Can Music Pay Off in the Internet Age? by Michael Veal

The media industries were irreversibly altered by the advent of the internet. Over time, its ability to let us share and access content has proved challenging for media industries, due to the rising prevalence of sites where pirated content is made freely available to download. Napster, which emphasised the sharing of audio files from peer to peer, was the first and perhaps foremost of these sites. Since then, a plethora of similar organisations have been developed, which are successively shut down by court order, only for another to rise up and fill its place. The hydra-like ability of online piracy to sustain itself has allowed it to become a relatively mainstream practice amongst content consumers. This is perhaps no more readily seen than in the music industry.

The music industry has attempted to combat piracy in a myriad of ways, the most notable of which was to digitise its catalogues. Through online outlets, notably the iTunes Store, music can be purchased and downloaded via the Internet. However, like buying physical content, users must purchase the content downloaded from such vendors. Piracy sites and the online vendors such as the iTunes Store are comparatively accessible, meaning that the inherent value of pirating content—by stealing it, you do not have to pay for it—wins out for many music consumers. Subsequently, the music industry has suffered in recent years: in 1999, the music industry generated $27 billion USD; by 2007, this figure had almost halved to $14 billion (IFPI).

It was into this gloomy climate within the music industry that streaming services first appeared. With the industry desperate to curb the effects of widespread piracy, a service to conquer it had to have one important feature: it had to be more convenient than its illegal counterpart (the price of piracy would obviously be difficult to contend with). Spotify entered the market as a promising contender for this role, and in 2007, the heads of Universal, EMI Music, Sony, Warner and Merlin agreed to license their entire catalogues to the Swedish start-up (Greeley). From here, Spotify has continued to earn considerable economic rent. The average pay rate for all employees—from executive positions, all the way down to receptionists—has increased enormously from 2010 where it sat at $66,792 USD to 2015, when it reached $150 687 (Resnikoff).

Spotify’s success can be attributed to the way that licensed streaming services redefined music consumption. Instead of buying the content permanently, streamers buy access to a vast library of content. By forgoing ownership of the music, in favour of the right to rent an almost innumerable number of titles, these listeners are “renting rather than buying records” (Marshall 179). This has allowed Spotify to flourish within the music industry. However, this can be said for all paid streaming services: Spotify’s economic rent is owing to other select factors.

Spotify can be distinguished from other streaming services such as Rhapsody or the relaunched Napster due to the brand familiarity it has achieved through successful marketing. One such marketing ploy used by Spotify was integrating Facebook information and friends to users’ profiles, producing a social component to the streaming. Its dominance in the streaming marketplace has even allowed it to dwarf Apple’s newly-launched streaming competitor, Beats, which boasts 13 million paying subscribers to Spotify’s 40 million (Hassan). Streaming services wishing to establish themselves and challenge the streaming giant for subscribers must be prepared to hand over the enormous licensing fees demanded by record companies. To gain clients, not only would they have to offer either improvements upon the service being provided or a reduced cost, but they would also have to expend considerable effort in marketing these advantages to an audience with which Spotify has already established itself as the market leader. These hurdles represent market barriers that Spotify takes advantage of in order to earn an economic rent.

This begs an important question: can Spotify justify the economic rent it is earning? It’s strong market presence (and subsequent familiarity of users with its interface), and pre-existing relationships with record companies, have thus far allowed the company to parry off challenges from rival streaming companies. The question that will henceforth be discussed is whether Spotify’s dominance in the music streaming industry is morally justifiable, and—more broadly—whether or not the streaming industry itself abides by ethical codes.

Spotify capitalised on the climate of uncertainty within the music industry just as streaming technologies were becoming sufficiently complex to support such a model. This is ethically sound: it is merely a business recognising a gap in the market, and developing a product to fill this space. In the years since its inception, it has continued to develop relationships with critical influencers such as Facebook. Its ties with one of the world’s most recognisable brands is obviously a huge advantage, but this association is not morally questionable. However, a closer look at the company’s ties to record companies shows that there may be more than a simple business transaction occurring between these entities.

Many record companies, in place of receiving cash for the licensing of their catalogues, decided to take equity in Spotify instead: it is estimated that record companies own around 18% of the company (Swanson). This would act as an obvious disincentive for record companies to license their catalogues at a similar rate—if at all—to competing streamers, as they could then challenge Spotify for its share of the market, threatening the company’s earnings. The choice of record companies to invest in Spotify has further added to the suspicion that clouds the streaming giant regarding its royalty payment model. However, the question at hand is whether the relationship between the record companies and Spotify is morally permissible. Despite the obvious challenge this poses to streaming companies wanting to establish relationships with record companies, these relationships are not morally reprehensible, but rather reflective of Spotify’s foresight and early establishment in the streaming market.

