Can the labels and Spotify shake off Taylor Swift’s rejection?

Implications of the decision for Spotify, Apple, Artists and Labels

Recap of Music Distribution Today

We all know that the CD is dying and digital is the future for record labels and artists (outside of live music). Within digital, there are a few different ways to distribute and monetize music: downloads (Apple), streaming catalogs (Spotify), digital radio (Pandora), and video streaming (YouTube, Vevo). Digital downloads via Apple have historically been the lion’s share of digital revenues. However, as consumers have trended towards streaming, downloads are dropping rapidly (down more than 13% globally so far this year).

Apple has seen the slow demise of downloads and has launched Apple Radio (marginally successful) and purchased Beats Music with plans to relaunch the streaming service.

Is streaming bad for the industry?

Industry revenues have collapsed from the peak of ~$14.5B in 1999 in the US to $4.5B last year as the industry has transitioned to downloads and is now making its way to streaming. If the industry can convince US consumers that music subscription is a pseudo-essential service like cable, at the same household penetration of cable (100M housholds) and a price of $10/subscription/month, industry revenues could actually climb back to $12B! It’s arguable that music is a much more personal service than household cable and there may be more than one subscription per household. Moreover, streaming revenues are recurring revenues (like songwriter royalties) unlike one-time revenues on downloads and purchases. Overall, if it works, streaming can be a hugely positive outcome for the industry.

Why is Taylor Swift abandoning Spotify?

Taylor Swift’s pulling all of her albums off Spotify is actually the latest in a series of smaller, one-album rejections by other major artists. Beyonce and Rihanna eschewed Spotify for their respective last albums. As explained above, in the long-run, as streaming penetration increases, the overall revenue in the industry should increase, but artists (esp those with the most clout) are impatient. Part of the problem is some artists are comparing a per-download price ($1.29) to per-stream revenue (<$0.01). Revenue per download depending on artist’s royalty rate is ~0.25. So if a song gets played more than 25 times, the artist will start making more money on Spotify than on iTunes. Regardless, in the short term, the absolute revenue that many of the largest artists generate in a given period of time via streaming is still significantly lower than downloads. Artists are rightly concerned about streaming cannibalizing revenue from high-paying download customers.

What happens now? Can anyone fix streaming?

In the short term, music piracy will likely increase (which has been on a several year decline thanks to Spotify) as consumers turn to bit torrent or YouTube for illegal copies of popular albums unavailable for streaming. In the longer-term, you need a player powerful enough to force the hand of large artists to invest in streaming for the future of the industry. If the labels can’t do it, the most likely player is, of course, Apple whose share in downloads is estimated to be >70%. Apple, using its iTunes download store power, can force artists to make all albums offered for sale on iTunes to also be available for streaming (or create a standardized subsequent window for streaming). However, given the revenue they generate from downloads today, Apple will be cautiously slow, mindful of self-cannibalization.

Verdict

Many credit Apple for saving the music industry from a bigger decline by providing a convenient solution that unbundled the album. If Apple goes down the above described strategic path, they will ensure that effectively they alone have the world’s most comprehensive catalog of music. If that happens, it will impossible for others to compete: size of the catalog is a far more important competitive differentiator than moderate differences in price and platform quality. The industry will once again become extremely reliant on one player—Apple.

While Apple does have some competition with Amazon Music and Google Play, overall, this is probably bad news for labels and artists in the long-run because it means Apple may ultimately extract a bigger piece of music industry economics.

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