Digital art by Sam Janssen

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The Recorded Industry’s Digital Revolution 

This article is a snippet from a recent essay written on music consumption in the recorded business. With not much gone into editing it and skipping over the history of music consumption, it jumps straight into the topic from where The Digital Revolution begins... 

 

1982 sees the first step of the recorded industry into the Digital Revolution with ABBA being the first to release an album on compact disk (CD), a ‘digital optical disk data storage format’, co-developed by SONY and Phillips. As the recorded industry enjoys its golden age through to the late 90’s, the digital revolution kickstarts its decline with the emergence of Napster, a file sharing service that distributed music for free download in digital file format and became a rampant practise among music consumers, which in effect exposed a new market for music consumption - an obvious threat to rights holders and major players in the recorded industry. Napster completely changed the game, introducing a model for music consumption that would turn the recorded industry upside down where music was digitally streamed at the expense of the physical sales that the recorded industry relied so heavily on. Here began the on-going fight against illegal download and digital streaming of music that continues today. 

 

“This rapid transformation of the music industry is a classic example of how an innovation is able to disrupt an entire industry and make existing industry competencies obsolete. The power and influence of the pre-Internet music industry was largely based on the ability to control physical distribution. The internet makes physical music distribution increasingly irrelevant and the incumbent major music companies have been required to redefine themselves in order to survive. — Patrik Wikström - Queensland University, Australia

 

The problem with the likes of Napster is that while they were amazing for music consumers they had no means of paying the rights holders for the music. Major labels began a crusade against illegal streaming and spent far more time working on eliminating it than on acknowledging the disruption and innovating to adapt to a new era of digital music consumption. Any ideas to innovate and adapt were strictly confined to that which only increased revenue and ideas were shunned that involved compromise or threat to current profit. Napster was quickly sued by rights holders and each new music-download service startup went out of business since the royalties demanded by rights holders far exceeded the revenue generated by each startup. Limewire, Pirate Bay, Kaza, all suppressed, but every startup the rights holders sued only made a gap in the market for another startup to cultivate the potential of the new digital age in ways that major labels and licensing companies were slow to be willing to do. 

 

Up until the turn of the century, major labels were seen as one of few keys to success for musicians. A major label's biggest strengths were their track record and international distribution system. The Digital Revolution posed a serious threat and while they were fighting small startups like Napster, they misunderstood who was really in charge - the consumer, whose behaviours dictate the market. With such access to the consumer that the internet allows, that is from music streaming on smart devices to online communication and social media, the typical role that labels play in an artists music career are becoming not just easily done by artists themselves but in many cases obsolete. Major labels themselves are facing innovative disruption in their own occupation with the likes of new, smaller labels like Kobalt and Essential introducing new label models, rivalling major labels to lead music into the digital age. 

 

So long as the means to download music exists, they’ll always be a market for it. This shook the foundations of the recorded industry where record sales dramatically decline as music streaming continues to become the future of music consumption. Global reach and accessibility to audiences through social media arguably trumps a major labels international distribution system and the rampant untracked download makes it impossible for labels to maintain a reliable track record - their biggest strengths rendered as just one option among many others leaving somewhat of a power vacuum in the recorded industry that musicians have opportunities unprecedented in music industry history to fill. 

 

With services like YouTube and Pandora the discovery journey is indistinguishable from the consumption destination.” — Digital Ascendency: The Future Music Forum, 2014


 

The Major Players

 

In 2003, a new business model was introduced from an unexpected company outside the music industry - Apple’s iTunes. Apple set out to convince music rights holders that music consumers would buy music if given the choice of individual songs for less than a dollar a piece, as opposed to the model at the time based on whole-album purchases. Apple successfully predicted that consumers would buy music through this model and convinced right holders in what can only be labelled a huge success with iTunes still a major player in music distribution nearly twenty years later. This transformed and facilitated the transition from the traditional model for music consumption into the individual track download that’s known today.

 

As one file sharing service after another is put out of business by rights holders, a service appeared on the scene in 2006 with a business model that major labels have been combating ever since - this service was Spotify, created in Stockholm, Sweden, by Daniel Ek and Martin Lorentzon. Now, the music industry is made up of three industries that have always overlapped but as of nowadays have never been harder to distinguish between. The industries are that of the live performance industry, the licensing industry and the recorded industry. For the last century and up until recent times the recorded industry has been the most profitable. The disruption of the industries caused by the Digital Revolution have caused physical sales to drop and have robbed major labels of their absolute necessity. While the recorded industry clings for life, the other two industries have remained virtually untouched. The live performance industry has no doubt benefited with the majority of artists resorting to playing live to generate revenue, live performance having become the most profitable industry on the contrary. Licensing has in many cases become significantly easier through the internet and innovation rising where creative bundle-deals are offered with more and more creative control left to the artist. 

