A solution to the billion dollar problems of Spotify, Apple, and the major labels
|May 17||Public post|
(Previously published in Arc Digital)
A Flute Concert of Frederick the Great at Sanssouci, Adolph Menzel 1815–1905
To think clearly is a necessary first step toward political regeneration. — George Orwell
Rumors of the music industry’s demise have been greatly exaggerated. Just as musicians have embraced every other epoch of technological change, they will embrace this one and come out ahead.
Yet as it stands in 2018, the relationship between music and technology is ringing with dissonance: ever-shrinking income streams for musicians, a torrent of intellectual property lawsuits against streaming providers, questions over what music property even is — all of these coming together to challenge long held notions about how the music industry ought to work.
Can anything be done to resolve these tensions?
Before we address these dissonances, it is necessary to remind ourselves of how we got here. How can we know what went wrong unless we retrace our steps?
A Brief History Of Recorded Music
Sharing is nothing new. Humans have been sharing things since the beginning of our time on Earth. At first we shared common ground, then common language, and soon after, common fruit, conflict, and the beginnings of history.
The story of music begins with the invention of language. With language, events on common ground could be recorded and shared, and people could know what happened in the garden or at the city wall, all without actually having been there to see it with their own eyes.
In early history, campfires were the first forums; the first social networks. After hunts, and during tribal gatherings, people would meet around a meal and a fire to live out their varying customs and share the stories of the day. Communing under the light of starry constellations and next to dancing flames, they passed on their myths and legends in the most enduring artform humans have known: song.
Song, the mother of poetry and, in virtue of that relation, the grandmother of all other forms of literature and thought. Song was the original data file storage device. With language, events could be encoded into memory, and with song those memories could be compressed into artful pieces of language-information that were memorable, enduring, and portable.
So the ancients passed on songs. When a composition was good and portrayed a worthy story, it was obliged to be repeated, which facilitated its entry into the cultural fabric that held societies together. Accompanied by music, repetition gave our early ancestors the ability to pass on copies of what they found most important.
Songs began to be recorded by means other than voices as early as the 15th century BC, when their melodies were first written in Akkadian Cuneiform by those then living in Syria. After Syria, the historical record shows Greek-speaking Ephesians notating melodies in 1st century Turkey, with other forms of music notation appearing in China by the 6th century, Europe in the 9th century, Ethiopia in the 16th century, and our current international form by the 20th century.
Given our natural aversion to change, it’s not far-fetched to imagine that as songs and their melodies began to be written down in the 15th century BC, certain luddite Akkadians would have lamented the imminent detrimental effects that written music would go on to have on their oral traditions and campfire culture. Speeches would be given by campfire storytellers, protesting the erosion of a communicative form thought to be instrumental to cultural survival. After all, didn’t this new scribe industry profit off of long held oral traditions?
In the age to come, as trades were specialized and industries formed, an increasing number of people began to reap the economic benefits of technological and political development. The means of leisure spread and became the foundation for a lush cultural landscape. The codified concept of private property made possible the pursuit of many inventions and innovations that we continue to appreciate today. In concert with these developments, an artistic class able to focus their time solely on creating music began to appear.
Composers like Mozart and J.S. Bach toured Europe, charging fees to royal courts and opera houses for the performance of their masterly works. They would supplement their earnings by writing musical masterpieces on commission for various patrons. When not writing or performing these composers took advantage of the printing press to publish and sell books of their works for fair prices. So spread the art of music to the far corners of Europe and beyond.
In 1877, the first of a series of great inventions arrived to shock the world: Thomas Edison’s sound-capturing phonograph. The phonograph was much like the invention of the song—it created a new way for information to be recorded and spread, and initiated a great change in how composers could distribute their music. For at least 300 years, the only way to make money in music, aside from visiting royal courts and various patrons, was by publishing written works. But with the invention of the phonograph all of that would change.
If we did the proper sleuthing, we might find columns in newspapers and journals in Edison’s day wondering whether his latest invention represented an existential threat to music publishing. Of course, from our vantage point, we know what happened. The music industry went on to do just fine from a commercial perspective.
The wax record and phonograph became the golden modes of recording and distributing music. This technology made it so that a person no longer needed to journey to a concert hall to enjoy the latest collection of nocturnes; no longer needed someone else to perform for them privately; no longer needed to know how to read music to listen to it alone.
Now, there were options. A person could buy a recording and listen whenever he or she wanted, as many times as he or she wanted, until the wax grooves wore out or the phonograph busted. This affected the communal culture that had developed around music, but with changes come tradeoffs. People may not have had the same incentive to visit the concert hall, but they were also no longer restricted by accidents of distance. Finding people with whom to bond over music didn’t suddenly become hard, either. The social qualities to music appreciation did not go away, but they did change.
