Karibi Dagogo-Jack, MBA Class of 2014
The word “genius” has recently become devalued through overuse. If A-Rod (one of the very few Major League Baseball players to have been censured for steroid use twice) can be described as a genius for turning a double play then what the hell was Daniel Day-Lewis in There Will Be Blood. Or, Madame Curie, for that matter. That being said, genius is just about the most straightforward description of Thom Yorke. Yorke, the leader of the bands Radiohead and Atoms for Peace, is one of the most important musicians of his generation. Blessed with a wisp of a voice that can beautifully conjure disaffection and lament, Yorke’s influence is evident on followers from Coldplay to Arcade Fire. His recent work has mostly been listless and flabby, but “Default” from Atoms for Peace’s 2013 release Amok still made the hairs stand up on the back of my neck.
So, sure, Yorke fully deserves to be called a musical genius. But judging from his daft rant against Spotify (the upstart streaming music service), Yorke’s genius does not extend to the business end of music. In July, Yorke and his frequent collaborator Nigel Godrich took to Twitter to complain about how Spotify was unfair to artists. In Yorke’s own words, “Make no mistake new artists you discover on #Spotify will not get paid. meanwhile shareholders will shortly being rolling in it. Simples.”
To which Godrich added, “Meanwhile millions of streams gets them a few thousand dollars. Not like radio at all.”
To which I added, “It’s easy to beat up on Spotify, but I don’t see anyone else out there trying to create a universally-beneficial, scalable solution.” All 80 of my followers were probably just relieved that I wasn’t tweeting yet another 2 Chainz lyric.
For a while, I worked at one of the biggest record companies in the world mainly making charts with Microsoft Office. Quarterly, I’d attend backslap meetings with a bunch of befuddled old men (the executives) who would make exasperating statements like, “We’ve got to get a Lady Gaga.” Or, “Tell them that we need an album by next week or we won’t be making our Q3 number.” I slowly realized that I would need to start seeing music as a commodity, as one more widget to sell, if I wanted to be satisfied with my job. However, music has always been my reminder that that there is a shared and intuitive nature to human life.
This past summer, I worked at Spotify within a culture that held a similar reverence for music. Every conference room was named for a member of the Wu-Tang Clan and every cubicle had music wafting out of it. A common music industry term is exploitation (it basically means the licensing of an artist’s music for use by a third party), but I never heard anyone use it at Spotify.
From the very beginning, the record industry has functioned as a particularly rapacious version of venture capital. Artists are discovered and labels offer to underwrite their recording, marketing, and distribution expenses in exchange for the lion’s share of their profits. Of 100 signed artists, 5 can be expected to blow the eff up (another common industry term). The remaining 95 would be lucky to break even over the course of their lifetime. So, how does an industry sustain itself on a 5% hit rate? Mostly by keeping as much of the profit as possible through legal (e.g. contractual sleight of hand that allows labels to reduce royalty payments by any and every artist cost) and illegal (dissembling, shady sales reporting, and wonky licensing side deals) means. With the amount of graft in the industry, it would be reasonable to expect substantial profit margins, but music execs have always preferred paying themselves to paying artists or stakeholders. A 10% profit margin was usually reason to brag.
So as long as the record industry has existed, musicians have not been paid. At least, not until they have proven successful (then, they usually get wildly overpaid). Spotify and other streaming music services attempt to address this by paying almost all of their earnings out to rightsholders. For every $100 that Spotify makes, $70 gets paid out in royalties to artists and labels. These royalties are basically apportioned according to the number of streams. Because consumers consider a music service more complete if it includes all of the old records, Spotify pays a fractionally higher per-stream rate for catalog albums than they do for new releases. Despite being on course to pay more than $1 billion dollars to rightsholders since its inception, the company still has to answer to periodic flare-ups from uninformed and justifiably wary musicians.
For so long, record labels have kept the flow of revenue so enshrouded that musicians are indignant in the face of Spotify’s transparency. They complain that millions of streams only result in a few thousand dollars. Well, that’s because music-streaming behavior is significantly different from music-buying behavior. A Spotify listener doesn’t lose much when they play a song out of curiosity, but in a music-buying scenario that listener would have to be willing to fork over at least $10 dollars to quell their curiosity.
The structure of musicians’ contract and the licensing process often also reduce their payout from Spotify. Because music streaming didn’t exist when the contracts were formed, older contracts don’t have provisions for streaming which allows record labels to pocket all of that streaming revenue. Similarly, record labels sometimes explicitly structure new contracts to reap most of the benefits of streaming music revenue for themselves. Fees to aggregators could also reduce the amount that musicians receive from Spotify. Aggregators are middlemen that smaller record labels hire to negotiate with Spotify. These middlemen take a cut which ultimately lowers the cash flow to musicians.
Not so long ago, it was established wisdom that the music industry was dead. Piracy was rampant and musicians themselves began to view albums as promotional tools that allowed them to make money through touring and sponsorships. For more than a decade, record labels, musicians, technologists, and even private equity firms tried and failed to solve the impossibly knotty riddle of creating a new, sustainable record industry. In just 5 years of existence, Spotify has solved a problem that had stumped so many before it and, in doing so, re-established a waning connection between monetary value and music. Genius.