 

Spotify is an innovation for music consumption that has successfully invaded the recorded business with a model that has been widely embraced and continues to develop despite much suspicion of its sustainability. Spotify began as just another ad-funded music service that rights holders had little faith in given the consistent failure of this ad-funded model hitherto. From Spotify’s emergence in 2006, their core mission was to convince rights holders that this model was sustainable and in 2008, a breakthrough was made when Spotify signed a deal with European countries that involved a significant compromise on Spotify’s part - on top of offering rights holders minority shares in the company itself, here was introduced the access-based subscription model to the music industry, where users of Spotify would pay a recurring monthly subscription for access to an almost-unlimited music library . 

 

“Spotify, Apple Music and their rapid growth indicate a shift in consumer expectation for music whenever and wherever.” — (Cole and Cole, 2020)

 

This new business model, which is known as Freemium, has two service versions - the free service and the premium service. Spotify’s goal from this point onwards has been to convert users from the free, ad-based accounts to paid subscription accounts that they’re calling Premium. The way to achieve that goal as of now is the negative features, such as intruding advertisements or lower quality music on the free version, but the question is how to push the consumer to convert to premium without dissatisfying user-experience too much on the free version. Spotify went on to reach a conversion rate of 20% (meaning 20% of Spotify users were on premium at the time) and had 30 million subscribers in 2016 which then more than tripled by 2019. 

 

This innovation for music consumption is a defining element of the modern recorded industry. Rights holders argue, since they’re paid based on Spotify’s customer quantity, that they share excessive risk from a separate entity they have no control over the management of. Spotify argues that rights holders should indeed share that risk and just be paid what the rights holders generate for Spotify. You could argue that the access-based subscription pioneers who failed beforehand did so because of the impossibility of surviving the traditional fixed-royalty-per-track demands by uncompromising rights holders. Nonetheless, Spotify is no doubt a formidable player now having seemed to convince rights holders in many cases to share their risks and buy minority shares of Spotify’s shares. 

 

Despite Spotify’s challenges, such as Apple Music which is an insignificant source of income to Apple itself in contrast to Spotify’s position in the music industry being its main source of income, Spotify has now generated billions of dollars for rights holders and claims that this alone is proof of the models reliable sustainability long term - but it’s not just the labels they need to convince. The artists present another view of current affairs, with the common belief among musicians that music download should be considered a performance royalty, which means artist-entitlement to 50% (+/-) of profits generated by Spotify for music companies, not the current mechanical royalty that means a 20% (+/-) entitlement. Indeed publishers and labels generally disagree and argue that streaming plays are considered unit-based music sales because a download is a tangible unit. Some artists condemn the likes of Spotify as corrupt and distance themselves from it but the industry discourse on risks and percentages continues with each end of the debate using the fact that royalty percentage is a pre-internet era invention as their logic. 

 

“The debate about what type of royalty a particular Internet-based music service should generate may seem like a legal issue with minor real-world implication, but it is an absolutely crucial question that will determine the structure of the future of the music industry.” — Patrik Wikström - Queensland University, Australia


 

The Future

 

Of course, this innovative disruption of the recorded industry hasn’t reduced the amount of music listeners, on the contrary, there are more than ever before. The explosion of universal access to music has transformed the way in which music is consumed and related to. A further innovative product of this access-disruption of the industry is the methods of organising music into context. Now models are extending into efficiency in organising music, mood and activity based playlists (Apple Music) and focusing more on what people can do with their music than on what they can or can’t access. 

 

It’s the belief of some that eventually these services will merge into a mass service involving access to every song ever recorded, give or take. It should be made clear the angle that musicians who are using niche marketing and personal branding for their own independent career models are attacking this from. The Digital Revolution completely rocked and transformed the recorded industry and left a power vacuum that multiple entities are trying to fill. One of the biggest threats in the recorded industry, at least according to the musicians on this end of the industry-political debate, is that of corporate power becoming the future of the music industry where some theorise artists will be signed by the likes of Coca Cola in a future oligopoly, which is where the price is what’s competed on for so long and becomes so reduced that the only surviving players left are so few and so large that anything they do can dramatically impact the market and therefore smaller competitors. Corporations are suspected to want to monopolise the recorded industry as just another step on the climb to the top of the economy. The concern is that if this happens, the industry will be at the mercy of the corporations whose CEO’s are virtually inaccessible on a personal, individual basis and as such could potentially face another century’s worth of exploitation of musicians - it’s argued that musicians, not corporations or other product distributors, should be the ones to fill the recorded industry’s power vacuum, not just because of a musicians up-close-and-personal status in the music industry but also because musicians, who are inevitably more deeply connected with their music’s consumers due to music being such a communicative product, could be most reliable to fill the vacuum effectively and take the industry forward.