Forty-three years after the arrival of the phonograph, a new technology appeared to shock the music world again: radio. Though radio was invented around 1880, it was not until 1920 that the first radio stations made their public debut in America and beyond. Visionary entrepreneurs saw the potential of radio technology for disseminating information, and they promptly acquired broadcast licenses. Again, as with the phonograph, enterprising musicians and music publishers took advantage of the new technological development and adapted it to cultivate a more vibrant music industry.
Throughout the 20th Century, radio would serve as a bullhorn for the latest music. And although radio slightly lessened the necessity of purchasing records, it greatly increased the number of people who were aware of the new records that were out. The business of radio paired up with the business of recorded music to become a large institution and a well-oiled machine.
The arrival of radio in the Roaring ’20s did not immediately bring with it seismic structural changes. The music industry kept moving along, with changes coming incrementally. As time went on, hard copy record formats continued to improve: discs, cassettes, CDs, videos, etc. The Walkman made music more portable but it did not upset the music industry with legal questions or distribution complaints as today’s new technology seems to bring. New laws were passed to protect the property rights of music creators and publishers. And the years after 1920 were a kind of Pax Musica where no new technology threatened to unravel the music industry’s established order.
All of that would change in the 1990s and early 2000s. This time, the technological advance would challenge the industry like few innovations before it.
Arrival Of The Internet
As we have seen, each period of dramatic technological change has required of its practitioners the ability to adapt to the new realities.
When sound recording arrived, musicians took the invention in stride. They did not try to charge a concert entry fee for the purchase of a record. They charged the cost of the wax plus a reasonable markup to compensate the production of the record and the artistry of the work. Composers understood that in the same way a ticket allowed access to music in the concert hall, purchasing a copy of a performance gave a buyer access to the music recorded on the wax disc. In later legal parlance, the royalties gleaned from these distributed copies of a performance would be called mechanicals, to show what kind of thing they were: mechanical reproductions (copies) of a performance.
When radio began to be used to broadcast music, it was apparent that even though listeners were hearing recorded performances — like on a record — radio was not the same sort of thing as a live performance. A different law would have to apply to music in this situation. When a listener turned on the radio, he or she was not entering into a direct transaction with the artists. There was no requirement to purchase a record prior to hearing the music. Listeners were merely tuning in to a signal being broadcast from a station which was playing the music on the station’s copy of the disc. So when radio capitalized on broadcasting music by selling ads — much like Spotify and others do with streaming today — a compensation had to be arranged for the use of an artist’s music. This circumstance led to the creation of the performance royalty.
So the music industry knew what kind of thing a record was. When a consumer purchased a record, he or she did not have a claim on the intellectual property (the music) on the record. Rather, the consumer owned the wax that granted access to the music. The music industry also understood what kind of thing radio was. A radio station would broadcast the performance of a musical work, but in contrast to owning a record, access to music via radio signals did not involve purchasing a copy of the performance on a wax disc. These processes and relationships were more or less clear.
However, when internet technology debuted toward the end of the 20th century, all of a sudden people had this new seamless ability to copy and distribute songs via electronic signals without entering into a relationship with those who have a legal claim on the music. Now things were not so clear.
How would music sharing on the internet work within the legal bounds of copyright law? The internet, as a platform, seemed to incorporate elements of copied record and elements of radio transmission, but also appeared to be importantly different. But what exactly was it? What kind of music royalty system would apply, if any?
Napster And The iPod
In the early 2000s, Napster was the first music-tech company to face the legal puzzle of trying to reconcile the as-yet-undefined medium of the internet with the business of music. They just needed time, they said, to figure out what exactly their product was, and how it could preserve the music industry and even facilitate its growth.
Reading comments and stories about the company at the time, one gets the sense that the people at Napster sincerely wanted to use technology to do something great for music distribution. They had high hopes. But time and the law were not on their side, and they did not get to experiment with the problem for a long enough period of time to come up with a lasting solution. They were sued out of their short existence, which meant someone else would have to take up the project of reconciling internet technology and the music industry.
Around the time that Napster lay dying, Apple pushed the phonograph to its logical conclusion: the iPod, a portable music player that could carry every record ever made in a person’s pocket. The songs for the iPod would be sold through an online store called iTunes, and Apple would charge a modest 99 cents per track.
Most of us would probably agree that the iPod was the device that officially began the decline of the record industry’s previous business model.
Though the iTunes price per track was based, for the most part, on psychological factors, the reality that files were being copied and distributed was within the legal bounds set by intellectual property laws. And since money was being exchanged, music companies adjusted to Apple’s innovation without much protest. Had Apple found a way to tame the internet’s intrinsic tendency toward free content?
