The incredible resilience of the music industry

In early January, Lucian Grainge returned from vacation with a New Year’s memo to Universal Music Group employees.

As CEO of the world’s largest music label, Grainge has a unique role in the industry, making his annual greeting the industry’s “State of the Union.” In recent history, this is welcome news. After a long era of disruption, the music industry has grown for eight straight years.

This year’s email begins similarly to previous iterations, listing examples of UMG’s absolute dominance on the music charts. But after the brief victory, Grange’s tone turned to alarm. “Bad actors . . . have swooped in,” he warned.

The same streaming innovations that brought the music industry back to life are now “flooded” with content that “barely can be considered music,” he writes. But under current royalty agreements, each recording is treated the same. “We need an updated model.”

This week, that music streaming model arrives. After months of negotiations and mounting questions from investors, UMG has made the first major changes to the royalty system since Spotify launched in 2008.

The deal with French streaming service Deezer will shift more of the royalty money to professional artists (defined as those whose work attracts at least 1,000 streams per month) than to bots and white noise soundtracks. It pays more for songs and artists that listeners actively seek out.

Critical moment 1: MP3 production

In the 1980s, German engineer Karlheinz Brandenburg and researchers from the Moving Picture Experts Group studied how to improve audio and video encoding, using Suzanne Vega’s a cappella song “Tom’s Diner” to find out which compression modes would sacrifice the best sound for In exchange for the best sound. Minimal digital files. In 1995 they gave the best format the file extension .mp3.

Industry players say it’s a momentous moment when UMG actually brings other major labels and platforms into a new phase of streaming. “This is the biggest change to the model in 15 years,” said Deezer CEO Jeronimo Folgueira.

Music is often the first field to be disrupted. Illegal file sharing began eating into the music market after Napster launched in 1999, long before Netflix’s streaming service started disrupting the TV industry. While their Hollywood counterparts are still in the throes of a painful transition, with the traditional TV industry in free fall and once-in-a-generation strikes intensifying, music companies have entered a more mature phase of streaming.

However, executives now believe that the terms they laid out for streaming platforms more than a decade ago, when the industry was desperate, are outdated. “Music is the only industry where all streaming is worth exactly the same regardless of quality,” Folghera said. “A 30 second YouTube video is not as good as an episode game of Thrones“.

As technology threatens to rip their businesses apart again—this time, in the form of artificial intelligence, Frank Sinatra sings “Gangster Paradise” — Big music is fighting back.

JPMorgan has warned that if left unchecked, Spotify’s platform could become overrun with artificial intelligence-generated garbage, potentially ballooning from 100 million songs to more than a billion in a few years. Analysts say UMG’s “artist-focused” model will remove the financial incentive to proliferate these AI repertoires.

Grainge’s proposed solution would lead more money to musicians, but also to UMG, which controls nearly one-third of the world’s music and draws money from Taylor Swift, Drake and The Weeknd. A certain percentage of the income of many superstars.

Moment 2: Napster and the file-sharing revolution

In 1999, American college student Shawn Fanning created a program that allowed users to search and share MP3s stored on personal computers over the Internet. Peer-to-peer network competitors such as Napster and Limewire changed the way music was consumed as millions of people converted CDs to MP3 format and began illegally downloading other people’s music files. A flurry of lawsuits followed.

This week’s news prompted JPMorgan to raise its UMG stock forecast, predicting that the new payment system could boost subscription revenue by 9% if widely adopted. JPMorgan reckons the new model could boost UMG’s revenue by more than 20% if a “dystopian AI future” becomes a reality, with video clips flooding streaming platforms.

Deezer plans to implement these new payment terms starting in October. UMG executives hope to announce deals with other streamers in the coming months. Together, these streaming services pay the music industry $25 billion a year in royalties, the backbone of the modern music business.

Where the balance of power lies is no mystery. “The labels control everything,” said David Turner, a former SoundCloud executive who was involved with the platform’s partnership with UMG earlier this year. “If you don’t have the UMG catalog, your whole business is going to collapse. You can’t have Spotify without Taylor Swift or Drake, so you always have to listen to what Lucian Grange has to say.”

Now, the music industry wants to play to that advantage. After stabilizing, the stock is looking to build on recent gains. The streaming boom is slowing, and pressure is on Universal Music and rival Warner Music (both publicly traded companies have investors Bill Ackman and Len Blavatnik) to maintain momentum.

Until recently, streaming revenues for the major labels have been growing at a high clip, with quarterly sales up 20% to 40% year-over-year. But about a year ago, growth slowed sharply.

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According to Midia, in 2022, the streaming revenue of the major labels will only increase by 5% from the previous year, reaching $13.2 billion. In Spotify, the major labels’ share of listens has been declining, from 85 percent in 2018 to 75 percent last year.

