Music Business

One Year Into The Future: Spotify And The New Record Business.

CDs won't ever go away completely; neither will vinyl. Physical recordings won’t disappear as consumer products. Collectors and audiophiles will still purchase them as part of high-end or limited-edition releases. (Well, maybe not all formats, though this is ironic given I was in a Range Rover last weekend that had a cassette deck hidden behind the GPS.) Each of these formats has a consumer, and each represents a revenue stream for musicians trying to make money by selling recordings of their work.

This brings us to Spotify, the Swedish streaming service that launched in the US a year ago. I remember anxiously awaiting its arrival, my interest piqued by reports from the international marketing staff who were hearing about the service in advance. We were waiting for this new service to launch in the US, wondering whether it would be important enough to revolutionize the music business.

It turns out that Spotify is important. It is the link between iTunes and the future.

The main question involving Spotify is how it replaces traditional revenue streams at a time when artists and record labels can’t completely shed their reliance on them. This is a particularly vexing question, as there are arguments that Spotify is not much of a revenue stream at all. (A subject for another post.) Physical sales still represent a substantial part of many labels’ and artists’ income (and margin), and no matter how much they may want to transition to digital, they must still deal with this reality. Even more troubling is that the mix of digital and physical sales is inconsistent from artist to artist, project to project and genre to genre. As a result, it is difficult to gauge the impact of any service.

Despite this question, Spotify represents a significant step forward in how music is monetized. Regardless of whether or not Spotify becomes the industry standard, it is important because it is the first to emerge that satisfies the issues previously affecting streaming services. It may not currently completely replace physical or even digital album and singles sales, but it works, shows consumer acceptance and is growing. It is also legal. Spotify may be untested, but as consumers shift into the cloud, and from "ownership" to "access" models, it gives artists a chance to adjust to these new models while continuing to make money from traditional ones. It also gives consumers an easy way to join the newest segment of the record business.

iTunes was once a new service that solved many problems inherent in "ownership" models. However, if the future is streaming, satisfying artists and consumers in different ways is the key to success for "access" models. Spotify is important because they have realized this.

What Can The Record Business Learn From Newspapers?

Flickr photo by NS NewsflashJust before I started this blog, I read a post by Mathew Ingram on Gigaom entitled “Why Clay Shirky is right and Warren Buffett is wrong”. In it, Ingram discusses Shirky’s argument that Berkshire Hathaway’s purchase of Media General’s newspapers showed a lack of understanding of the newspaper business.

I thought about this again after reading David Carr’s piece in the New York Times, “The Fissures Are Growing for Papers” (hat-tip @gleonhard). The difficulties for papers that Carr describes reminded me of Ingram’s piece.

These two articles gave me a better understanding of the current state of the newspaper business, which, in turn, gave me a greater understanding of the current state of the record business. They’re in similar positions.

Ingram quotes Shirky:

The reality is that newspapers have never sold the news to readers—readers pay for the distribution platform on which that news is printed, i.e. the paper itself and the packaging involved.

This is also a description of the record business. Artists don’t sell their music to fans—fans pay for the format on which that music is recorded, i.e. the 78, LP, 8-track, CD or download itself.

Another quote:

Buffett said that the problems newspapers were facing were in part a result of ‘giving away their product at the same time they are selling it.’

This is true for some music business models. Artists give away music in an effort to generate enough attention so that they can sell the very same music via a distribution platform.

But fans don’t want the distribution platform, they want a relationship with the artist.

For years, the best way for a fan to engage with the artist was to buy a recording. In fact, buying recordings has been such a major component of fan engagement that we’ve forgotten that it is actually a substitute for that engagement. If fans want to engage today, they can check out an artist’s Twitter feed or friend them on Facebook.

Current media models are problematic because fans no longer have to pay for a distribution platform simply to get the engagement that they crave. The price of a recording is now effectively zero. There are countless other ways to create engagement between artists and fans. Yet despite this, music itself has not lost any value and engagement remains priceless.

Shirky’s point is that the underlying facets of the newspaper business are far too often misunderstood. This is true of the music business as well, and I wonder if anything can be learned from this comparison.