Streaming services have changed how people listen to music. But they have not changed the fundamentals of the music business: Labels sign artists, invest lots of money into turning them into sought-after superstars, and collect royalties from third parties who want to use or redistribute the music. Since most listeners would not be willing to commit to a digital music streaming service that lacks releases of the big label artists, Spotify & Co have to enter into expensive licensing agreements with the major labels. These licensing fees usually have to be paid per user and month, which makes it challenging for streaming services to ever achieve economies of scale. That explains why a service such as Spotify still isn’t profitable, despite 40 million paying subcribers: The more users it has, the more royalties have to be paid to the license owners, who then in turn pay the artists signed with them based on how popular their tunes are on the service. Here is Spotify’s own explanation of how it pays royalties.
For streaming services, the most desirable change in market dynamics would be if subscribers stopped seeing the availability of major label releases as a requirement for agreeing to pay the monthly subscription fee. So far, such an approach has not been successful for any serious contender in the streaming race. In fact, SoundCloud tried to grow without costly label deals and official licensing, focusing on independents instead, but didnt’ manage to turn this strategy into a working business model. The Berlin-based company is now adopting the conventional paid subscription model.
However, a seemingly trivial innovation introduced by Spotify last year, could lead to a paradigm shift in the streaming business:
I am referring to “Discover Weekly”, an automatically generated playlist that provides Spotify subscribers every Monday with a curated list of personalized music recommendations. A recent Bloomberg article describes the positive effects which Discover Weekly has on indie artists that have put their music on Spotify.
What makes Discover Weekly special
The magic of Discover Weekly is that it makes people consume music chosen for them by the Spotify algorithm based on the stuff that people with similiar tastes are listening to, and it puts the curated compilation itself into the foreground, not the names of big artists. People listen to Discover Weekly because they have learned that it helps them to discover great tunes, not because they necessarily expect superstars.
For Spotify there is no need to fill a Discover Weekly edition with too many songs by famous artists signed by major labels if it has plenty of similarly relevant releases by indies in its catalogue. As long as the compilation of tracks is perceived as relevant and well matching to a subscriber’s taste, they are happy. Judging from the numbers that are circulating, this is in fact the case. 40 million Spotify users have at least tried the feature, and in total 5 billion songs have been streamed through Discover Weekly so far. Recently, Spotify launched a spin-off called “Release Radar”, a playlist containing only new releases. It is generated every Friday and available to all users. Personally, I enjoy both lists a lot. Update September 27, 16:00 CET: Spotify has just released yet another personalized playlist feature, this time with a daily rotation.
Changing the industry’s power dynamics
It has become clear by now that the concept of a curated, personalized playlist published in regular intervals, filled with an eclectic, yet finite selection of songs, is a killer feature for a music streaming service. Users like it because they are being freed from the “too much choice” dilemma and they get something to look forward to. For Spotify, it offers an opportunity to slowly shift the power dynamics that rule the music industry. As the Bloomberg article notes: “The more Spotify steers people to independent artists, the more negotiating power it has with the labels and music-publishing companies”. And: “The more it can mint its own stars, the less it needs the labels’ glittering rosters”.
The more people consume the songs included in Discover Weekly, Release Radar and possible future spin-offs, the bigger Spotify’s opportunity to influence and impact people’s artist preferences gets. The company can start to form its own celebrities by giving an unknown indie artist with a catchy tune instant distribution to millions of people – people who eagerly will listen to it, since Discover Weekly and Release Radar have earned their trust. Over time and with an increasing number of loyal subscribers, the service could reduce the amount of label-powered superstars and increase the reach and visibility of indies who it transforms into its own superstars. Not instantly but slowly, the dependence on the music industry’s incumbents would shrink. Once users consider the curated playlists alone worth paying for, the power shift and the transformation of the music industry through digital streaming would be completed.
Labels will fight this existential threat
If such a stunt actually can be accomplished is still unclear. Anticipating a possible existential threat, the major labels will do everything they can to prevent such a paradigm shift from happening, and they might attempt to hurt Spotify by getting into an even closer partnership with Apple Music, Spotify’s biggest rival. However, considering that Apple itself seems to aim at owning the entire music industry, this would not improve the labels’ future perspectives.
What’s safe to predict is that Spotify will put an increasing focus on personalized, algorithmic playlists with set, weekly release dates. With each subscriber that it can convert into a loyal, even enthusiastic follower of those playlists, the company will get a bit closer to turning the music business’ power distribution upside down.
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