Friday, April 19, 2024

Spotify Threshold The Result of Universal Music Group’s War on Digital Distribution? 🤔

Spotify and Deezer’s new streaming models restricting artists that can earn revenue to those that cross certain thresholds are all due to Universal Music Group’s push for what they’re calling an “Artist-centric” royalty model. 

At the heart of the issue is marketshare. Take this headline for example 

MAJOR RECORD COMPANY MARKET SHARE ON SPOTIFY FELL AGAIN IN 2022, AS INDIE TRACKS FLOODED THE SERVICE

Over the past 5 years major record companies and indie labels have lost 12 points off their market share. From 2017 to 2022 here’s the market share of major record companies and indie labels 

The use of artificial intelligence stands to explode the amount of artists and music being created and released to music streaming platforms. This will cause a more rapid erosion of their marketshare. Tunecore announced a feature allowing anyone to create and distribute tracks using an AI replica of the voice of the artist Grimes. 

With the artist’s eating up Major label marketshare using digital distributors, major labels are declaring war with the head of UMG referring to them as “merchants of garbage” 

To paint a full picture, Let’s go back a bit to when Spotify was first introduced. Spotify was first introduced as a solution to file sharing. Illegal downloading was killing the music industry. Spotify allowed them to turn it into a revenue source by monetizing consumption. 

It was only fractions of a penny, but it beat the blank they were generating due to file sharing. Initially artists like Adele and Taylor Swift – who both famously withheld their music from the service – were concerned it would cannibalize sales. After launching in the US , the result was that Spotify cannibalized sales just as they thought it would. What happened was that ended up being a great thing for record companies as it led to a resurgence for the record industry. 

It’s reported that major labels take up to 80% of revenue generated from streams. 1,000 Artists generating just 1 million streams annually earn $3,000 respectively. That drives $2.4 Million for record companies. Yet, each artist would only earn $600. If you think 1,000 artists is a lot, not when major record labels are signing over 50 artists a month. 

On top of saving the industry from file sharing, it turned Discovery into a revenue source. Previously, record companies spent millions pushing songs on radio, pr campaigns to get it coverage in magazines and blogs, music video promotion to get it on MTV and BET. None of those things generated revenue. In order to make money, they needed people to buy the music and discovery was a step in that process. 

As the old saying goes, you can lead a horse to water but you can’t make it drink. All the discovery in the world couldn’t force people to buy music they didn’t feel was worth their money. Spotify and streaming made it so it’s all about leading the horse to water, it doesn’t have to drink. The money comes from just getting it there. 

Once upon a time in a land far away, people discovered a song on radio and had to go to a store and hand over money to buy it in order for a record company to get a sale. Now, they discover a song on a playlist and that is the sale. 

Your friend tells you about a new song you should check out. You go to Spotify, look it up, and stream it. That’s a sale. You hit play on your Discover weekly playlist, every stream of any song on the list over 30 seconds is a sale. Every stream of any song on a Spotify editorial playlist over 30 seconds count as a sale. If you streamed the song and hated it. So what, doesn’t matter. It’s still a sale. If you streamed the song and loved it. Great, stream it more and deliver more sales. They no longer need to make music people love in order to make money. They can effectively force music on listeners to ensure they get the most streams. 

Remember the time they put Drake’s face as the cover of every playlist on the platform during his album release? 

Now the gravy train is dependent on how Spotify pays. Currently, whoever gets the most streams in total, gets the most revenue. You get 90% of the total number of streams, you get 90% of the revenue. This disregards the individual listener because if I have 1 person paying $10 to stream my music exclusively and you’ve got 100 people that have streamed your song just once, I only get $1. 

This is why the User-centric model was rejected. User-centric would have paid artists based on individual listener consumption. Under that model, a user paying $10 to stream my music exclusively would earn me $10. That model resulted in the top ten artists seeing between a 12%- 17% decline in their revenue from streaming. Artist-centric is about rewarding artists that are responsible for the traffic driven to Spotify. They don’t care what happens when people get there. 

This was alluded to during a Universal Music Group earnings call where UMG boss  Sir Lucian Grainge talked about their recent licensing deal with Spotify and an agreement 

“[E]nsuring that real artists with real fan bases are fairly rewarded for the platform engagement they drive.”

The keyword there is ENGAGEMENT  

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