Separation Disagreement: Why Taylor Swift and Spotify Is Not (Just) About The Music

News yesterday shined a light on the new queen of popular music, Taylor Swift. After selling 1.3 million copies of her shiny new pop release, 1989, she made the decision to remove her whole catalog of music from Spotify. It’s hard to overstate the effect this decision has on Spotify. “Shake It Off” was the most popular song in the service. The company said that Taylor’s music was included in 19 million playlists. Obviously losing the most popular artists on the service is a huge loss for Daniel Ek’s company.

Taylor has been a critic of streaming services and strongly believes that album sales are still the way most artists should make a living. In a Wall Street Journal article this July she mentioned that some major artists have given their albums away as promotion and believes this is a mistake. As she put it:

“Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for. It’s my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album’s price point is. I hope they don’t underestimate themselves or undervalue their art.”

But is this really about free? After all, streaming services pay for the right to play the music, as do Internet radio services like Pandora. And if we’re going to really discuss about free, shouldn’t we discuss YouTube, which provides so little money back for playing music that it might as well be free? No artist in the world, even Taylor, would release music without a YouTube strategy. It’s reach and power is enormous. And as of today, YouTube is the only place users can stream the three biggest songs from 1989. For free.

With 1989 Taylor decided to hold the release back from streaming services to help increase retail sales, just like she did for the previous release, Red. Windowing to streaming services is an emerging tactic for artists, as it limits access to fans only to retail to experience the entire record. After the retail window closes, the record becomes available on streaming outlets.

While 1989 is windowed on all services, Spotify was singled out for elimination of Taylor’s music. Her catalog remains available for play on streaming services like Beats Music, Rhapsody and Rdio, and on the world’s biggest streaming service, YouTube.

So what’s going on here? Why would Taylor stiff one of the largest music listening platforms in the world, one that is providing the third most revenue in the music industry, while leaving her music up on other services that are smaller, but pay nearly the same on a per-play basis as Spotify, and on YouTube–which pays diddly squat compared to streaming services?

It’s all about participation.

That is, participation in financial events, like initial public offerings and acquisitions. In this day and age of frothy music startups, there are those who get a stake and those that are left looking in from the outside. Can you take a guess which respective side of the line artists and major labels fall?

In August, Vivendi reported that Universal Music Group closed the sale of Beats Electronics to Apple and gained a nice tidy sum of $404 million. Granted UMG was an early investor in Beats. Nevertheless, UMG cleaning up on these kinds of investment strikes artists as unfair. Without music, would there be any company to sell to Apple?

It’s also been widely reported that all the major labels have sizable investments in Spotify. As the company prepares its IPO, the major labels have a huge stake at stake at making it successful, as they’ll get a big chunk of change that won’t be shared with artists.

When you are most popular artist in the world, you probably believe that you should participate in an event where the label gets paid. After all, labels are compensated for providing a catalog. And the catalog is woefully incomplete without Taylor Swift. In fact, Taylor’s decision to withhold her music from Spotify will have a fairly sizable impact on UMG’s topline revenue.

UMG is the distribution partner for Taylor’s label, the independent Big Machine. All their music rolls up into UMG revenue for streaming services. Sure, UMG still must pay Big Machine for the plays, but artists and even labels have long been unhappy with unfavorable streaming deals and sloppy (or worse) accounting practices of major labels.

Even without knowledge about Big Machine’s deal with UMG, it’s easy to speculate that the label is unhappy–or at least unimpressed–with their revenue from Spotify. And as an added extra, news broke yesterday that the label–along with Taylor as its flagship artist—is for sale. And one of the leading suitors for the Nashville-based firm? UMG.

With all this information, it leads to these questions:

-Did Taylor’s catalog suddenly come out of Spotify to pump the price of Big Machine’s acquisition by UMG? Nothing would show the power of Big Machine like pulling one of the most popular artists at the top of her game. It will also have a material impact on UMG’s revenues. How much? Just my meatball math based on Spotify’s reported revenue and Taylor’s probable popularity, removing the catalog could decrease UMG’s share by a full percentage, meaning at least $13 million less.

-Was Big Machine negotiating a relationship directly with Spotify and hit an impasse? Spotify has come to agreements with holdout artists like Led Zeppelin, The Red Hot Chili Peppers and Metallica. But all those are legacy acts  that have all made tons of cash on their deep catalogs. These acts got a big check were ready to  move on.

