Piracy is a problem as old as the music industry itself.
In Victorian times, it was illicitly copied sheet music that was the avowed enemy of the artist, and the operetta team Gilbert and Sullivan paid toughs to go around London pubs smashing up pianos with sledge hammers whenever they found bootlegged scores.
But that was before the internet. With its facility for instant and limitless reproduction — the web has opened the door to piracy on a scale of which even the most industrious 19th-century printer could only dream. Global music revenues have nearly halved since the millennium, from $27 billion (Dh99 billion) in 1999 to just $17 billion last year.
Amid the carnage, there have been few bright spots for artists. But among the more hopeful innovations has been Spotify. Launched by the Swedish entrepreneur Daniel Ek in 2008, the music sharing business is based on the same sort of technology that powered the original pirate sites, Napster and Kazaa — authors of so many of the industry’s ills.
But Spotify has legitimised the model, licensing more than 30 million tracks from musicians and record labels. Instead of buying songs and albums, users pay a monthly fee ($9.99 in the US) for unlimited access or get served an advertisement every few songs if they are on the free tier.
While the majority of the company’s 60 million users don’t pay, sacrificing some functionality, the more avid consumers increasingly do. Spotify has 15 million paying subscribers.
For an industry still wrestling with how to replace physical sales, you might have thought this would be a lifeline. From a near standing start in 2008, subscriptions brought in $2 billion in 2013 against the $5.1 billion consumers spent on downloading tracks from digital stores such as iTunes — the other main digital distribution mechanism.
Moreover the download market has started shrinking, and by 2016 streaming is expected to have overtaken it.
But far from being a source of celebration, streaming’s rapid growth has set off an agonised debate about whether Ek and his ilk are good for the industry. Last year the American singer Taylor Swift pulled her albums off Spotify after the company refused to allow her to be present only on its paid-for tier.
Now the record companies have weighed in, led by Vivendi’s Universal music label, arguing that the company’s free service, is not sufficiently distinct from what customers pay for. They have real clout: their catalogue licences are up for renegotiation and without permission to use them, Spotify has nothing to sell.
The labels have understandable concerns. By setting an “all you can eat” flat rate of $120 a year, Spotify is pitching its paid-for offer beyond the appetites of most US consumers, whose average spend is closer to $50.
“All we are doing is recreating the Napster problem and seeding a generation of people who think music is free,” according to one industry executive. Ads bring in a fraction of the income generated by subscription sales.
But it is far from clear that clamping down on the free side of Spotify is the answer. The company argues that it needs free to maximise its chance of turning users into paid subscribers. At 25 per cent of total users, its conversion rate is far better than most rivals. Pandora, a US service with 80 million users, has only 3.5m paying customers. You Tube has 1 billion users — none of whom cough up a cent.
Moreover it is an open question whether customers, deprived of free streaming, will flip back to downloading tracks or buying CDs. As likely is they will simply switch off, or revert to piracy.
The answer to the problem lies not in intervention, but competition. New entrants are lining up, and these will have different business models.
Apple, for instance, intends to relaunch ‘Beats’, which it bought from the rapper Dr Dre last year, as a subscription-only service. Google and Jay-Z, another hip-hop star, are also planning offerings.
Spotify is scarcely in a position to sit back and milk the market. The company may be looking at raising money at a valuation of $8 billion. But thanks to the licence fees it pays, it is not making any money. Indeed, in 2013 it made a tidy loss of $93 million on sales of $747 million.
Indeed if Swift feels short-changed by the industry, hard questions might usefully be directed elsewhere. Streaming may be losing money and artists struggling to get by, but the labels have weathered the digital storm remarkably well. For instance, Universal made operating margins of 11 per cent in 2013 — nearly twice what they were a decade before.
In a stagnating market, it is ever less clear how the labels earn their crust.
— Financial Times
