Taylor Swift May Be The Death Of The Record Labels

Swift might think she is saving her revenue, but she may be creating a monster.

Decisions sometimes have unintended consequences.

And those consequences sometimes have the potential to destroy the entity that made the decision, no matter the short-term benefit that decision may have achieved.

This is something your mother likely told you over and over again when you were 19, but 19-year-olds never listen to common sense. It is not until later in life, after a string of sometimes unfortunate events, that you wake up to realize that every decision you make, every action you take, creates a ripple that reverberates through your life.

Some of those ripples are a lot bigger than others.

Earlier this month, Taylor Swift pulled her amazingly popular new album “1989” from Spotify in apparent protest of the size of payments she receives from the music streaming service. While Swift’s decision was in many ways motivated by her record label’s agenda, the artist herself admits culpability for the decision.

The media reaction has focused its critique on whether Ms. Swift is too focused on her own personal gains over that of her fans. But that may be missing the larger developing picture.

The Windowing Of Content

As a bit of background, the movie and television business has long had the concept of release “windows” where different outlets get the media at different times. For example, a movie is first released in the theaters, then via outlets such as hotels and airplanes, then DVD, cable outlets (such as HBO or Starz) and then is finally released on Netflix and a few other services, a process that can take many months from beginning to end. The unintended consequence of the release window strategy has been to enable piracy. People want what they want and don’t really care if the content owner is running a business or has an agenda.

Despite a few experiments collapsing these content release windows, the video content industry has, more or less, locked in on this practice. In addition, media companies have recognized that the initial payments they agreed to with Netflix were too low and that they inadvertently created a monster, not unlike how the music industry enabled iTunes and then came to regret the power (and the payment structure) it ceded to Apple. Both Apple and Netflix created real markets for content — something the content companies have long been unable to build by themselves. Netflix and Apple both have a tenuous relationship with the studios and record labels respective to pricing. The content companies like the money — and the growth rate of those payments — but they are not happy giving up pricing control to Apple or Netflix.

Back to Netflix: once the content companies realized that they had sold their content for too little, they started raising prices. Raising prices wasn’t necessarily the answer though. The next step was for the studios to utilize the likes of Netflix as an additional release window — and one that was pretty much bottom of the barrel. So they started charging Netflix more and reducing the amount of their highest value content that would appear on the service.

Netflix did not really have a choice but to play the studios’ game. The lack of high-quality and new content at the top of the pipeline is one of the reasons that Netflix has responded by producing original content. Hence we see House Of Cards and Orange Is The New Black as Netflix exclusives. The studios, in their endless machinations, created a direct competitor not just in content distribution, but also in creation.

Taylor Swift May Be The Death Of The Record Labels

With the Taylor Swift action this past week, it is fairly clear that the record companies will start moving, as a standard operating procedure, to a similar windowing approach. The trend has already started as different music streaming services having different access to different songs and artists. It seems obvious — and economically the best decision for the content owners — to start windowing their releases. The music labels make more money if content is first only available for purchase and then moves to the subscription services to take advantage of the long tail.

Speaking of unintended consequences, the window-release of music may inadvertently create a resurgence of music piracy which has been reduced to a trickle in recent years due, ironically, to the subscription services.

Spotify, Rdio and the other music subscription sites all operate on extremely tight margins. If content windowing starts to become the standard in music business, it will be increasingly hard for them keep paying customers (they’ll likely have less trouble keeping free customers). So what is the next step for these companies? Become record labels themselves and cut out the middleman.

Cutting out the labels is the natural conclusion of such a sequence of events. It has already happened in book publishing, where Amazon has come to the conclusion that they can bypass the publishers and increase their control and margins. Netflix, too, moved into original content following the example brilliantly executed by HBO — recognizing that being only an aggregator was a quick way to becoming the discount outlet of the media business.

Spotify May Blow Over The Record Labels’ House Of Cards

It won’t be long before we see a major artist sign directly with Spotify. The relationship would not be dissimilar to the one between Apple and U2, where Apple reportedly paid$100 million to distribute U2’s new album exclusively. The new model that cuts out the labels will be optimized around existing artists with existing fan bases.

Spotify and its ilk will first poach the largest artists they can afford from the major labels. This model will attract up-and-coming artists. Pandora’s radio-oriented model could guarantee airtime for new artists — a function that terrestrial radio has long provided — but a move that could radically improve Pandora’s gross margin per play and create the seeds for a radical transformation of the music business.

Could this be why Apple seems to be stockpiling artist-related talent like Trent Reznor, Jimmy Iovine and Dr. Dre? Granted they could simply be waiting out their lockup period, but what if, instead, Apple was actually thinking of developing its own artists?

Here’s the most ironic possible unintended consequence: imagine if Taylor Swift’s next album was released by Spotify.

Lead image: Taylor Swift “Speak Now” Tour In Australia, 2012 via Eva Rinaldi Photography, Flickr, Creative Commons.

Originally published on ARC: The Law Of Unintended Consequences: Taylor Swift May Be The Death Of The Record Labels