Finance

Music labels split over Spotify’s push to promote songs for lower royalties

The Josh Abbott Band, formed by a group of fraternity brothers in Lubbock, Texas, has spent the past decade touring the dusty plains of the region and finding success with twangy songs about cotton farms, God and romance. 

Concerts have earned them enough to make a living even as the music industry transitioned to subscription streaming, which pays artists meagre sums — typically about $1 for every 200 plays.

When the streaming service Spotify recently offered the band the chance to prioritise songs in its algorithms, in exchange for taking a 30 per cent lower royalty payment, it was a “no brainer”, frontman Josh Abbott told the Financial Times. 

“These days . . . what earns our company revenue is concert tickets and merchandise. Our albums are marketing opportunities to get people to a show,” he said. “It’s a great trade-off . . . to get the exposure that might lead to a much higher ROI.”

Across the ocean in Sweden, Spotify founder Daniel Ek could cite this Texas band as proof of the grand vision he has spent years pitching to investors. In Ek’s view, Spotify’s reach and sophisticated data can “connect” fans and artists in a way that benefits musicians — and Spotify’s profits.

Towards the end of last year, Spotify began asking record companies to participate in “Discovery Mode”, through which Spotify prioritises an artist’s songs on select music feeds in exchange for reduced royalties.

However, so far, the reaction from the major labels has ranged from lip service to staunch opposition, according to interviews with more than a dozen executives in the music industry, most of whom would not speak on the record. 

Spotify’s four largest suppliers — Universal Music, Sony and Warner plus indie coalition Merlin — when combined make up about 80 per cent of its total streams, making their participation significant. None of the three major labels is testing Discovery Mode, according to five people close to the situation.

Privately, some executives grumble that Spotify is creating a new version of “payola”, the controversial practice in which record labels pay radio DJs to promote songs. A US congressional committee last month sent Spotify a letter demanding answers about Discovery Mode, warning that it “could weaken the core goal of copyright and intellectual property”.

Spotify’s core business is tough. The streamer hands over 70 per cent of its revenues as royalties to the big music companies. Investors want to see Spotify find a way out of that punishing model, either by increasing its share of streaming payments or finding other ways to make money, such as podcasts

It is not the first to try this. Pandora attempted a similar idea in 2014, led by former chief executive Tim Westergren, to “steer” songs into its feed in exchange for lower royalties. “I literally lived this tension. When you’re paying out 70 per cent of income, the money is just not there. We got crushed as a public company because we weren’t generating profit,” Westergren said. “The only way you start making money is by paying less for music. It doesn’t feel like you have a choice.”

Pandora ultimately scrapped the plan. “It felt too at odds with everything else we were saying,” Westergren said. “We were saying we would play the best song for the listener. How is that compatible with what we’re proposing here? It’s not. It’s payola,” he said. 

Spotify told the US congressional committee that Discovery Mode only increased the likelihood of the company recommending an artist’s tracks. “Discovery Mode is not a guaranteed placement and does not guarantee additional streams,” the company said. 

Spotify’s “marketplace tools”, as Ek has named them, are a potential way to chip away at that 70 per cent figure and lift Spotify’s gross margin, which has hovered between 25 and 26 per cent for the past three years. 

The logic: if Spotify can provide valuable services, such as advertisements or streams, artists will either pay for it or cede royalty money and Spotify’s margins rise. “It’s a win-win,” chief financial officer Paul Vogel told the FT.

Others are less sure. “It sucks, in my humble opinion,” said Michael Sukin, a longtime music lawyer who has represented the Rolling Stones and the estate of Elvis Presley. “If they’re boosting stuff to you because they have to pay less for it, it’s kind of nasty.”

Payola dates back decades, typified by scandals in the 1950s when record labels bribed radio DJs with airline tickets, televisions, and cocaine. In many countries, the practice is illegal. However, streaming services fall outside laws forbidding payola on radio.

The fear among sceptics is that the experiment will trigger a “race to the bottom” in which everyone starts accepting reduced royalties in order to stay competitive. “If it becomes commonplace, then everybody has to do it,” Sukin warned. “It’s like a virus that spreads.”

Spotify executives have been touting the “two-sided marketplace” since 2018, when pitching to investors ahead of its public listing in New York. The company in 2019 began testing a “Marquee” tool through which artists pay for a pop-up notification promoting a new album release; stars such as Justin Bieber and The Weeknd have used it. 

Spotify’s Discovery Mode has drawn more direct accusations of payola. 

The tool arrived in November at the same time as some analysts grew impatient with Spotify’s costly podcasting acquisitions, pulling down its share price more than 20 per cent in 2021. Vogel has told analysts that marketplace tools would be “additive” to profit margins this year, while podcasting would be a “bit of a drag”. 

Spotify executives tell reporters that Discovery Mode is in the midst of early testing with a “limited select group” of artists on two music feeds, with a wider rollout later this year. These artists have seen their number of listeners increase by 40 per cent through the tool. 

Spotify has worked on the programme with Tunecore and Believe, companies that provide independent artists with some of the services of a record label, such as distributing their music on streaming platforms. “Tens of thousands” of artists from Believe have used the tool, according to Andreea Gleeson, co-head of Tunecore, which is owned by Believe. “For our segment this is very attractive, in not needing money to pay for advertising,” she said.

Mark Noel, manager to the Josh Abbott Band, said the group’s streams had jumped “almost overnight”. 

“Sometimes our marketing budgets are 50 per cent or more of the costs of actually making the record,” Reed said. “So a 30 per cent fee that we don’t have to pay upfront, and allows us to expand our marketing budgets in other ways, is actually pretty large and substantial.”

Spotify said it is working with major labels, independents and distributors on testing Discovery Mode. When asked for an example of a major-label artist that has used it, a Spotify representative said: “During closed testing periods, we only disclose details of our early partners with their permission.”

A senior executive at a major record label described the tool as “very borderline if not directly payola,” and a “very bad slippery slope”. Another major label executive echoed the sentiment but expects it will succeed over time. “As long as Spotify is the biggest [streaming] player in the market, then if they’re putting a lot of chips into something, everyone has to take note.”

Universal Music, the industry goliath that commands a third of the US music market, last year announced a new licensing deal with Spotify. In the statement, Ek called Universal “music’s most innovative company”, hailing it as an “early adopter” of marketplace tools such as Marquee. 

However, Universal has not used Discovery Mode, according to three people familiar with the matter. Mark Mulligan, music analyst at Midia, said Universal “were persuaded to make a big deal out of something that is not a big deal yet”.

Discovery Mode may not be making an impact in the world of pop stars for now, but Abbott sees himself as “blazing a new path”. 

“They’ll be doing studies on the first decade of Spotify, and yeah, maybe we’ll be a part of that,” he said. “Something I used to say in my young, maybe slightly cocky days was: I want to set the trends, not follow along. We’ll just keep the wheels going and . . . keep making music until we can’t do it any more.”


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