Big 3 Labels Negotiating to Kill Free Access to Music, Indies Scramble

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Sony Music Entertainment, Universal Music Group and Warner Music Group (the “Big 3”) are trying to destroy free access to music as we know it. As the rights holders of roughly 2/3rds of all the world’s music, and the vast majority of the world’s most profitable music (back catalog), they are using every bit of the massive leverage they have to maximize their profit.

Amazon, Apple and Google hold a similarly oligopolistic hold on the digital consumer ecosystem, and have been slugging it out with the labels over the terms of the next phase of the music industry.

Caught in the crossfire is Spotify, which despite being by far the market leader in streaming music, is directly in the crosshairs of the Big 3 for offering tens of millions of listeners ad-supported free music streaming. Spotify’s contract with the major labels is up in October.

The main dynamic here is Apple Music — the majors have conceded a free 3-month trial (with no royalty payments to labels or artists for any music played), in exchange for the guarantee that no free subscription tier will be available. Using that deal as leverage, the Big 3 are now putting enormous pressure on Spotify to phase out its free tier in order to renew licensing contracts with the most popular music on the planet.

These negotiations — which some would describe as collusion or “mob-like” — have caught the attention of two state Attorney Generals because of their appearance as violating antitrust law. This would seem commonsense to the average observer, but when powerful corporations are involved, money buys more room for intepretation. It may very well turn out that we get official confirmation of unfair market activities from the music industry’s biggest players… something that occurs with alarming frequency.

Indie Labels & Musicians Scrambling on Sidelines

Also caught up in the fight are independent labels, who are faced with a monumental decision to once again kowtow to the less-than-favorable terms dictated by major labels (and obviously geared toward concentrating profit amongst the most lucrative, most heavily-marketed artists). The alternative? Change the narrative, challenge the terms and use what modest leverage they have to make a positive change in the music industry. Indeed, some indie labels have already decided not to participate in the trial.

These indies are particularly upset with the 3-month free trial period, where under Apple Music’s label agreement, they receive absolutely no royalty payments. Whereas the major labels are seen to be able to whether that storm with enormous financial coffers, indies would likely miss out on tens of millions of dollars in royalties, which they can barely afford to lose.

The pervailing wisdom is that, at the very least, indies should wait until a few months after Apple Music officially launches to sign licensing agreements with Apple. This is because there will likely be a glut of free trials during the first few months after launch, and this is expected to taper off. Essentially,

But there are further complications. Streaming music is both a jukebox and a discovery platform, and that’s where the free tier can be of particular use to indie labels. A fan that discovers a band on Spotify may remain a free Spotify user, but may spend $50 in a year going to that artist’s shows, buying merchandise, etc. Indeed, revenues from live music have always been the lifeblood of independent artists, so the need for access to music to remain free for discovery purposes is another dynamic indie labels may not be paying enough attention to.

While independent labels’ share of the music market as a whole has been slowly but steadily increasing, the story within labels tells a different story. Most indie labels are operating on shoestring budgets with an absolute minimum of staff. Unlike the corporate world the Big 3 live in, most indies are small- to medium-sized businesses that are always on the brink of financial ruin, and have to scrap and fight as underdogs in the music industry to sustain their businesses. And yet within the indie scene the few largest labels dictate market terms, a microcosm of what’s happening with the Big 3 and indies at large.

We’ll be following the situation closely and bringing you updates as the negotiations unfold. With Google working on introducing MusicKey as a way to monetize access to music via YouTube, it may seem like free access to music’s days are numbered… for now. If there’s one thing we’ve observed in the digital music industry, it’s that there is always another surprise around the corner.

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