Digital Transformation In The Music Business:

What Other Businesses Could Have Learnt From It, And The Convergence (or Not) of Spotify and Netflix

I stepped in the music business in the year 2000. I was really lucky to be able to experience the final days of the majors’ golden age: A lot of CDs were sold, massive media campaigns were launched, piracy on the Internet was still inexistent, revenues were not that bad…

At that time, labels were selling their catalog in CD format, after setting aside vinyl and cassette in favor of an “indestructible” and “with the best sound possible” format; selling 10–12 track-compilations which in many cases included only some “hits”. Napster had just been launched (an early version had been released by the end of 1999), and it was not very popular yet (at least in Spain). Record companies saw the Internet as a mere promotional window, and back then they didn’t feel threatened by it yet (as it later happened).

BMG, the company for which I was working at that time, was the one that bid for Napster and purchased it in 2002, but it was unable to do anything with it later. Today, it is very difficult to venture what would have happened otherwise, but certainly, with the perspective that we have now, it seems that if all the companies had agreed to set up a legal file exchange system with a payment mechanism, they would have saved many years of “crossing the desert”.

We shouldn’t forget that Napster, very vilified at that time, popularized P2P (“peer to peer”), the technology that later allowed the development of services such as Spotify or Netflix.

In any case, until iTunes was launched in mid 2003, the Internet didn’t offer any business possibilities for companies, and it was considered just “a piracy pit”.

iTunes was the first major revolution the music industry was forced to accept, having to shift its focus from a physical medium to a purely digital one (music downloads with DRM –digital rights management). However, this first transition was quite smooth. For many years, both formats coexisted and the changes were gradual. In any case, the industry had to rethink some work procedures which had become usual by then, and which, surprisingly enough, other businesses still find difficult to assume. For example, with physical format distribution, it was usual to decide what to release, and what not, in each country (some music fans may remember imported record stores), and labels took advantage of this to launch artists who had proven their worth in their origin countries, being also able to count with them, in person, for promotion. Movie industry, on the other hand, still operates this way (although later they complain about people pirating movies not available legally in their countries).

The arrival of iTunes brings about a dramatic change, given that all the music is available all over the world at the same time. As mentioned above, this forces record companies to change the way they work.

It’s also worth noting how Apple was able to launch a common platform with all the labels on board. This has left a significant mark on the present. No one can even imagine nowadays a music platform without the whole catalog (in fact, there are less and less artists not allowing services such as Spotify to access their works). However, why do we find it normal to subscribe to audiovisual streaming services which do not offer an entire catalog?

The second and last — for now — big revolution came with streaming. Spotify stormed into the industry in 2006 and turned the music business upside down (so far, at least), with the latter being forced to switch its focus from “product” to “service”. The change from physical product (CD) to digital (music download) was very slight compared to what this new change eventually entailed.

Streaming has been the main factor allowing the industry to grow again after years and years of crisis, during which they saw their revenues decline significantly (although without reaching the levels of the late 90’s for the moment).

However, the music business environment at the moment is far from being at ease. The power has dramatically shifted towards distribution platforms (mainly Spotify and Apple Music), and the record companies are very vulnerable to the economic agreements with them.

This shift in power is also evident in the way the record labels are no longer, at least to a large extent, the “gatekeepers”. Years ago, they had much power deciding which songs were to be played in the media (making these more likely to succeed). But nowadays, this role is played mainly by distribution platforms. If Spotify, for example, decides to feature a song on a playlist as powerful as “Today’s Top Hits”, this will determine to a large extent the song’s success. This has a significant impact on the relationship between companies and artists, meaning that the first ones must reinvent themselves to remain relevant, offering value-added services to artists that justify their relationship. Let’s not forget that self-releasing is already another option. In fact, and in order to try to cover different levels of service to all the possible artists’ needs, labels have recently been purchasing distribution platforms (e.g. Sony Music and The Orchard). This way, they can provide fewer services to artists (charging less for them) if that’s what they want.

At this point, let’s consider what other businesses could have learnt from music.

It’s true that music was initially overwhelmed by all these changes. Music was a very interesting content for Internet users, and it could be easily transmitted through the networks (as soon as MP3 was invented, and the music contained in a CD could be compressed efficiently).

It was the first audiovisual industry to suffer piracy, and each of the changes commented above.

The other two industries that have gone through similar situations, and that could have learnt from music, are publishing (books) and audiovisual (cinema at first, and then TV too).

The first one was able “to escape” from all these issues until the appearance of a device that allowed content to be enjoyed in a similar way to paper-format books: The “ebook” or “reader”. However it’s true that perhaps because this industry is a niche (at least compared to music), or because paper is too good, the digital format hasn’t quite taken off. And this industry has been very reluctant to embrace changes. For example, there are still some books not published in digital format, there is no subscription system offering the entire catalog, similar to what Spotify offers, etc.

The second “escaped” until networks increased their bandwidth and compression technologies improved. By then, the audiovisual sector was immersed in the same situation as the record industry was years ago. And again, and similarly to the publishing industry, they have been highly reluctant to embrace changes. As I mentioned before, they premiere films on different dates around the world, they continue working with distribution windows (first theaters, then on demand payment services and physical format sales, later, open TV channels, finally, newspaper distributions, etc.); there is no platform with the whole content, they are trying to launch their own platforms (which is something that never worked in music)… But it is true that, at least for the moment, their strategy seems to be working.

Indeed, many are the voices who nowadays insist on comparing Spotify and Netflix, specially given that Netflix has been a profitable business for a long time now, and Spotify, until very recently, was not.

While it is true that both provide access to content (musical and audiovisual, in each case) on demand through streaming technology, there are many differences between them, as their starting points are widely different.

Netflix was ​​established in a very distant 1997 (and started offering its services a couple of years later). What initially began in the United States as a subscription service for DVD rental by mail, via the Internet, ended up mutating into the popular digital worldwide platform that we all know.

Netflix’s boldness in 2010 to bring about that change is highly commendable. In 2009, the service had reached a great popularity, offering a collection of 10,000 titles in DVD and surpassing 10 million subscribers. By then, the company had had to face the competitors that had emerged in the business. Blockbuster, the popular DVD rental chain, for example, entered this business in 2004, and for some years both companies engaged in a price war. But that year (2010), Netflix decided to launch the service for which we all know it today, even aware that it was undoubtedly going to cannibalize the one that was so successful until then.

On the other hand, Spotify emerged in a very different way. They started offering their services in 2008, and were born directly in the digital environment. By then, the music business had already changed a lot.

As I mentioned above, thanks to iTunes (the music download store launched by Steve Jobs in 2003), it was unthinkable that a platform did not host all the music production. And, on the other hand, the model of distribution windows had already fallen.

Having said this, it is true that a certain convergence between both services may be noticed nowadays, but we must bear in mind that it is the nature of the content in each case (Spotify and Netflix) the reason why these models do not tend to converge further.

Thus, Netflix can pay for the creation of its own audiovisual content, which will then be seen a lot — or not — on its platform (but without having to pay for each viewing).

On the other hand, in the case of Spotify, with music, the right holders must always receive a compensation each time their work is played.

This is the root reason why these models can not be more similar… even the recent purchase of two podcast companies by Spotify changes slightly the situation. Daniel Ek (Spotify’s founder) just wrote: “We believe it is a safe assumption that, over time, more than 20% of all Spotify listening will be non-music content”. And that content (such as the podcasts one) could work as the Netflix one.