a new story of course (dates back to mp3.com, etc.). At least the licensing in 2011 (costly/onerous) is better than 1999 (non-existent).
It is possible to build a music service which leverages statutory licensing. Non-interactive DMCA compliant licensing (i.e., online radio / Pandora model) is not as expensive as negotiated licenses, and do not have issues around term expiration. Pandora is one example of a company that has built a successful user experience within these design “limitations.”
Although government regulation (i.e., statutory licensing) may hinder startups in most markets, it is no secret that having statutory rights frameworks has been helpful in music industry. The terrestrial radio business is still very robust ($17B market in USA in 2011, $40B globally), with good margins, because it relies on more attractive copyright framework. Radio has been a great marketing channel for artists and new releases (albeit getting your music on the radio is a challenge – which is another topic entirely). And there are services built around music discovery, concert discovery, etc. which create benefits to ecosystem while avoid licensing burdens.
The future of music industry will need to solve this problem. In the meantime, the best business models will likely be built on frameworks other than those available with negotiated licensing.
Mike, why do you think terrestrial radio is still a robust market ($17B in USA)? It’s because the performers of each song aren’t paid! Anybody on this thread realize that Aretha Franklin hasn’t made a dime on her hit, “Respect”? That’s right, except for the amount she was paid by her label for the day she spent recording it, she hasn’t been paid a dime. The composer and publisher? Yes. The performers? NO! America, Iran & North Korea are the only countries that don’t pay performers a fee everytime their song is played on the radio. It’s been a massive rip-off since the beginning of the radio industry and it’s a high crime!
Back in 2009, John Conyers sponsored a bill to rectify this egregious crime and the terrestrial radio industry squashed it. THAT’S why radio-land still makes a ton of money.
If you care about this issue, like every musician and music lover should, you can read up on it more here:
http://en.wikipedia.org/wiki/Performance_Rights_Act
Then tell your representative to sponsor a bill rectifying this crime!
You have no idea how many times I’ve purchased a few songs off an album on say emusic only to come back a month or two and find the album pulled. The whole fiasco they had with the Rolling Stones catalog, to the recent huge uproar over the Zune Marketplace where lots of content went missing.
What is worse is you think the deal is bad for the service provider, the deals are also just as bad for the music provider/artist! Everyone can site the TLC incident but it is still happening, these re-releases and such that you see are to do nothing more than to entice the audience to repay for something while renewing the lease to the rights holders – the artists may see nothing of those sales.
This is a prime situation for “there aught to be a law” against the labels.
you lost me at hot dogs.
This is the most idiotic article on Spotify I’ve seen. A hot dog vendor pays MONEY to the hot dog maker (ie the artist) and in turn charges its consumers MONEY for it’s product. I’m no fan of the major labels, but to say that poor Spotify is being taken advantage of because they want to make it hard for Spotify to give away their product for free is ridiculous.
It’s not a monopoly yet. Mono=one. I’ve been out of the business five years now. Most of us got in because we love music, not because of greed. But the stranglehold must be further reduced before people who love it can overtake it from those who merely use it to preserve their over-inflated lifestyles.
I always feared that was the hidden truth.How many time will these services last?That’s the plan,labels always will win.
So many people want to ‘make it’ and get on the charts. I find an atmosphere where music is made for yourself and possibly others for artistic reasons the most fruitful. If you want to take it easy, party and play all the time then do something else than music or don’t whine about labels and money. It’s ridiculous to still long for the the good ol’ days and the simple musician’s retirement plan. Being an artist is not a job, it’s something different. These times need multi skilled people. It is better (even for your health) to do different things, contribute in various musical groups/projects, combine music with other creative areas or do other completely different things on the side for a living, regular day job is just one option. It is possible to live with art, but it is not the 80s anymore nor the 90s or 00s for that matter. The industry is changing, recording is becoming more available to all. This means more quantity but more quality as well, and we get to decide who gets played on our radios. Of course we have to support and listen more independent works and found small labels that are in it for the quality and not the profit, but most of all the biggest step has to be taken inside everyone’s head, the ancient work-related attitude towards music and all art has to be forgotten. So lets free the music from money so we can let the money come freely to music.