Spotify has never done a deal with a premier active artist, and I’m sure it is very reticent to start, as Rihanna, Beyonce, Jay-Z and other big acts will line up for their own deals. Big Machine also would be looking for participation points above and beyond any compensation for plays, such as equity and potentially advances.

Also, Spotify will correctly claim that it already is paying top dollar for the catalog. Why should the company have to pay twice for the same content?

Answer: because that’s the way business is done.

More Breakup News

NY Times: Taylor Swift Announces World Tour and Pulls Her Music From Spotify

Wall Street Journal ($$): For Taylor Swift, the Future of Music Is a Love Story

Bill Werde: An Open Letter To Spotify About Taylor Swift And Why I’m Unsubscribing

NY Post: Taylor Swift’s Label On The Block For $200 million

Vivendi/Universal Music Group: Closing Of The Interest Sale In Beats

Ellen DeGeneres

The Beats Formula For Streaming Music’s Happy Ending

Close your eyes. Good. Now let me ask you to imagine something. A product that has every song ever recorded, available for you on the devices you use everyday wherever you are, regardless if it’s at home, work, the gym or even places where you don’t have a connection, like the subway or on an airplane. Sounds pretty sweet, right? Any song you can think of, available at your fingertips.

At its crux, that is the promise and marketing pitch for every all-you-can-eat music service that has come out in the past decade. It’s a pretty cool product. And lots of consumers gave it a shot. Only problem is nobody wanted it.

Okay, okay, I’m being a little provocative. When I say ‘nobody’ what I mean is only the most hardcore music nerds—those people who obsess over their playlists and the perfect collection—were willing to pony up the $10 a month. Certainly not the number of people who’ve signed up for other access products, like Netflix or Hulu, or even other music products, like the satellite radio giant Sirius/XM.

Which made it kinda strange when Jimmy Iovine and Dr. Dre’s Beats By Dre headphone juggernaut bought the failing MOG subscription service and planned to relaunch it. Great, just what the industry needed. Another subscription service. But they had another idea.

Jimmy and Dre, along with Chief Creative Officer Trent Reznor, decided that the streaming services had it all wrong. Nobody wants 20 million songs. Music fans want 20 awesome songs for what they were doing in a particular moment. They want them picked and sequenced by someone who knows lots about music. And the company thought that most of all, they want the stamp of approval from a music legend. Like someone who produced one of the greatest rock records. Or an artist/producer who redefined music. Or the lead singer of one of the most innovative bands of all time.

In a nutshell, that’s the Beats Music product. Music designed for the way you listen brought to you by music people you trust. And while the product launched two weeks ago falls well short of delivering those lofty goals, the positioning is so different than the zillion or so other companies now crowding into the space that it might work. Maybe. If Jimmy and Dre can market it like they did headphones.

You see Jimmy and Dre turned headphones—which used to be either a cheap commodity, or a high-end specialty item—into a must-have cultural icon that people would drop $300 without blinking an eye. Why? Not because of quality. Not only because of quality. There have always been high quality players and Beats By Dre headphones don’t always win the best headphone bakeoffs. It’s because everyone you look up to is wearing them. Like Super Bowl champions. And celebrities. And the hottest rappers. When they first launched, it had the stamp of approval of Dre. When he’s recording the next superstar, Beats were the headphones he used. And you could trust him.

So it’s that combination: a differentiated product with an imprimateur that consumers trust, and the marketing muscle to sell it to people who have never heard of Spotify, Rdio or Rhapsody. Beats Music says they’re going to get behind it in a big way. How big? Well, they started with a Super Bowl commercial featuring Ellen DeGeneres. But the company is promising to do much more. And they’ll have to if they want to have a lasting impression, because compared to headphones, marketing streaming services is a tough sell.

So will it work? Can Beats Music extend the Dre-pire and sell the value of streaming music where all the music nerds failed? Yes. If Beats can continue to improve the product so it delivers on the promise of ‘music so right it’s like magic.’ If they can make it effortless to subscribe by adding it to your cellphone bill for cheap. And if they can market it with the sheen and style of Beats By Dre, we will have the hit that the music industry so desperately craves.

More for the obsessively curious

Podcast: Can Beats Music Crack The Mainstream

Spin: Is Beats Music All Its Cracked Up To Be

NY Times: Algorithm For Your Personal Rhythm

Hollywood Reporter: Ellen DeGeneres Reveals Her Super Bowl Ad

NY Post: AT&T Delays Big Push as glitch hits Beats Music