The Record Label Oligopoly

The aughts were a near-death experience for the major record labels. Digital downloads were cannibalizing CD sales. Apple was desperately trying to make the CD obsolete with a massive iPod marketing campaign. mTV, formerly the industry's #1 marketing channel, had abandoned music for reality tv. Music on terrestrial radio was losing market share to talk radio. Print media was losing influence by the day. And the labels were flummoxed at how to co-exist with the internet. Review sites like Pitchfork and a burgeoning blogosphere were redefining public taste. Piracy was turning the history of recorded music into a public library. And social media was beginning to supplant all forms of traditional media.

It was a pretty wild time.

And a shock to an ecosystem that began the decade enjoying record breaking sales. N*Sync's No Strings Attached, the best selling record of 2000, moved 2.4m units in the first week alone, fueled by six-figure music videos & round-the-clock plays on Top 40 radio. The entire decade of the 1990s had been a smorgasbord of consolidation as majors scooped up indie labels in a race for market share dominance. They had never before enjoyed as much control over the industry as they did in 2000.

But few anecdotes exemplify the changing decade as much as inaugural American Idol winner Kelly Clarkson's storied feud with RCA CEO Clive Davis over whether or not she'd be allowed to write her own songs on her sophomore album. When she played him Because of You, a version of a song she wrote when she was 16 about her parent's divorce, he allegedly told her she was a "shitty writer who should be grateful for the gifts that he bestows upon [her]," bringing her to tears. When that song eventually became her second biggest hit, he allegedly spent a million dollars recording & re-recording the debut album of a band he signed to replace her on RCA's roster. The singles from that album failed to perform on radio & the album was never released. Which illustrates both the outlandish hubris & the loosening grip of the the executives of the time.

As revenue continued to fall, the labels began offering less & asking for more. Universal CEO Doug Morris famously fired employees in droves & slashed recording budgets. One way to earn your profits-based bonuses is to generate revenue. The other is to simply reduce costs. And he never missed a bonus.

The same techniques were applied across the industry. But even as marketing staff disappeared & recording budgets dried up, the labels rolled out so-called "360" contracts that took a cut of artists' merch and touring revenue for the first time. They seemed desperate to stay afloat.

When intermediary companies like TuneCore & CD Baby began allowing independent artists onto major digital stores like iTunes, it seemed as if the gatekeeping era was over & that the labels had become all but obsolete. Then a streaming service in Sweden launched & changed everything.

A big green life raft

Most people don't know that there was a private beta launch of Spotify in the US in 2008. Because the record labels immediately shut it down & spent the next 3 years negotiating terms for licensing their catalogs. And boy did they ever come out ahead.

Their leverage was built, in part, on the indie label land grab of the '90s, which led to the four major labels controlling the vast majority of music. MCA purchased Geffen records in 1990, which gave them Guns 'N Roses, Aerosmith, & Nirvana. Polygram bought Island Records & A&M Records around the same time, which gave them U2 & Iggy Pop. EMI purchased Virgin Records two years later, which gave them Peter Gabriel & the Sex Pistols. Polygram bought Def Jam Records in 1994, which gave them Run DMC & early Beastie Boys hits. Polygram bought Motown the same year, which gave them the biggest pop/soul hits of the 1960s. And MCA/Universal bought Interscope in 1996, which gave them artists like Nine Inch Nails, as well as subsidiaries like Death Row Records, which included N.W.A. & 2pac. We think of all these artists as being major label stars, but prior to the 1990s, indie labels were regularly creating massive hits.

Had Spotify launched under such diversified interests, the major labels wouldn't have had the leverage to shape the streaming economy. But as it happened, there were only 4 meaningful parties for Spotify to negotiate with: Sony (who purchased major label BMG in 2004), Universal (formerly MCA, who purchased major label Polygram in 1999), EMI (which would later be parted out by by Citigroup in 2012), & Warner.

Much of what we know about how these negotiations transpired comes from documents that leaked after the ink dried.

For instance, Techcrunch was given a cap table that revealed Sony had negotiated 5.8% ownership of Spotify. Universal had negotiated 4.8%, Warner had negotiated 3.8%, EMI had negotiated 1.9%, & Merlin (a representative of the remaining indie labels) had negotiated 1.0%.

Verge received Sony's full original agreement, & detailed it on the site. It detailed $42.5m in guaranteed payments over the first 3 years, plus a most favored nation clause that meant if another label negotiated a better advance relative to the label's share of plays, it would have to be matched.