I assume this will last until the labels become dependent on streaming services for distribution. Then the power won’t be in the labels favor.
Well, if they won’t do business with me in a way I find acceptable (such as through services like Spotify) then I’m back to torrents. This is a situation where the RIAA is cutting of its own nose to spite its face…they feel they are entitled to keep making the same profits forever, no matter that the distribution technology has completely changed.
Hopefully more and more artists will start removing the middle-men in this industry as well. They were once necessary, then multiplied themselves to create a huge industry of middle-men who did very little to deserve their cut, but they are determined to keep it. Get rid of them. All that is necessary in the modern era is a computer and the musicians. Good program for recording, mixing, and encoding, then upload, then make money. You don’t need to “get signed” anymore. I can tell you, I’m a writer and we are doing the same thing…getting rid of the middle-men (and it’s scaring the crap out of them). Step up, musicians, and get rid of yours. Otherwise, you will never be able to make money again…so long as your prices are inflated by all the middle-men, and the middle-men are determined to sabotage every new distribution model because those models won’t give them the profits they want, then we are going to resort to pirating long before we relent and start paying all those middle-men again.
It’s very simple, musicians…fire your middle-men, be able to keep your careers. Keep your middle-men, get pirating into bankruptcy.
Read about a Boston-based group named Karmin. They used YouTube to become an overnight sensation. There is a way to do it using the Internet! And make sure you SELL your CDs at YOUR concerts! Have a BANNER made up that has your WEBSITE ADDRESS on it and make sure you hang it up in back of you when you play. If you are good, people will find you and PAY for your product! Nikki Minaj sold a million of her own mix tapes before she was signed to a record label. Some rappers have sold a hundred thousand copies of their own produced CDs out of the trunks of their cars. You can MAKE IT!
este es un tira bomba me parece… :P
I agree with the thesis of this piece, but it takes a rather static view of things. The opportunity for Pandora, Spotify or any other digital music platform is to establish direct relationships with emerging artists, providing distribution and music licensing opportunities. So, instead of musicians signing with labels, they will “sign” (in some way, shape or form) with the next generation of distributors. There may not be any margin in the music of yesterday, but for the music of tomorrow, it is a completely different story.
This is all sad, really.
It’s very important to make the distinction between the record companies with power and huge catalogs, who are to blame here, and smaller labels who don’t have these luxury blackmail contracts and hardly don’t get any money at all from Spotify and are simply given the choice: be visible on Spotify or look like you don’t exist at all. We’ve had Spotify for many years here in Sweden and we have a situation where many people don’t listen to music if it’s not on Spotify because there always something else to find out there. Without them there would be no quality music nowadays. Personally I don’t care about if Spotify goes down or not but that smaller labels are taking a hit is really bad for music. Why doesn’t the author of this article bother to make this important distinction?
Yes — smaller labels and Indies are great to work with, like the Orchard. Agree 100%, total difference between them.
I’m just confused as to where the actual money is going then. The artists aren’t getting it, the streaming / subscription services aren’t getting it and the labels say they’re not getting it. Where the hell does it all go? If the labels have a contract with a band don’t they have to account to the band for revenues due from exploitation of the artists music? Or does streaming fall outside these realms as the customer doesn’t own the music therefore it wasn’t technically purchased? Or are the labels just lying and finally found a way to start making money again?
The labels are getting nearly all of the money. As the article says, the online streaming companies cannot disclose the terms of their agreements, so the record companies can say anything they want to without anyone to dispute it. But when Apple turns over 90% of its iTunes revenue, that money goes directly to the record labels. The labels are just angry because iTunes is mostly selling one song at a time. Before, the labels could get you to pay $10 (wholesale cost) for two good tracks and eight bad or mediocre tracks. Now people are only buying the two good tracks for $3. They see it as a loss of $7 for each transaction.
