Taylor Swift

Taylor Swift Vs Spotify: Fact or Fiction

Well, that was fun. The spin was hot and heavy last week after Taylor Swift said goodbye to Spotify. You had Taylor describing why she left, her label president, Scott Borchetta, offering some facts and figures, Daniel Ek giving his side of the controversy, and a myriad of opinions on what the deal really was about (including mine). So what’s really going on? Let’s take a look at a few of the issues and see if there’s truth or not to the claims.

Number 1: Taylor Swift made a rash decision to leave Spotify

Fiction

Taylor Swift and Big Machine made a rationale decision based on the numbers and what they considered real value and what Spotify is actually paying out. Or at least what they saw in their pocketbooks. Nobody is in a better position in the industry to make that decision than Team Taylor and I’m sure it wasn’t without some deep consideration.

However, the timing of the decision appeared to be made to milk the maximum value out of Spotify in terms of promotion. When an artist is releasing an album, he or she is looking for the largest number of people to know it and hear it. YouTube, Late Night With Jimmy Kimmel, covers of magazines, tv ads, and yes, even Spotify plays its part. Shake It Off was one of the most popular tracks on the service until it disappeared. It also should be noted that Taylor’s catalog didn’t get yanked until a full week after release of 1989, allowing her fans to listen to her old releases before removal Monday, providing lots more headlines and curiosity of her albums.

Number 2: Spotify is not paying Taylor Swift for her music

Fiction

Spotify does have a free-to-the-listener tier. However every spin of her music generates some revenue. But how much? It’s actually a fact that most of the revenue Spotify pays comes from its paid service. But the company doesn’t pay per stream from subscribers. The formula divides up all of its revenue by the popularity of artists/catalog and then cuts a check.

It is unknown how the free plays are paid, but artists have noticed a difference between free plays and paid plays, which could mean that there is indeed a micropayment for every play. Or there could be a much lower active rate per listener.

Spotify says it needs the free service to drive more listeners into the paid tier. Daniel Ek claims that 80 percent of paid subscribers were once free listeners. And Spotify has had great success scaling its business with the free tier. At 12.5 million worldwide subscribers, Spotify paid subs has made all the other services currently in the market an afterthought.

Taylor’s camp also made a pretty strong point about how she doesn’t believe in free music, and had asked to be removed from Spotify’s free tier. Citing how vital free is to its acquisition strategy, the company refused to do so. It might also be pointed out that besides P2P and semi-pirate services like Grooveshark, several of Taylor’s new songs, including Shake It Off remains free on the world’s largest streaming service, YouTube.

Number 3: Spotify Pays Much Less Than Other Services

Fiction

Earlier this week The Trichordist posted a chart of all the per-play “rates” from services and asked if Nokia Music was paying a much higher rate, then why can’t Spotify. Unfortunately, that formula didn’t include the most important number: revenue.

Nokia doesn’t pay more than Spotify. In fact, it pays less. Much less. Yes, the per-play rate might seem bigger. But Nokia’s service is so unpopular and content costs are so high that it appears they are paying much more per play. In terms of real dollars, Spotify is the labels’ number two or three account in every territory worldwide behind Walmart and iTunes. They will probably pay out a billion in revenue in 2014. And remember: this is a company that didn’t exist six years ago.

Number 4: Spotify pays artists

Fiction

For the most part, Spotify has an agreement with and pays the rights holder, generally a major label or aggregator, like Tunecore. The rights holder distributes the money to the artist based on their deal with that entity.

Number 5: Artists have no idea what Spotify pays

Fact

This is where Spotify really gets into really deep doodoo. It is far from clear what Spotify contributes to artists. There’s a ton of reasons for this. Bear with me as we go through it:

  • Spotify has an agreement with a rights holder for the license to the catalog. It can include a bunch of fees due to the label, like a minimum revenue guarantee, an advance, or an equity stake. It’s unclear where these buckets of revenue would show up in a royalty calculation for an artist (most likely, these fees would go to the rights holder’s bottom line and not into a revenue shared bucket).
  • The artist has an agreement with a label. There’s generally a split of revenue, which has traditionally meant CD, LPs and digital track sales. There are also some deductions from the artist’s revenue pool before money is dispersed. Most of these expenses are from a time when the labels made tons of money by egregiously marking up physical distribution and marketing costs. For some reason, some of these deductions at some labels remain in the digital world. There have been some tragically hilarious lawsuits where legacy acts, like the Temptations, have sued their major label for continuing to charge deductions on iTunes downloads when the company clearly didn’t incur any costs. There are also deductions from negotiations with streaming services. As a rule the deductions cover bandwidth, credit card processing costs, and any type of deal the streaming service gets for, say, a discount on the royalty as the label is sharing on the costs to get billing from a cellular carrier.
  • The artist gets an incomplete, indecipherable royalty report from their major labels that shows plays divided by revenue, but nothing else.