And these payments were not recoupable advances on royalties. Instead, they were more like catalog licensing fees. In other words, Sony was using its artists' music as negotiating leverage, but had no obligation to share these payments with the artists themselves. Instead, they could use this money to pay advances to newly signed artists, to subsidize a higher royalty rate for a major artists, or to simply keep for themselves as profit. And this money is presumably skimmed off of the top of the royalty pool, so it's coming out of the pockets of independent artists, not Spotify.

In addition to these guaranteed licensing payments are the minimum per-stream payment guarantees. Sony's usage-based guarantee for free tier plays in 2011 was $0.00225. This means if the total ad revenue for a given period divided by the total number of free plays is less than $0.00225 per play, Sony receives the guaranteed rate instead of the pro-rata rate, all at the expense of independent artists. The delta between the pro-rata rate & the guaranteed rate literally comes out of the pockets of other artists. And Sony negotiates a similar guarantee for premium plays based on the total number of subscribers.

It's in Sony's interest, then, to negotiate a guarantee that's higher than the likely pro-rata effective rate. And then Sony can decide if they want to keep the bonus payout or use it to pad their artists' streaming royalties. This is how labels & even individual artists like Taylor Swift & Led Zeppelin negotiate higher streaming rates at the expense of independent artists.

These agreements marked the return of the era of the haves & have-nots, & right in the nick of time as far as the labels were concerned. Before these Spotify deals, the distribution gates had been kicked open. Independent internet publishing had overthrown the traditional music marketing channels & affordable home recording had made the now paltry label recording advances all but pointless. The labels were on the verge of obsolescence when they used their catalogs as leverage to once again make themselves indispensable, crowning themselves gatekeepers of Spotify's payouts.

Of course, catalog licensing fees in the tens of millions & guarantees like $0.00225 per stream seem insignificant now that Spotify is a $17b/year company. But Spotify's entire revenue was only $244m in 2011, & they ended the year with a net loss of $59m. It's safe to assume that Sony's advances & guaranteed rates are much higher now. And yet, without another contract leak, it's unlikely that we'll find out the extent to which they're pilfering the coffers.

Just recently, Universal announced a new deal with Spotify that includes a direct license between Spotify & Universal Publishing. This means that songwriters who sign to Universal will receive a better rate than those who don't. Major publishers have been lobbying for some time for these so-called "fair market rates," which, in a pro-rata economy, really just means more money for the majors at the expense of the independents.

But it doesn't end at pickpocketing.

Rigging the playlist landscape

Spotify's Jeremy Erlich once told Forbes, "Our philosophy is that any good song should have a playlist where it can start and should have a path to the top of the pyramid — no matter where it's from in the world, no matter what genre. We have the best editors in the world listening to thousands of songs per week and then curating them."

Playlists are, in fact, so essential to the service that they are a primary way in which the app directs users to navigate its catalog. The major labels realized this early on & purchased the largest independent playlisting firms on the app: Filtr (Sony), Topsify (Warner), and Digster (Universal). And these playlists allow the label to launch new artists & songs to pre-engaged users.

The problem is that the playlists masquerade as neutral, third-party curation when they are actually marketing efforts.

Take Filter's "Hip Hop Made Me" playlist, for instance, that currently has 237,849 subscribers & claims to contain "Today's Best Rap Tracks." If the playlist was called "Sony Rap Artist Promotional Playlist," it wouldn't likely have as many subscribers. And yet if we look at the current tracks...

1. BIA, Young Miko - Epic Records, a division of Sony
2. A$AP Rocky - Sony
3. Polo G, VonOff1700 - Columbia Records, a division of Sony
4. 4L JAVI, OHGEEZY - Santa Anna Records, a division of Sony
5. DDG - Epic Records, a division of Sony
6. Tyler, the Creator, Pharrell Williams - Columbia Records, a division of Sony
7. Travis Scott - Epic Records, a division of Sony
8. Bryson Tiller, Luh Tyler - RCA Records, a division of Sony
9. BIA - Epic Records, a division of Sony
10. Tyler, the Creator - Columbia Records, a division of Sony

And on it goes through track 100.

These playlists allow Sony--without disclosing--to juice their position within the algorithm by simply adding a new track. The appearance of a track on a popular playlist is one of the major factors Spotify uses to determine the popularity of a new song.

What's more, many of these major playlists were likely created before the playlisting companies were purchased by the major labels, & were only converted to label-specific marketing tools after the playlist had become popular via un-biased curation.

The uphill battle for independent artists

Creating a following as an artist has never been easy. But it shouldn't be the case that an independent artist must be considerably more popular than a major label artist to receive the same payments & algorithm placements. This is a broken, severely undemocratic system that demands change.