Are Streaming Music Services Competing With Record Labels?

As streaming services continue to pour more and more resources into original content, they could be precipitating fundamental shifts in the music industry, with a particularly strong impact on conventional record labels.

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Guest Post by Bas Grasmayer on Synchblog

In the last two months, we’ve shifted from music media being dominated by discussions about streaming payouts, which focused mostly on Spotify, to debates about music being exclusively released on one service. These topics have underlying reasons, that many of us are not in on. Most articles on exclusives will mention:

That exclusives may drive users back to piracy, threatening the progress made in recent years;
Why exclusives are part of some companies’ strategies in an intensified competitive streaming landscape.

But when you read anything about exclusives and streaming payouts, you should bear in mind that:

Spotify is out-of-contract, and in negotiations, with all major labels;
Exclusive partnerships with streaming services may pose a threat to the industry establishment.

Let’s investigate. The Wall Street Journal has billed it “the summer that streaming took over” and perhaps all the celebrity attention for streaming services, from Taylor Swift, to Kanye West has made it so. It’s definitely visible in growth numbers, with Spotify jumping from 30 million paid users in March, to 39 million subscribers in August. The big winner in streaming, is Universal (UMG), which claims streaming revenue now “more than offsets” the decline of downloads and physical sales. Music industry analyst Mark Mulligan compared labels’ growth and market share in an excellent analysis on the state of the global streaming market: "UMG’s streaming revenue grew by more than 60% while Sony and Warner grew by an average of 42%.” But UMG also lost something. Frank Ocean decided to go indie and release his new album on his own label, through an exclusive deal with Apple Music. Forbes went as far as to say Frank Ocean ignited a “streaming war”. He joins a list of other prominent artists who have chosen to do exclusive deals this year, like Rihanna, Kanye West, and Beyonce. Their releases are incredibly important for streaming services. Hip-hop and R&B, together, make up for 30% of all on-demand audio streams, a significantly larger share than other genres, due in part to the services’ relatively young audiences.

The exclusive release by Frank Ocean prompted strong responses. Music industry critic Bob Lefsetz said there’s a "conspiracy between Apple Music and the industry to change the game, to get everybody to pay for a subscription by putting hit content behind a paywall.” And slammed the short-sightedness behind such deals. Lucian Grainge, CEO of UMG, called for a company-wide ban on streaming exclusives. Troy Carter, the former manager of Lady Gaga, now employed by Spotify, chimed in saying "exclusives are bad for artists, bad for consumers and bad for the whole industry." But perhaps most interesting is the reaction from a former Apple Music employee, who worked on original content and its Connect feature. He highlights the projects that wouldn’t have happened without exclusive deals. One quote stands out in particular: “There’s one guy who is behind ALL of these campaigns — and he is light years ahead of everyone else. He works intimately with each artist as a creative peer, and develops an amazing plan, this is no simple land grab. He works closer with the artists than labels do.” Some streaming services, and the companies behind them, are turning over billions in revenue. The choice to invest in content, so they can be less reliant on external factors, is logical. Earlier this year it was announced that Spotify is producing its own video content, and now, they’re making their own music. They own the masters, and place the music on popular playlists. Their vast troves of data help to determine what kind of content to create. Owning the masters mean they only have to pay for the content once. Still struggling to become profitable, it could be that they’re testing this mix of licensed and original content as a path to profitability. Google has its own ways of investing in content. There was the $100 million YouTube Original Channel Initiative, which was a big push in 2012 to create original content and had participants like Madonna and Pharrell Williams. It has continued to invest in YouTube channels and stars, in part to stave off competition from Facebook’s video effort, and is now also investing in original content for its VR platform. Its investment arm, Google Ventures, led a $60 million investment round for Kobalt, which as Mark Mulligan explains, is focused on “providing label services without taking ownership of the masters and in turn putting the label and artist relationship on a more equitable agency / client basis.” With video content, Google and Spotify are competing for attention, and revenue, with Netflix. The latter, perhaps driven to despair by the difficulty of acquiring and maintaining global licenses for great video content, is spending as much as $6 billion on original content, this year alone. Netflix’ target is to spend 50% of its content budget on content acquisition, and the other half on producing its own. So, with crucial negotiations going on between Spotify and the music industry, it’s important to bear in mind that you should take what you hear in the media with a grain of salt. There is a lot of stake, and negotiation partners or competitors are fuelling discussions, so they may benefit more from these negotiations. Whether the gossip is about Spotify, Apple Music, TIDAL (reportedly in talks to be acquired by Apple), or the majors, make sure to consider the different perspectives, angles, and who benefits, before drawing any conclusions. What we do have, are the trends. When technology changes, the music business changes. Often, when referring to the music industry, people mean the recording industry. They have become synonymous in a way. The proliferation of the recording marked a fundamental change to the old music industry, giving rise to new companies in the late 1920s and early 1930s. These companies excelled at using the technology of their time and understanding how to use that to bring products to market. With Google, Spotify, Apple, Amazon, and others investing money in content, perhaps it’s not so hard to imagine that one day, they might become synonymous for the music industry. Sending the major labels the way of the major sheet music publishers of the 1930s. With music, who controls the distribution channels, controls the industry.

Our 'Projecting Trends' series is created by digital strategist Bas Grasmayer, who runs the MUSIC x TECH x FUTURE digital strategy agency and newsletter. Subscribe to our Synchtank Weekly to receive all of our blog posts via email, plus key industry news, and details of our podcast episodes and free webinars.