Despite these relationships, it seems likely that as Spotify’s revenue continues to climb, so too will the licensing fees imposed upon it by record companies. Though the companies stand to gain money through their shares in Spotify should they minimise its expenses, it is likely that this potential earning is outweighed by the unrestricted prices they can set on their catalogue. The problem with copyrighted content is that Spotify has no other choice but to meet the seller’s demands, there being no way to access the content other than through the record company that owns it. This problem is highlighted by James Richardson, who has coined it the “spotify paradox”: “costs are typically kept down by the fungibility of the component goods. Yet, in markets for copyright protected content, goods are not readily interchangeable” (Richardson 58). This allows the record companies to keep Spotify’s earning in check, and make sure that they are not profiting disproportionately from the content that ultimately belongs to the labels.

Richardson has proposed that proper legislation be introduced in order to address this issue. To ensure that Spotify is not gaining a disproportionate return on the content licensed by record companies, a rate-setting agency could be introduced to maintain an adequate level of remuneration for the content suppliers. This agency could, in turn, stop record companies from hiking up the prices for licensing, allowing Spotify to continue to operate efficiently. If the rate-setting agency were to have power over the financial dealings of record companies with multiple other streaming agencies, this could also lower the cost barrier for market entry that is currently stopping rival streaming companies challenging for Spotify’s market share.

For the purposes of this discussion, it is briefly worth investigating the ethics of music streaming, rather than focussing soley on Spotify. Streaming has been largely criticised within the artistic community, due to the substantially small returns that artists generally receive from each stream. However, as Spotify has outlined, revenue from streaming is not comparable to revenue from unit-based consumption, as streams represent an ongoing source of income whereas unit-based consumption is singular and discrete. Spotify allots a proprotional sum of its revenue to return to record labels: the more users are active on Spotify, the higher the royalty returns for record companies. The amount returned to each record label (and subsequently each artist) is dependent on the popularity of their songs, measured by the number of streams. This system is thus similar to that of the CD era: Spotify—and by extension, record companies—make a large amount of music available, with the earnings from popular songs recuperating the losses made on their less popular counterparts (Marshall 186).

In conclusion, Spotify’s earning of economic rent owes mainly to its early establishment as a forerunner in the music streaming industry, and the subsequent relationships it has been able to form with record companies and other highly influential entities such as Facebook. These relationships have improved the functionality of the program, and its popularity relative to other streaming services has allowed it to maintain control of the market due to consumers’ familiarity with the brand and its interface. In order to mediate the economic rent that Spotify is earning on their copyrighted content, record companies could implement a third-party agency to maintain a proportionate licensing rate. Such a system would ensure that record companies are unable to unfairly hike up their prices, due to copyrighted material being non-interchangeable, unlike other fungible goods. This would also lower the market entry cost for streaming agencies wanting to establish themselves and challenge Spotify for its share of streaming consumers.

 

Works Cited

Greeley, Brendan. Daniel Ek’s Spotify: Music’s Last Best Hope. 14 July 2011. 12 June 2016 <http://www.bloomberg.com/news/articles/2011-07-13/daniel-ek-s-spotify-music-s-last-best-hope&gt;. Website.

Hassan, Charlotte. Streaming War: Apple Music VS Spotify. 28 April 2016. 2 June 2016 <http://www.digitalmusicnews.com/2016/04/28/streaming-war-applemusic-vs-spotify/&gt;. Website.

IFPI. International Federation of the Fonographic Industry. 12 June 2016. 12 June 2016 <http://www.ifpi.org&gt;. Website.

Marshall, Lee. “Let’s keep music special.” Creative Industries Journal 8.2 (2015): 177-189. Print.

Resnikoff, Paul. Average Annual Salary for a Spotify Employee: $168,747. 25 May 2016. 13 June 2016 <http://www.digitalmusicnews.com/2016/05/25/average-annual-salary-spotify-employee/&gt;. Website.

Richardson, James H. “The Spotify Paradox.” UCLA Entertainment Law Review 22.45 (2014): 45-74. Print.

Swanson, Kate. “A Case Study on Spotify: Exploring Perceptions of the Music Streaming Service.” Journal of the Music & Entertainment Industry Educators Association 13.1 (2013): 207-230. Print.

 

 

 

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