 

On the other hand, free market libertarians argue that the likes of Apple and Amazon have demonstrated no monopolistic intention at all and definitely bear no resemblance to that of the oil industry a hundred and fifty-odd years ago. But according to many artists, music entrepreneurs and smaller, music streaming services alike, the suspicion that corporatism is on a power grab in the industry is not unfounded. The likes of SoundCloud and Spotify, who pay Apple (the biggest competitor) a 30% fee per download since they’re Apple apps, are theorised to resemble Amazon’s retail competition who, according to some former Amazon employees, are targeted with a literal policy from Bezos (owner of Amazon) himself to target smaller competitors “like a leopard targets a baby gazelle”. Bezos has since denied this and has distanced himself from the narrative surrounding the allegations.

 

So, while those who argue that Apple and Amazon behave in no way monopolistically in the music industry, it could be suspected that it’s that very scrutiny that prevents them from doing so, such widespread suspicion making it necessary to tread carefully where competing with smaller businesses is concerned and what’s more, even free market libertarians often admit that corporations can’t be trusted when left to their own devices. It’s important that musicians become aware of the circumstance, not so that they can be niche marketers but so they themselves know exactly what it is that they stand for in the industry - what position would you take? It should be stressed that many argue very credibly in favour of the likes of Bezos and corporations. 


 

The Industry’s People Power

 

The innovation toward how people consume music isn’t just based on what platforms and formats they use, large-scale innovation is headed toward how people relate to music and to their favourite artists. As is said, access to music is a given and now companies are having to find new ways of being unique by developing what consumers can do with music in terms of organisational convenience. But what can the artist do? Musicians are using their own ways of innovating to improve how their audience relates to (consumes) their music. Hence the seeming power shift from major labels to the artist. Artists are in a powerful position to lead by way of future music consumption with the international access to their audiences worldwide where relationships with their fans is dramatically enhancing customer experience - could personal branding and niche marketing for artists, with its emphasis on genuine communication of who the artist is personally and personal connection with a quality-over-quantity fanbase, be the gateway to the future of music consumption? 

 

As is said above, power in the pre-internet era was largely based on the ability to control physical distribution with the major labels main strengths (their proven track record and international distribution system) viewed by artists as one of very few keys to ‘making it’ in the music industry. Untracked digital download and the internet’s allowing of global access to audiences renders this near-on obsolete, forcing traditional business models to adapt. With multiple entities competing to fill the vacuum, artists are left seemingly unaware of the potential innovation for music consumption that substantiates an answer to the problems facing musicians in the recorded industry’s historic transition back to normality in this age of abundance. It’s interesting to consider what is actually transpiring in the recorded business; which is literally the creative overthrow of what you could literally call extreme capitalists who have believed in the abuse of their position as product distributors at the expense of the product generators for more than a hundred years - what if the product generators took on the role of product distributors for honest/personal communication and independence? 

 

Throughout the history of the recorded industry, musicians had a relatively low social status in contrast to the 20th century’s age of musician superstardom - many arguing that the recorded industry’s dramatic decline amidst The Digital Revolution is its return to normality with many artists’ view of the current industry in the context of the last century said to be counterproductive where building a music career today is concerned. With many artists still looking toward major record labels or making hit songs, many are arguing that the solution to today’s issues amidst The Digital Revolution lies in the universal access to audiences and the connection that can be built with individuals across the world. Global access to consumers, which is to say global access to markets, brought on by the internet has enabled the serving of value (value that an individual is able to create as a product of themselves) to audiences across industry’s - standards have been raised particularly in music consumption in the music industry, where the value musicians can offer an audience/market is stretching beyond just the music. 

 

“The retrospective record collection served as such an identity marker in the pre-Internet age, but as music listeners abandon their physical collections they are required to search for new ways to use recorded music as a tool for communication of their identities to their friends and the world.” — Patrik Wikström - Queensland University, Australia (Wikström, 2018b)



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