A transparent royalty statement doesn’t need to be complicated. It could be pretty simple, but it should detail where all the money went.

At a minimum a streaming royalty report should include this:

  • How many plays I had on Spotify: XXXXXXX
  • How much revenue that generated: XXXXXXXX
  • Itemized deductions from my revenue: XXXXXXX

Spotify’s position on transparency has been tone deaf. I’ve heard representatives say ‘go ask your label’ when lack of transparency is brought up. Without any clarity to what the artist is generating from Spotify and what deductions came out of the revenue bucket, it’s impossible for anyone to make a decision about 1) what’s the value of Spotify and 2) how badly an artist is getting ripped off.

I’m sure there are cases, maybe an overwhelming number of them, where Spotify isn’t actually creating revenue for the artist. But arcane royalty reporting is making it hard for an artist to make an informed decision about streaming’s value. It may be unfair, but Spotify needs to help solve this problem. It’s also clear that the company has zero leverage in changing the way business is done. It makes the company’s mission to change the way fans listen to music seem easy in comparison. At the end of the day, though, Spotify will need to make it much simpler for artists to understand their value and revenue in the service.

Number 6: Spotify Believes That Scaling The Business Will Create Enough Money For Everyone

Fact(ish)

Nobody has grown like Spotify in the streaming. Its revenue growth is phenomenal and they’ve done something that company after company has failed at: getting a mass number of people to pay for music subscription. Daniel Ek claimed 12.5 million subs and 50 million users worldwide. The company did a roadshow recently for artists and showed what kind of monies it’ll contribute when it reaches 40 million subs.

I’ve written about how Spotify’s goal is to be the biggest media channel dedicated to music, but that requires rolling out services around the world. Spotify is still not in some massive markets, like, Russia, India, and China. But it must be pointed out that piracy is so rampant in those countries that there isn’t even a thought about paying for content. The company claims that it has wiped out P2P services in some territories it has launched in. It’s a huge gamble to believe if Ek will be able to convince residence in Shanghai to change their behaviors and start paying for music.

If Ek can accomplish this feat, it could well see a couple hundred million active listeners and 80-100 million paying fans. But it’s not a given that the company will do so.

Number 7: Spotify Is Killing Digital Music Sales

Fiction

First Napster andP2P maimed CDs and then iTunes tore its heart out as it lay dying. Now here comes Spotify that will turn $1 downloads into micropennies for artists. This is the theme you hear from people in the industry. It’s undeniable what P2P did to CD sales.

But it’s questionable that the death of iTunes sales is solely Spotify’s fault. It probably has more to do with consumers having always connected devices with a variety of apps in their pockets. iPod sales have fallen through the floor as the iPhone has taken over. And instead of buying tracks, consumers use Pandora, YouTube, Soundhound, Spotify, Rhapsody, iHeartRadio, Stitcher, Deezer and a flood of other services to fulfill their streaming music needs. Customers have changed their behavior as the technology changed. It’s hard to blame it on one service.

Number 8: Spotify Is Killing The Album Buyer

Fact (with a caveat)

It is true that music fans (like me and probably most people in the music industry) that used to end up with a stack of CDs at the Tower Records checkout line are now getting awesome value. For the monthly price of one CD, that fan now gets hundreds of thousands of releases, available whenever they want. And say you want to keep it for your subway ride to Williamsburg? No problem, just download it as part of your subscription.

But here’s the deal: if someone subscribes continuously to Spotify, they are paying more than double what the average music customer bought during the heyday of CD buying ($65 a year). Spotify’s bet is that it’ll signup enough subscribers to the service and stay with the service long-term that it’ll far outstrip the CD sales. Others believe that even if Spotify scales the business, it will completely obliterate CD and digital sales, further shrinking the global music business.

You can’t blame skeptics for seeing the world as half empty rather than half full, but even in a Spotify-free world, those big customers aren’t coming back any time soon.

Number 9: Spotify is only exists because they’re full of greedy technologists and venture capitalists who want to get rich off musician’s lifework.

Fiction(ish)

Spotify is preparing an initial public offering so that they can fund the expansion of their business. It is true that many employees who work at Spotify will get rich off the IPO and start buying houses, boats, horses and other trappings of the nouveau rich. Investors in the company will also see a payday, including the major labels. But that’s what happens in venture funding.