It’s really incredible. I did lots of work back in the day at AOL and Ruckus network with Spinner, MusicNet, Napster, Kazaa and others. Negotiated and built one of the earliest 1 million-plus track services at Ruckus. The terms are almost exactly the same as they were in 2004! No business model innovation at all from the majors, even in mobile. Pandora and iRadio guys are lucky, as DIMA (shout out to Jon Pitter and team) fought and won the CARP battle for them. Most folks don’t remember that Pandora was one step away from being out of business in 2005 or thereabouts. Also shows that VCs and many investors often fail to dive as deep as they ought to really understand business risks . . . . instead they trumpet “disruption”, allege that nay sayers “don’t get it”, and they pump and dump to an IPO or some large company buyer (who then writes off millions in goodwill when things don’t work out). Ka-razy . . .
What would it take to disintermediate the labels? Why can’t independent artists work directly with digital music companies? What value do the labels add that can’t be done otherwise?
How is spotify’s position different from Amazon’s position with regards to book publishers? Amazon looks in good shape!
Must be some difference between the work and world of writers and the world of musicians.
Your Looking too hard for an explanation!!
Sherlock Holmes was right – Eliminate all other factors, and the one which remains must be the truth.
They are trying to kill off all other forms of streaming music online, until the record labels can come up with a virtual version of HMV, or Tower records.
If the Record labels lose control of Music Distribution, its game over for the music industry. Why shud music always be used as a loss-leader for other products and advertising? They shud pay a fare price for a fair product.
Kill off the apple store, all streaming services, and finally Youtube. then build a better version of a digital music superstore where people pay to play music that is paid to be recorded.
I’d rather take my chances with a well-regulated monopoly, than with a bottomless free-market business model.
It is not a question of “if” record labels will fail, but rather a question of “when.” Here is how I see it, in my crystal ball:
A global online and on-the-phone community (the interactive “community” part is uber-important) will introduce a new music initiative that will give the lion’s share of profit to the artist. Anyone that has rights to their music will be able to make their tunes available to a global audience. Eventually, music publishers will be obsolete.
The social community will create its own ecosystem, where everyone is incented to benefit from music proliferation (artists, managers, promoters, radio stations, etceteras). New artist success stories will be determined by the community, instead of coming from a finite list of artists that are force-fed through label channels.
The new artist chart-toppers will emerge in a very Darwinian manner… most songs consumed across any number of genres. Future platinum artists will emerge from mobile phone and other wireless listens.
As artists discover that they can effectively promote and distribute their music to a global audience without giving away the rights to their music, the labels will fade away. It may take a decade, or even two, but it will happen. Then, the only thing labels will be able to do is license their back logs, as new talent goes to happier hunting grounds.
And now Congress wants to give these criminals the power to cut off payment services to anyone based on mere unfounded accusation.
The labels need to realise that the world has changed and the industry must adapt. Everyone can benefit from the new possibilities. Otherwise, the industry as it stands is doomed, and the scale of piracy will continue to increase.
Might be worth noting that the remuneration that actually reaches recording artists and songwriters is in the “little to none” range. Labels are not contractually obligated to distribute pro rata shares of the huge advances they demand to music creators, and the royalty streams are microscopic. Indie labels are pulling out, as are some artists, and the model is unsustainable as far as creators are concerned.
Technology has developed rapidly, but the fact that the sale of music needs to be remodeled and repriced has been dragging on for so many years now – record companies demanding their old cut (which was never fair in the first place) is halting progression into something better. Now they’ve mucked up the face of the entire industry by meddling in privacy issues and the rights of every individual on the planet – and wasted billions of dollars that they so greedily coveted in the first place. Let’s be honest – if music wasn’t, in general, so grossly overpriced, the average downloader wouldn’t feel the need to pirate. These aren’t criminals and thieves with a “fuck you” attitude – it’s people who honestly found something as simple as a song has been deemed too valuable for them to afford.