Universal Music executives say the issues they are addressing are ones of survival, and having learned from the pain of the piracy era, they are taking early action. Michael Nash, UMG’s chief digital officer, told the FT: “It’s about fixing the roof when the sun is shining.”

Universal script

The sunny state of the music industry in 2023 is a far cry from the dark days of the turn of the millennium.

Then, illicit downloads via sites like Limewire all but destroyed the music business without a viable solution for over a decade.

Universal Music saw an opportunity to flex its muscles in the mid-2000s, with a wave of new music services attempting to tackle piracy.

Grainge’s controversial takeover of ailing record label EMI in 2012 consolidated that power, giving UMG a market share of around 40 percent – an unprecedented concentration of power that famed Beatles producer George Sir Martin called it “the worst thing in the history of music”. Face”. That makes Grainge the man anyone looking to launch a music platform needs to go through.

“That’s when UMG’s script started,” said Midia analyst Mark Mulligan. “That’s when Universal first started to realize that it could play a market-shaping role.”

Moment 3: The iPod and the iTunes store

In October 2001, Steve Jobs introduced the first iPod, enabling consumers to carry more than 1,000 songs with them. Launched in 2003, the iTunes Store lets people buy rights-managed music (mostly for $0.99 each) and seamlessly add it to their iPod library.Apple wasn’t the first to launch a digital music player or a digital music store, but it was the most successful

That all changed with the advent of Spotify. Spotify was created in 2008 and launched in the US in 2011. Despite skepticism from some music giants, Grainge struck a licensing deal with Spotify founder Daniel Ek.

The financial model is simple. Users pay Spotify $10 a month to listen to music online. Spotify pools all the revenue it receives from subscribers and distributes it according to each musician’s share of listens. Spotify, and subsequently other streaming services, pay about two-thirds of every dollar in royalties.

This simplicity is a virtue. Each stream is counted equally. But it also promotes economic incentives to game the system, with a focus on accumulating large streams. JPMorgan analysts crunched the data and found that if someone uploaded a 30-second track of themselves to Spotify and then programmed their phone to listen to it repeatedly 24 hours a day, they would earn $1,200 a month in royalties.

Executives estimate that as much as 10% of all music streams are “fake” — from streaming farms, where vast numbers of devices loop services like Spotify.

Swedish newspaper Svenska Dagbladet reported this week that criminal gangs are exploiting Spotify’s royalty system to launder money they earn from drug dealing and assassination missions, illustrating their concerns in a timely manner.

Spotify told the Financial Times earlier this year: “Artificial streaming is a long-standing industry-wide problem and Spotify is working hard to eliminate it across our service.”

The deal, announced this week, could help end this kind of content farming. But it also highlights how Universal Music Group has successfully navigated the turmoil of the digital age. Just 10 years ago, JPMorgan was valued at 6.4 billion euros, and this week it said it “sees room for upside to UMG’s valuation” and is now valued at 100 billion euros.

set the agenda

Much will depend on UMG’s ability to quickly woo other streaming companies on board — especially Spotify, the undisputed leader in streaming.

Publicly, Ek doesn’t fully subscribe to Universal Music Group’s “artist-centric” model. When asked about it on an earnings call in July, the Swedish billionaire said an artist-focused approach “rarely makes the big difference most people think it does.”

“Obviously it’s a big debate,” he added. “How do we make the economic model fair to as many participants on the platform as possible?”

However, according to people familiar with the matter, the two sides reached a new agreement this summer, and UMG made Spotify’s participation in the “artist-centric” process a stipulation of the agreement. A Spotify spokesman declined to comment. Apple and Amazon are said to be far from reaching a new deal.

Moment 4: Spotify and streaming

As high-speed Internet became more common, MySpace and Pandora showed interest in streaming new music online. Launched in Sweden in 2008, Spotify established a streaming model where users either endured ads or paid for a subscription to access a vast music library. In turn, the company pays royalties to the creators of the tracks played.However, there has been controversy over the level of royalties paid and manipulated streaming

Early results from Deezer will be instructive. Deezer is a small player in the music streaming space, with only 1% or 2% of the market, but its dominance in France makes it a useful test for wider adoption. “It’s hard to get a big organization like Apple, Amazon, Google to relocate. Spotify is too big to do anything to threaten their position. So we moved first,” concluded Deezer’s Folgueira.

Some observers say UMG’s early success in reshaping the industry demonstrates the staying power of a handful of conglomerates that have ruled the industry for decades.

Even when the tech giants have taken over distribution rights, the major labels (which are a fraction of the size of Apple or Amazon) have managed to maintain their grip, as Grainge incarnates, with control of the market as Bob Bob Iger has the same status in Hollywood.

“If you’re a record label, artist, songwriter or publisher, there’s a lot of existential anxiety right now. You’re a slave to the algorithm,” says Midia’s Mulligan. “It’s a way of saying to the market, whether it’s investors or (streamers): Actually, rights holders can still set the agenda.”