And it’s also not a given that Spotify will have a successful IPO. Many investors and analysts are extremely skeptical. There is much we do not know about the company. The good thing about the march to an IPO is that Spotify will be compelled to disclose a treasure trove of facts about the business and the risk factors in investing in its stock. It will make it easier to ascertain the company’s long-term prospects. An IPO, an acquisition or even bankruptcy and liquidation all seem possible at this point.

It’s necessary to point out that the big payday is amazingly rare in digital music. You can count successful companies on one hand. More common is the experience of (the legal) Napster, which lost tens of millions for a couple companies before selling to Rhapsody for pretty much nothing. The digital music graveyard is filled with corpses of great ideas, and every day there are new companies popping up that will undoubtedly join the lost souls.

Digital music seems like a good way to turn billions of venture financing into nothing. I hold the overwhelming majority of people (but not all) who start digital music businesses aren’t motivated by the payday. They do so because they love it.

Number 10: Spotify is a good bet for investing

Fiction

Good god, no. This isn’t Joe Montana with the ball and 2 minutes left in Super Bowl XXIII against the Cincinnati Bengals. This is Joe Montana against a coliseum filled with unfed, angry Bengal Tigers (who have a much stouter defense). Okay, maybe that’s a bit much. But Spotify faces huge challenges even if Taylor Swift and Daniel Ek make up.

Outside of the previously mentioned leap of trying to get a majority of the world’s population to pay for content for the first time ever, Spotify’s free service is extremely expensive to run. Some believe too expensive to allow profitability. Additionally, subscription businesses are extremely tricky to get right, in particular if you aren’t a quasi-utility that requires a monthly fee, like a cell phone or cable bill.

In the words of my former boss, Mike Lunsford, this calls for the ‘what would it take for you to believe’ test. Meaning what assumptions will have to become true if you believe that a company like Spotify will succeed.

Here’s my list of assumptions:

  • Spotify will succeed in rolling out around the world and make most of their markets successful, but in particular the big ones, like Russia, China and India.
  • Spotify can build a worldwide channel of music listening that international brands will pay top dollar to be part of, and therefore defer free listening costs.
  • Spotify can convert enough free listeners to paying customers and (maybe even more importantly) keep them paying for a long time.
  • Spotify can keep the cost of acquiring customers (mainly in free music costs) to a minimum.
  • Spotify can pay artists enough money that they won’t follow Taylor Swift and leave in droves, eating into its value proposition and watch customers quit because there’s no music in the service.
  • Spotify can continue its hockey stick growth chart as YouTube’s Music Key and Apple’s iStream launch.
  • Spotify can fix search, which sucks.

Okay, I threw that last one in there. But a misstep in any one of the above could deeply harm the company. Missing on two could potentially add Spotify to the Digital Music Graveyard. Use extreme caution when considering its future.

More Spins Than A Record

JonMaples.com: Following Their Own Beat: Spotify’s Ambitions Outsize Anyone In Digital Music

Time.com: Taylor Swift on 1989, Spotify, Her Next Tour and Female Role Models

The Guardian: Spotify Paid Out $300k To Stream Shake It Off

NY Times: Billboard Changes Charts, Will Count Streaming

Digital Spy: Dave Grohl on Taylor Swift and Spotify “I don’t f**king care”

Spotify Blog: Two billion and Counting

Sonic Boom: How Spotify Acquiring The Echo Nest Remakes Digital Music’s Landscape

The Echo Nest: now part of Spotify
The Echo Nest: now part of Spotify

Whoa! Did you hear that? If you’re in the digital music business, that ear piercing sound you just heard is the cracking of the industry’s landscape. Maybe not right away, and maybe it won’t cripple many companies, but the fact that Spotify purchased The Echo Nest today puts a spotlight on the challenges all the companies that partnered with the music discovery company now face. And even beyond that, it could give Spotify a huge advantage.

The Echo Nest powers music discovery for quite a few of the music services, from Rdio to Rhapsody to iHeartRadio to Vevo. The companies use it primarily to run their radio services. But the service can take any piece of content–tracks, albums, playlists, radio, similar artists, or genres–and create recommendations. And The Echo Nest makes the recommendations personal for each of their client’s customers. The service provides the company with all the plays that a customer logged and The Echo Nest creates a ‘taste profile’ for every user. That, in turn, guides the recommendations algorithm.

