Streaming Music and the End Game - Label Hog-onomics Will Kill Them
    • WEDNESDAY, JUNE 10, 2015

    • Posted by: David Moffly

    Streaming Music and the End Game - Label Hog-onomics will kill them

    The streaming wars have heated up! Apple Music, built off the bones of the Beats streaming service they acquired last year as part of their purchase of the headphone maker, will be here June 30th. The pundits, press, and Apple fan boys have gone wild, with most predicting an all-out war between Spotify and Apple. Just imagine the longwinded debates on features and pricing comparisons that are to come. Poor web radio services like Pandora and iHeartRadio will be shoved aside. Second Tier services like RDIO, Deezer, and Slacker will be consigned to niches. Tidal is doomed (of course, everyone already knows that).

    There is tons of very smart analysis out there about the competition. Major stock houses put out research notes about the potential financial impact of the new service on Apples earnings (which is of course straight out guessing). The Major Labels and Music Publishers will get another huge windfall of advance payments for access to their libraries, which theyll promptly fail to share with their artists. The Label heads will pay themselves multi-million dollar bonuses and go home thinking they have won the future by extracting these huge advances and close to 75% of the gross dollars coming through the door.

    But these same executives should also be terrifiedthe hammer is coming for them and I doubt many of them actually see it coming. Labels have collectively tried to right the poor decisions of their past (Radio and MTV) and the false revenue bloat of the CD era off the back of the streaming businesses of tomorrow by demanding ever larger pieces of the pie in return for access to their huge music catalogues. As a result, Daniel Ek and whoever is actually running the deals at Apple have to be building up suitcases full of resentment for the rapacious behavior of the Labels. These ruinous deals could destroy Spotify and pose huge potential losses for Apple. But perhaps this is irrelevant because the endgame will soon be at hand.

    Think about Amazon Prime Video and Netflix. These two streaming video services have substantially similar (if not exactly the same) video inventory. They pay the Film Studios through the nose for the rights to this content. Does anyone talk about the latest movie adds to Prime Video or newest TV shows on Netflix? The answer is no. People care about House of Cards and Orange is the New Black; original programming commissioned and owned by Netflix and Amazon. The distributor has used its economic power and data intelligence to commission and create exclusive, differentiated programming that will make these companies money over the life of the product. Amazon and Netflix compete on original programming, not on having the entire Full House series. They are cherry picking the best and smartest people to create high quality, exclusive programming to bind their subscribers to their brands. Netflix just bought Brad Pitts latest project.

    These companies own the audience and now they own the programming.

    Like in music, the pool of movies and TV shows people are actually interested in is finite. Of course there is a long tail of specialist or niche programming, but even this is very thin. If there are 15 million songs on Spotify, my guess is only 10,000 of them actually play on a global basis with any consistency or frequency. The truth is there a globally dominant set of artists that only number in the hundreds. If you are Apple, why not pay Taylor Swift $100 million for all her past and future output? This type of money is inconsequential to a company with more than $160 BILLION dollars in cash in the bank. Jay Z was correct in his assertion that Tidal was going to be about exclusive content from artists. Unfortunately, he cant afford it and his audience it too small.

    A super interesting twist to the story yesterday is that several State Attorneys General are looking into whether there was any anti-competitive behavior between Apple and the Labels. The likely result these inquiries is that the labels will be forced like utilities to license their libraries to all comers on substantially similar terms, they will not be able to because of their size and influence will not be able to do deals that preference either Apple or Spotify.

    Like Netflix and Amazons strategy to bypass the studios that feed them, Spotify and Apple are going to compete on proprietary content, not pricing and features which can be easily replicated. They own the audience and they own the data and (because of outrageous label economics) they have the powerful incentive to use this to develop their own artists that will yield higher margins. They can identify popular artists and trends long before an A&R rep at a Label, theyll use this information to create and own the songs that people will listen to on these platforms. If data suggests that an independent artist whose songs are in the system (from an aggregator like Tunecore) are breaking out into the mainstream, Apple or Spotify will know this long before a Label will and they will certainly take advantage of this edge.

    This end game will take years but companies like Apple and Spotify will have the muscle to push the Labels aside and create programming unique to their platforms that will elevate them beyond being beholden to the Labels and their Hog-onomics

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