We Stream, They Scream: How Silicon Valley Broke the Music Industry

Music streaming platforms like iTunes and Spotify have transformed the music industry. While artists and record labels are suffering, there's one big winner: consumers.

Of all the industries that have been transformed by technology, music is undoubtedly one of the most compelling. Both the production and distribution models have radically changed. Record labels can no longer own talent as they did in the A&R-driven era that birthed the Big Four. Stars are born in bedrooms, shine on YouTube, and tweet directly with their fans. Labels struggle just to add value and join the conversation, and that direct interaction is even more troubling than the DIY laptop culture that has invaded the ground level. Add free releases and direct transaction sites such as Bandcamp to the wrecking ball of piracy, and the brick-and-mortar distribution channels in which labels have invested so heavily lie in ruin. For the Big Four, continued survival requires major innovation.

Interestingly, and perhaps fittingly, it’s technology companies that have come up with the most significant solutions to what are ostensibly label problems. Once Sean Parker and Napster introduced digital music distribution as a serious concept, Steve Jobs and Apple quickly set out to monetize it. That they were able to so quickly is a testament to their forward thinking, and is reflected in their contracts. For every $0.99 song purchased on iTunes, Apple immediately pockets 30%, with 60% going to the label and 10% to the artist. That 30% is a tremendous chunk of revenue essentially cut out of a record label’s business model. How could things get any worse? Well, while label execs sat in their offices cursing the MP3, something even more sinister emerged: the cloud.

When Daniel Ek and Martin Lorentzon launched Spotify in 2008 (and in the U.S. in 2011), another shockwave was sent through the music industry. Though other cloud-based services such as Rhapsody and Rdio arrived first, Spotify provides a song library and mobile experience that consumers love at a price-point ($10/month for premium) that can compete with the messier universe of illegal downloads. The revenue split, however, is similarly disconcerting for the traditional players: Every time a song is streamed, the label earns $0.0016, and the artist earns a nearly invisible $0.00029.

So what does this tech zeitgeist really mean for the music industry and all within?

Artists. Put simply, times are tough. The retail price of your product has been slashed to near insignificance. Because of this, labels are insisting you sign much-maligned “360 deals,” in which they also receive a cut of your touring revenue and merchandise. Not to mention, as the web waterfall provides a constant flow of new music, it can be hard to rise above the clutter. The bright side? Never before have you been so equipped to share your talents. Affordable software provides access to production tools once exclusive to expensive recording studios. Social media allows you to directly distribute your music to an audience previously accessible only through radio (a fickle and highly politicized sub-industry). If your product is compelling, and you have a measure of business savvy, your potential is limitless.

Labels. Times are tougher. Nearly every step of your process is being outsourced. A million people on YouTube have seen the Next Big Thing before your talent scouts have even had a chance to meet them. The populist nature of production and mass real-time feedback has created less of a need for corporatized talent development. And of course, your stake in the distribution process is rapidly diminishing as the advanced hands of iTunes and Spotify join the proverbial pot. To remain relevant, you’ve attempted to take more of a role in marketing and branding your artists, land-grabbing endorsement dollars alongside managers and agents. Some interesting ideas, such as collective brand marketing, have been proposed. With rampant layoffs commonplace, it’s clear that a new approach is necessary.

Consumers. Congratulations. Of all those affected by iTunes, Spotify, and the transformation of the music industry, you are the only clear winners. You have all the music in the world at your fingertips, available to be bought or streamed at a staggeringly low price. Where you once paid $12.99 for a fifteen-song CD that would monopolize your discman, you now pay $10 for portable access to a library of fifteen million. You have greater influence in breaking artists than the mass media machine you once followed in lockstep, and your ascent to that leadership position has been swift and staggering.

Why are consumers at the head of the table within the new industry structure? The answer is simple: they control the money, and Silicon Valley knows this. Technology companies are designing a new ecosystem with consumer interests in mind, not the interests of artists or labels. Artists will adapt; their role has a clear necessity ­– they create the product. For labels, the future is much murkier, as they must find new ways to add value outside of their traditional business model. Sadly, they aren’t going to be getting any help from Steve Jobs or Daniel Ek.

Photo Credit: Wikimedia Commons