Within an hour of the announcement, an exec from one of Echo Nest’s customers told me that The Echo Nest said they will fulfill their contract, which he understood to mean that after the contract is up, his firm will need to build a recommendation algorithm. “It’s tractable work. It just requires time and money,” he said.

And talent, too. Let’s not forget that part of the equation. What has made The Echo Nest so attractive to music startups is the peerless quality of their algorithm. To create a great algorithm, you need to understand music, you need to understand technology and you need to understand cultural significance. These are three different skillsets that don’t naturally go together and getting them to work as successfully as The Echo Nest has, for a massive number of customers, is extremely challenging.

So unless startups are willing to create highly skilled teams of musicologists, machine learning Ph.Ds. and engineers that know how to tap big data, a company isn’t going to get close to what The Echo Nest can do. Conservatively it’s at least a million bucks to get into the game, and probably more than that just to get to parity with them. And instead of development times taking a minimum of a year, The Echo Nest can get you up and running in about a month.

But here’s the thing: to do a deal with The Echo Nest, a company most likely chooses to not build its own algorithm, which is what all these companies are staring down the barrel of today. Everyone who is a customer considered The Echo Nest to be a neutral partner that didn’t play favorites to any of their competitors.

But not everyone thought about it this way.

When Spotify launched their radio product in 2011 it was with The Echo Nest’s algorithm, but it quickly developed its own. Why? The company knew owning its algorithm was strategically important. Beyond that, it might not have wanted to hand over customer play data to personalize the system. And that’s where this deal gets very scary.

Think about play data for a digital music company like you’d think about a country’s natural resources. It contains amazing insights of what customers like, what songs relate to each other and a great deal of intelligence about customer behavior. But just like getting natural resources out of the ground, it requires a big data infrastructure to mine it and make it actionable. Some companies have invested in heavily in this infrastructure, but most have this data—perhaps a service’s most important asset—buried deep in within their usage logs.

It just so happens that The Echo Nest has all this data—from all of its customers—to power its algorithms. Services are very protective of this data and are therefore extremely concerned about exposing their streams to competitors, and of the ability for The Echo Nest to potentially centralize the data and create products that show a total view of online listening.

But here’s my question: did Spotify just get access to all the listening data for all of The Echo Nest customers? Even if it does not commercialize it, just seeing that data could lead to enormous advantage for the company.

Look, all these services have different customer bases. An iHeart customer is very different from an Rdio one. Rhapsody customers listen differently than an Xbox one. Insights on how these music fans are different (and are alike) would give Spotify a total view of the listening universe, which could help in everything from tuning their algorithm to targeting customers for acquisition.

And if Spotify wants to continue to sell The Echo Nest’s algorithm, wouldn’t that give the company an enormous, NSA level of music playback? The company confirmed today that they’re pulling out of the algorithm business for other platforms once all the terms are up. But if you want to build an app on the Spotify ecosystem, you can have access to The Echo Nest’s goodness.

Daniel Ek has built Spotify into a company with the best technology in the industry. He’s now bought the shiniest tech toy on the market and he’s taking it home to play with it. Alone.

Algorithmic-Free Linkage

TechCrunchTogether, Spotify And Echo Nest Want To Build The Facebook Connect Of Music

GeekwireSpotify acquires music discovery service The Echo Nest to the dismay of Rhapsody, Xbox Music

HypebotSpotify and Beats Music Acquisitions Illustrate Differing Strategies

Gigaom: Spotify Acquires The Echo Nest and Its Musical Smarts

The VergeSpotify Could Be Making Trouble for Rdio

Missed Connections: Why Technologists and Music Execs Must Partner to Win

@jmaples | Friday, February 14

Near the end of Marc Geiger’s amazing sermon at the European music conference MIDEM he made a comment about the differences between technologists and music industry execs face.

“Companies that are leading the music revolution don’t even know about the music industry. I can tell you Sergey Brin didn’t grow up in the music industry. Neither did Steve Jobs…even Daniel Ek. They didn’t come up knowing what we all know. We have to educate them. And when they think ‘theory’ we get mad at them. They think about it from the user perspective.  We think about it from an artist and industry perspective. There’s a big disconnect.”

This remains a big problem in the digital music world. Artists, music industry executives and technologists have been wary of each other’s motives. It’s been uncomfortable, and from time to time it can be downright contentious. I’m sure that music executives can reel off a greatest hits of outlandish and ridiculous asks from techies who just don’t understand how the music business works. And I have participated in some ‘colorful’ conversations about shortsighted label terms that only slowed down critically important progress.

