Beat of the Drum: The Music Issue | March 20, 2014 at 11:16 am

A Brave New World: Spotify and the Future of Music

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For most of the 20th century, changes in the music industry were limited to hardware. The gramophone became the record player, which eventually became the hi-fi and later, the at-the-time revolutionary CD. The biggest labels dominated the industry, supervising the mass dissemination and release of albums in an age of limited media. Like a venture capital firm, labels would invest in ten new artists in hopes of hitting it big with one.

The old-school business model peaked in 1999, with global music sales just shy of $28 billion. Thirteen years later, revenue was nearly cut in half—the result of a music revolution that began with Napster and became the rise of Generation Y, consumers endowed with a sense of righteousness that was anathema to paying for music. These changes necessitate that an industry historically slow to adapt make drastic changes; to serve this new generation, the music industry is catering to the Napster mantra it once fought hard to suppress.

In the Beginning

Like Facebook, Napster began in a Boston-area dorm room. Creator Shawn Fanning thought of the program as a music search engine, underestimating a project that first harnessed the power of the Internet and peer-to-peer (P2P) sharing. Launched in May 1999, the site had four million songs by October and 26 million users by February—a catastrophic blow to an industry at its peak. The invention of the MP3 file format in the late ‘90s had enabled the music industry to compress large audio files to a fractional size and had led to the rise of the palm-sized CD, then the primary industry revenue driver.

Napster turned the boom of the ’90s into the recession of the 2000s. “MP3” overtook “sex” as the Internet’s top search term in 2001; unauthorized downloads became 90 percent of the market. Unable to compete, scrambling labels turned to the courts to rebalance a permanently tilted field. The Recording Industry Association of America (RIAA) sued over 35,000 individuals in the early 2000s, creating an expensive toll for P2P sharing. As Napster and Fanning fell under a barrage of litigation, iTunes rose to fill the void, co-opting Napster’s technology and offering the labels a solution with one big concession: the contemporary album.

The iTunes store was initially a compromise between Napster’s unregulated freedom and the old business model. Consumers had unlimited, but not free, access to music. As the music industry’s only lifeline, the five major record companies acceded to all of Steve Jobs’ demands. All albums became available on a track-by-track basis. iTunes sold tracks for ninety-nine cents, two dollars less than Sony Music. The new program allowed consumers to buy individual tracks, forcing the industry away from the filler tracks off which it had previously made large profits.

Larry Miller, professor of music business at New York University, noted that Apple’s streaming services were a way of pushing forward its hardware business. “One thing to note here with respect to Apple and Samsung … they are device companies first and service companies second,” Miller told the HPR. “So music has, in a way, incentivized dramatic growth of their device business.”

iTunes was remarkably successful at driving business, but it left the Napster generation unsatisfied; once consumers had tasted free music, letting go proved difficult. Artists who had flourished under the previous model struggled under iTunes, creating a void. Garth Brooks, AC/DC, Metallica, Madonna, and The Beatles refused to sell their music to the service. Consumers grew frustrated with Jobs’ vertical integration of the store, first with his initial decision to open it only to Apple users and later with his digital-rights management (DRM) software—copy-protecting software that made iPods the only compatible hardware to play iTunes music.

Heading Downstream

Enter streaming services. Online music players Pandora and Spotify launched in the latter half of the aughts. The new applications allowed users to listen to unlimited free music at the expense of audio advertisements, at the same time promoting their platform to artists by offering compensation per play. Pandora was an assault on the modern radio network, Spotify a substitute for the iTunes store.

The new streaming services are the future of the industry, both a response to illegal downloading and to the iTunes pay-for-play model. The two leaders channel the attitudes of a generation that feels entitled to free music. Over the past year, streaming—divided into interactive (Spotify, Rdio, etc.) and noninteractive (Pandora, Google Play, iTunes Radio) sectors—is up 32 percent and digital download sales are down six percent.

“It used to be the case that if you wanted to listen to what you wanted when you wanted, you had to own it,” Selena Elton, a professor of music business at the University of Miami, told the HPR. Elton said that interactive and noninteractive services, while both substitutes to owning music, are not direct competitors.

However, Spotify, in particular, has presented itself as the next decade’s Napster. Swedish founder Daniel Ek is a Fanning acolyte, co-opting both his software and his ideas. Ek, who has stated the company’s mission is to pay musicians their fair share, has put $500 million back into the pockets of artists, labels, and publishers.

“Spotify was really created to combat piracy,” Graham James, Spotify head of U.S. communications, told the HPR. “The record business was in serious danger because people could steal music and nobody felt like they had to buy. We had to set up a legal alternative to piracy that was better [so that] we could fairly compensate artists for their work.”

So far, the company has enjoyed substantial growth despite not yet turning a profit. Company revenues are up 128 percent in the past year, meaning more and more money is funneled to artists, many of whom already receive more from Spotify than iTunes thanks to the sheer number of users on the service.

Berklee College professor of music business Peter Alhadeff said that Spotify, like Napster, has changed the way that people consume music. “It is changing the way that people think about access,” Alhadeff told the HPR. “At last I think it is triumphing over ownership.” In this way, Spotify is the next step in the P2P sharing process Fanning pioneered, in which people share music rather than take home copies of their own.

These services benefit artists as much as they help consumers. Monitoring software allows users to follow the artists their friends are listening to, providing a crowdsourced means of evaluation that ensures artists will receive exposure under the new platform. Spotify, without the burden of one-time payment, provides a simple alternative to illegal downloads. Ek, the former founder of P2P sharing site uTorrent—which has since evolved, beyond his control, into a hub for illegal downloading—understands how to harness the unlimited exposure of free music into profitability for artists.

“We recognized you have to have a free tier to be successful,” James said. “If people can create any song they want through pirate sites, you need to offer them a free experience.”

The streaming access model favors timeless over rhyme-less. With profits based on aggregate clicks, timeless music becomes much more profitable than songs with ephemeral appeal. The result is an ostensible meritocracy and a template for musicians to adapt to the streaming age.

Weak Streams

Ultimately, Ek’s success is a product of effectively embracing the intentions of Generation Y, imbedded with the Napster presumption that music should be free and they should have full choice at their fingertips. Sean Parker, who went to court on his conviction that music should be free, was an initial investor in Spotify. Napster was the first place where consumers could listen to the music of any artist they desired, but Spotify is the first to monetize that for artists, giving record labels (and the artists they control) a fair shake in the battle against piracy. In a new era, it isn’t the CD model or the iTunes model that characterizes the outlook for the music industry. Instead, interactive services like Spotify are leading the industry into a new age.

Image Credit: Wikimedia

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