Apple’s approach dominated until the late ‘00s, at which point a shift began to take place. Companies realized that most of the time that people spent logged on to computers was time spent online, and most of the files that people wanted access to could be easily stored in “the cloud,” a digital storage space not bound by prior restraints, such as your local hard drive or even a portable USB drive. This realization, paired with increasing wireless network speeds, set up an almost imperceptible psychological transition from the need to own copies of songs to the need to have access to them. Instantaneously, ownership became superfluous.
Spotify, a Swedish music streaming company, recognized the opportunity afforded by the cultural moment, as well as cloud technology, and launched in 2008. So while Apple had in effect developed an electronic copy of the now old model of the music industry, Spotify would pick up where Napster left off in 2001 to use the internet to work on something new for music distribution.
(I have often wondered what Shawn Fanning, the founder and former CEO of Napster, must have thought of Spotify’s solution. It seems entirely plausible that Napster could have arrived at the same approach, given more time. In any case, the process of innovation is never without obstacles.)
Spotify, The Major Labels, And Fairness
When Spotify moved into the U.S. music market, they had to find a way to include the massive music catalogs of the major U.S. labels. Without these song catalogs they would not have the ability to become the competitive destination for music listeners that they envisioned.
A non-comprehensive content micro-model would not work for Spotify the way it is currently being pursued by television studios (CBS All Access, HBO GO, etc.). Since Spotify is not a music producer—in the way CBS and HBO are television content producers—it must secure content from existing music labels.
To acquire the music catalogs and stay in business while refining their product (learning from Napster), Spotify took advantage of the then-working terms of major music rights holders in applying the legal principles of the mechanical license to the digital streaming of songs. But for a number of reasons this move to agree on a provisional streaming mechanical quickly proved problematic, and has turned out to be a main source of the current conflict and resentment between music rights holders and streaming providers.
In 2017, Harry Fox Agency listed the value of a mechanical license:
The current statutory mechanical royalty rate for physical recordings (such as CDs) and permanent digital downloads is 9.1 cents for recordings of a song 5 minutes or less, and 1.75 cents per minute or fraction thereof for those over 5 minutes.
Under this mechanical rate, artists who routinely rack up play-counts in the millions on streaming providers — numbers which would normally glean royalties in the hundreds of thousands of dollars were they to come from physical sales or radio — make returns in the mere four digits, equaling compensation on the mere thousandth of a cent per stream.
Take Kevin Kadish, the co-writer of “All About That Bass” who, in 2014–15, received a paltry $5,679 from 178 million (million!) streams of his song on the personalized internet radio service, Pandora. This payout amounted to about $31 per 1 million streams, or 0.000000005 cents per play. This dismal number is an astronomical distance away from the mechanical rate of 9.1 cents per song.
If Kevin Kadish had gotten 178 million plays on Pandora and had been paid the proper mechanical rate, he would have made around $16 million. $5,679 versus $16 million — no small discrepancy. According to the law of the mechanical license, a person can seek reparation for up to $200,000 per infringement when they aren’t paid according to the legal rate.
There are many stories like that of Kevin Kadish. And musicians and rights holders have rightfuly taken streaming services to court over these massive discrepancies.
Spotify, a leader in the music streaming space, has received the lions share of legal ire from music rights holders far and wide. It would be reasonable to see their legal challenges as indicative of the present music streaming climate as a whole.
A quick search of “Spotify” on Digital Music News brings up a host of headlines which show that it is not only music rights holders who are feeling the dissonance of unresolved legal questions in the streaming and music space:
To date, Spotify has paid out more than $70 million in damages. And if their past legal record is any indication of their future, they are going to be paying much more.
Other companies are not so confident in the music streaming space. Recently, Microsoft threw in the towel on the idea of pursuing a streaming product of their own; they seem to think that the legal risks outweigh the possible benefits of competing in a such a volatile market. Apple has remained in the market, and could be set to overtake Spotify, but their long-term strategy remains unclear. In the midst of all this, Spotify is positioning for an IPO.
How do we make sense of all this?
Surely, it would be better if all parties came to an understanding; if musicians could be paid fairly for the use of their work by streaming providers; if streaming services weren’t being sued by small armies of music rights holders; if the legal understanding of the music–streaming marketplace was reliable enough for competition.
It’s possible that the central dilemma between content producers and content distributors is that no one has come up with a definitive answer to one very important question: What is streaming?
That’s the question I’ll explore in Part 2, next week. Stay tuned.
Thank you to Reagan Israel, Raf Sanchez, and Nathan Cobb for looking over earlier drafts of this essay.