There are a few (three?) major record labels. Somehow they all have the same pricing structure, licencing terms and never compete with each other. How is this not price fixing?
I dont care who pockets the money, I just want access to the music. The sheer amount of music out there means that the way the world works means that even if I spent every penny I earned on music I would be able to hear about 0.1% of it.
If the labels want to run a spotify service then they get 100% of the revenue which is fine by me.
Just stop putting us all in a situation where we cannot access the music.
The analysis in the article is interesting, but lack a very important component: The balance of negotiating power. Once the online music services have millions of monthly subscriptions, the power balance changes. The labels cannot just increase prices (even though they may contractually have the option), since they are messing with their most important and only growing source of revenue, whereas their alternative (legacy) revenue sources are shrinking. So the threat os halting supply is theoretical, and artists would never accept it – established artists may even cut out the middleman and enter into an agreement with the music service directly. Consequently I believe that the analysis is correct, but the conclusion simplistic.
The Music Industry and the Law should continue to target Companies the likes of Megaupload, Rapidshare, fileshare that have been built on providing services for “Uploaders” who generate cash from Advertising placed next to the uploaded links, some of these Companies even pay on a “per download” basis and the down-loader is often not even aware they’ve helped generate revenue for people that have nothing to do with the creation or release of the music. It’s not a “loophole” it just hasn’t fully “Outed” yet, what they are doing is still illegal and they know it What they are doing doesn’t just hurt the Corps but also the Independents, and they know it!
Friends sharing a tune over the internet? This May be also “illegal” but no different than “making a tape” from music us 30 and 40 years olds purchased as kids and passing it on to friends. This actually helps the industry and helps people discover Artists and tracks via the “word of mouth” model and ultimately encourages people to purchase music, merchandise and go to concerts! People currently tune in to listen to tracks on YouTube, some go on a buy, some go on and download illegally from the sites that need shutting down as mentioned above, so again let’s target those sites and dodgy “Uploaders” for Copyright infringement NOT the end users!
Spotify, Rara and the other bunch of new model army, self proclaimed saviour’s of the Music industry seem nothing more than an attempt at a legal version of the above illegal business model but cut out the dodgy Uploader that used to get a share of the Ad revenue. Yes, they have sort legal consent off the MAJOR-ity with HUGE ADVANCES paid to the MAJOR LABELS but certainly have not cleared all of the Copyright from Owners as mentioned in section “6″ of above article so mostly publishers and in some cases owners of Sound Recordings that have been licensed to 3rd parties without written consent for this kind of commercial exploitation but will and have already found their way on to these streaming networks.
This new business model for the music industry is unlikely to solve the problem of generating revenue for Independent Artists and Musicians JUST REPLACE IT WITH A NEW ONE.
Neither will it solve the long term revenue issues for Major Labels. These models will not attract the so called “illegal” downloaders and people who share files “illegally” with friends for free as claimed by Spotify but most probablly attract a huge percentage of the CURRENT MARKET OF EXISTING BUYERS WHO LEGALLY PURCHASE DIGITAL MUSIC. Why? because initially it seems like a legal “Too good to be true” offer. The bigger picture is the streaming services WILL REVERSE THE CURRENT TREND OF GROWING DIGITAL SALES, further more streaming services such as Spotify and Rara will not benefit from the amazing INDEPENDENT MUSIC that get’s released from day to day because Independent Artists and Labels will remove their content from these services once they see they are getting no meaningful share of revenue.
Our Company is an Independent Music Company that Publishes lots of Music and has released lots of recordings. We have never knowingly granted rights to any third party to exploit our music via the Streaming business model.
Digital shops selling music ,yes.
Digital shops selling music and providing services for storage from purchased Tracks or Albums, yes.
A massive free for all, too good to be true business model where Artists and label share a monthly subscription per user of £10 minus the streaming companies costs and cut, No thanks!