Banning Spotify Won't Solve the Music Industry's Problems
In the early days of MP3 technology, I vividly remember attending a school assembly on the dangers of music piracy. A number of PowerPoint slides and stern lectures from administrators warned students that illegally downloading music was theft, and offenders were sure to face harsh consequences. Inculcated with fear and shame, we silently promised ourselves we’d never illegally download music.
In contrast, today’s age of digital streaming makes guilt-free music downloads possible--and the waters of intellectual property law even murkier. The Department of Justice is currently reviewing several copyright regulation proposals that could drastically affect the future of music streaming. Companies that profit from digital streaming, such as Pandora, Spotify, and Apple, are set to spend millions of dollars on lobbyists before the DOJ reaches a decision by the end of 2015.
According to a report for the Recording Industry Association of America (RIAA), revenues of music streaming services saw tremendous growth in 2014, surpassing profits of digital tracks and albums by an all time high. Music streaming revenue currently accounts for 66 percent of the total market. These statistics are largely a result of Pandora and Spotify, whose simple business models distress anyone in the music industry hoping to capitalize on music sales.
Pandora generates most of its revenue through advertisements. Users without a subscription can listen to Pandora stations for free, but face the occasional interruption of ads; upgrading to a subscription gets you continuous streaming. Similarly, Spotify offers a free-tier and a subscription-tier of their service. Unlike Pandora, Spotify makes most of its money from subscriptions and functions as more than radio-style listening, allowing users to construct playlists and “keep” songs. Both models agitate those in the music business, with the latter proving particularly worrisome for the industry.
Spotify and Pandora are legal because they pay artists royalties based on how many times a particular song is streamed. However, artists, songwriters and their record labels argue that the royalties are far too low and unfairly take advantage of intellectual property.
The RIAA is one of the strongest players in the fight against free music streaming. Along with the RIAA, Apple is pushing for heavier regulations, as it plans to release Apple Music, a $9.99 per month streaming service, on June 30th, 2015. Apple, which has hired lobbyists to help make its case, hopes to wipe out its competition before Apple Music emerges on the market.
The intangible nature of music makes regulation in this realm of intellectual property exceedingly difficult. Melodies and lyrics stem from ideas which are naturally elusive and hard to quantify. The birth of popular radio in the 1940s turned music into a non-excludable good, meaning that once a track was produced and broadcast over the radio, no one could be forced to pay for enjoying that song. Years later, records and CDs came at a price, but going to a friend’s house to listen to a newly released record, or overhearing a favorite song from a neighbor’s porch was always free. The digital age has complicated matters further. Somewhere along the line, the ease of streaming emphasized the non-excludable aspects of music consumption, and cost-free listening became more of an entitlement than a luxury.
The ongoing battle over digital streaming sheds light on the music industry's quagmire, prompting a series of questions about what the results of pending legislation will look like, and whether the music industry’s problems could be solved in the absence of regulation.
On the one hand, some argue that digital piracy is inevitable, given the increasingly technological society we live in. The true issue is the lack of legitimate alternatives available to consumers. Without services such as Spotify and Pandora, music lovers likely face a choice between paying the iTunes monopoly or downloading songs illegally. Because people have become so accustomed to free music, banning the services they’ve come to love may result in more piracy.
On the other hand, Spotify and Pandora challenge artists’ abilities to capitalize on their work. It takes nearly a million streams of one song to generate $90 of royalties from Pandora. According to an op-ed by musician Aloe Blacc, “Wake Me Up” was the 13th most played song on Pandora with more than 168 million streams, but yielded only $12,359 in royalties. After splitting shares between songwriters and publishers, Blacc received about $4,000 from his hit song. If artists and songwriters can’t make enough money from their craft, they’ll have less incentive to work hard creating quality products.
The business models of Pandora and Spotify rely entirely on musicians’ permission for their work to exist on these platforms. So, unhappy artists are bad for business. Although Spotify and Pandora saw a great deal of growth over the past few years, the companies have not been as profitable as expected. Ninety-one percent of Spotify’s revenue comes from subscriptions, but only 8 million out of its 36 million users subscribe to the service. As a result, Spotify has yet to turn a profit.
The answer to solving the music industry’s problems is not simple, but one thing is clear: the business has changed and the industry needs to adapt. In future, we may see more artists making money through live concerts and tours, as they focus on providing experiences recorded music cannot offer. We may see companies like Spotify become profitable as more users join and advertisement revenue increases. We may also see artists receive better royalties if streaming platforms continue to grow in popularity.
A DOJ decision to expand copyright regulations will hardly solve the problems that naturally arise with technological innovation. Fostering healthy competition among legitimate programs is a reasonable way to prevent illegal downloads, create a system that profits artists, and meet the demands of consumers.
Savannah Saunders is a contributor for Economics21.
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