Image
Can’t we get along: After Spotify signed Metallica to the service, Sean Parker, Lars Ullrich and Daniel Ek were all buddies.

So I couldn’t agree more with Marc’s points, but it’s a two-way street. Both sides need to come together. What both the startups are trying to pull off (create new platforms of music consumption) and what the industry is in the middle of (rebuilding revenue from a product that no longer works) is hard. It will take both sides sitting down and understanding each other’s issues, motives and problems if we are going to deliver Marc’s vision.

It’s very easy to get caught up in what the other side is doing wrong. What the music industry doesn’t always understand is that to find out what are the great products, we need to experiment. You never know what’s going to take off and quickly building products, iterating as quickly as possible to ‘fail fast’ requires more flexibility than what has traditionally been granted. What technologists need to understand is that music is just not a commodity to be packaged in a cool app. The music industry may have its faults and limitations, but it is still the best in the world at discovering and shaping great artists and understanding what is going to connect with the music fan.

Building Great Customer Experiences

One area where both sides have been fairly unsuccessful is delivering what the music fan really wants in an experience. The industry might know the demand for artists and styles, but they sure couldn’t figure out how to deliver it. Let’s face it, none of the music formats have been really great, which is why we keep replacing them every decade or so. And asking your customers to replace their albums with 8-tracks, cassettes and then CDs while consistently upping the price has proven to be a horrible way to engender customer satisfaction. Part of why Napster hit its popularity in the first place was that there was such a bad taste in music fans’ mouths about having to spend so much money to only get the one song they liked on the radio.

The first few generations of products have felt more like technical solutions designed by people who write code instead focusing on solving hard problems for the customer. Technologists have also fallen way short in their relationship with artists and management. I’ve heard stories of artists seeing demos of tools designed for them without the technology firms even talking to a single working artist or manager about what was needed. The techies started by trying to solve their own business problem instead of artists. Big problem.

To start we need to get both parties together in a room. We need more events like Cash Music Summits that bring both technologists and artists together to discuss some of the thorniest problems and greatest opportunities facing the industry today. It’s a good start, but technologists need to do more than just talk. Getting artists involved in tasks like ideation, product definition, value propositions and even the customer lifecycle would go a long ways towards engendering goodwill and building a strong partnership. After all, if they’re great at making music, they might great at making music products. It bears mentioning that Beats Music’s chief creative officer is Trent Reznor.

Teamwork Rules

So what would working together look like? Well, a good example is the deal Twitter’s Head of Music Bob Moczydlowsky put together with Lyor Cohen’s new label, 300 Entertainment. Bob told Billboard Twitter will provide access to data that will help 300 decide who to sign to the label, a skill known as Artist & Repertoire. It used to be the A&R dude would spent 350 nights a year seeing potential acts to sign. But now data has become an important part of the job (along with going to see lots of music). Twitter understands that they don’t do A&R. But they know that they have amazing data that will help companies like 300. So Twitter partners with someone who really knows A&R and works with the company to provide solutions. Sounds like a pretty happy arrangement.

I have spent hours describing in detail to more than a few tech execs why they shouldn’t get into A&R. It’s a amazingly specialized skill set that very few people at any streaming company know anything about. It’s also ridiculously expensive and the ROI doesn’t pencil out until you invest for years, and even then I couldn’t say with any certainty that it would return anything. Most likely they’d waste a ton of time and money and lose the focus on their mission, which was to build a killer music experience. In a thin margin business where you’re getting squeezed by aggressive suppliers and distributors, it becomes very tempting to try to ‘move up the value chain.’ But that’s a mistake.

Playing Your Position

It’s like playing on a really great baseball team. Everyone needs to play their position.  It doesn’t mean we can’t call out the shortstop for a lack of effort or tell the centerfielder they need better skills. That kind of feedback just makes everyone better. But if we understand our roles and respect what massively talented pros can bring to the table, we could build the all-star team that will be necessary to build Marc’s $100 billion behemoth.

Today’s Teamwork Links

Dave Allen: Can Streaming Music Services Create a Bigger Recorded Music Industry?

CNet: EMI Wants CEO’s Assets

BillboardTwitter’s Head of Music On What The 300 Deal Really Means

RhizomeDo Artists and Technologists Create The Same Way

The GuardianThom Yorke Calls Spotify ‘The Last Desperate Fart of a Dying Corpse’

The GuardianDavid Byrne: ‘The internet will suck all creative content out of the world’

Follow On

Marc Geiger

Bob Moz

Dave Allen

Cash Music

Jesse Von Doom

Maggie Vail