In praise of oligopoly

Having three major labels in the middle of the music-industry ecosystem is a good thing all round.


Do you understand the storm surrounding Taylor Swift and Spotify? Don’t feel ashamed to say no: it’s very complicated. But it’s worth thinking about, all the same. Because if you can get your head around the various forces at play, then you have a very good chance of being able to see a bit of what the future might hold for the music industry.

The reason that this whole situation is hard to understand is a simple one: there are a lot of different players, and they all have differing incentives. Once upon a time, the music industry was simple: there were artists, and then there were record labels. There were retailers, too, but no one paid a huge amount of attention to them — they were basically just a place where you could buy the product that the artists and labels put out. Even less noticed, in terms of the economics of the industry, were the companies pumping out streams of music — primarily radio stations, but also anybody else playing or broadcasting music. Historically, that was a quiet and predictable income stream for the record labels, but suddenly it has become their lifeline.

Right now, you see, the industry is fragmenting, and not in particularly auspicious ways. The artists are still around, of course, and even the labels as well, although they’re steadily losing their clout. There are still a few old-fashioned retailers of physical CDs, although that business is almost dead. Then there are the digital retailers of songs and albums: Apple, mainly, but also Amazon, Google, and maybe a few others. Most importantly, there’s a multitude of competing streaming services, including both Spotify and the behemoth known as YouTube. And, of course, virtually all music can be downloaded illegally, for free, with great ease.

In this new, fragmented economy, power can move in unexpected directions. It looks like it’s moving away from the record labels — but where is it moving to? And what does this all mean for musicians, and for music lovers?

And, is power really moving away from the record labels? The total amount of money that all the labels are making, on a combined basis, is going down. But then again, the total number of labels is going down, too. In 1999, there were six major labels: Warner Music Group, EMI, Sony, BMG, Universal Music Group, and PolyGram. Today, there are just three: Warner Music Group, Universal Music Group, and Sony Music Entertainment. (EMI became part of Warner, BMG became part of Sony, and PolyGram became part of Universal.)

The fact that there are only three major record labels is a godsend to the world of digital music. It means that if you’re trying to do anything innovative with digital music, you basically only need to deal with three counterparties. Once Spotify or Rhapsody gets three contracts signed, for instance, they can effectively tell the world that they’re offering all the music you might ever want to listen to. Sure, there will always be a few exceptions here or there. But, as anybody with one of these services knows, you can generally play just about any album you want to listen to. It’s an amazing, magical thing— and it’s a service which, to boot, is generally offered on a freemium basis. To have the world’s music at your fingertips, these days, you don’t need to do anything illegal, and you don’t need to pay a penny.

The value proposition for companies like Spotify, then, is pretty compelling: for $10 a month you get everything. It stands in stark contrast to, say, Netflix, which seems to be acquiring content on a title-by-title basis, at ever-rising prices, and which as a result has seen its movie inventory collapse. If you want to watch a movie at home, you probably can’t. But to find out whether you can, you first need to go to a service like canistream.it, which will search a bewildering range of services (Netflix, Amazon, Hulu Plus, Crackle, Redbox, YouTube, Epix, StreamPix, Snagfilms, Vudu, Apple, Target Ticket, you name it) to see where and on what terms that movie might be available.

Clearly, if the music industry moved in a similar direction, that would be very bad for consumers, and also for discoverability. Which means that we want the big three record labels to retain a certain amount of power and influence over the industry as a whole. So long as they can deliver substantially all of the artists in the world, we’ll continue to be able to listen to pretty much any artist we want, on any service we want.

So what’s going on right now? Well, there are always a few high-profile exceptions to any rule. Normally, in the music industry, the list of exceptions tends to begin with The Beatles, but right now it begins with Taylor Swift. What do those two artists have in common? They both own — or at least have a major stake in — their own small record label. (Apple Records for the Beatles, Big Machine for Taylor Swift.)

Small labels are a real headache for digital music services, especially when they have ulterior motives, or are controlled by capricious artists. The majors can be counted on to drive a hard bargain but ultimately to act in their own best interest; with independents, that’s not always the case. What’s more, streaming contracts with big labels generally operate on a Most Favored Nation basis: whatever the label offers to one streaming service, it has to offer to everybody else. That’s good for competition and innovation — but again, it’s not necessarily something which happens as a matter of course with independent labels. (The Beatles, for instance, might strike a deal with Apple, but feel no need to commit to offering the same terms to Rhapsody.)

So having the major labels in the middle of this ecosystem seems like a good thing all round. At the same time, however, it’s increasingly hard to what the major labels actually do, for artists. Someone like Taylor Swift can use Universal for her distribution while publishing on her own label: that setup doesn’t seem to have caused her any harm. And in the indie world, of course, it’s often a matter of pride to publish either on your own or on an idiosyncratic boutique label.

That’s why the fight between Taylor Swift and Spotify is worrying. It’s not because one of them is right and the other one is wrong; it’s because there’s no major record label capable of stepping into the fight and forcing these kids to play nice together. The fear is that this particular fight is only going to be a harbinger of things to come: more and more artists are going to want to take things into their own hands, rather than simply going along with what some big major label has agreed on their behalf.

There’s another fear, too: what happens when big artists start signing, not with major labels at all, or even with indie labels, but rather with individual streaming services? U2 might sign with Apple, Taylor Swift with Amazon, Jay-Z with Spotify, and so on. All of those services have both the ability and the desire to pay top dollar to lock up the artist in question for their own platform, much as Netflix is trying to do with its own TV shows.

At that point, our current nirvana comes to an end. Albums will be like movies: you’ll have to hunt through all manner of rival services to be able to stream the one you want. And of course the digital music companies will be hurt as well: while snatching up an individual act might seem like a smart tactical move, it will ultimately lead to a world with fewer digital subscribers overall, just because the value won’t be there any longer.

Bill Werde is already unsubscribing from Spotify, based on the Taylor Swift move alone. As far as he’s concerned, $120 per year is no longer fair value for Spotify, if Spotify doesn’t include Taylor Swift. If other artists start asserting their independence in similar ways, expect many other Bill Werdes to follow suit.


Felix Salmon is a senior editor at Fusion.