Analysis

Spotify, Apple and Amazon at the UK streaming economics inquiry


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Reporting on a two-and-a-half hour parliamentary inquiry session the day after liveblogging a two-hour Spotify event plus associated interviews? That’s living alright! It’s a busy week for anyone involved with the music streaming world.

Today’s hearing in the UK’s streaming economics inquiry was the long-awaited appearance of Spotify, Apple Music and Amazon Music to field questions from the Digital, Culture, Media and Sport (DCMS) Committee.

The results were… well, there weren’t many fireworks, and neither Spotify’s Horacio Gutierrez, Apple’s Elena Segal nor Amazon’s Paul Firth roused the ire of the MPs like Universal Music’s David Joseph or YouTube’s Katherine Oyama had in previous hearings.

There were some strong signals about where the committee is heading in terms of its likely recommendations though, and some interesting signs of willingness on the part of the DSPs to engage with them.

Plus some useful back-and-forth on whether streams are sales or rentals; some blunt comments on YouTube; and a great big red herring about Harry and Meghan’s podcast fees. Read on.

The ‘sale or rental?’ question is clearly front of mind for the committee, as it mulls whether to tinker with the way streaming royalties are divided between rightsholders and musicians – well, specifically between labels and artists.

What is streaming? “It is different than an ownership model. I’m not sure that it is quite the same as a rental per se,” was Gutierrez’s initial response.

“It is hard to find analogues in the physical world of what streaming is. It is an ephemeral right to enjoy a stream, and you have full access to the catalogue that is made available. Renting has certain economic and legal connotations that I think are not 100% applicable to our scenario.”

It will be interesting to see where the committee goes with this question in its report. Whether a stream is a sale or a rental affects how the royalties are split, but if the correct answer is that it’s neither, it’s something new, perhaps that’s a challenge for the policymakers to come up with a new formula too.

The topic came up again later in the hearing, when Apple’s Segal was asked the same question.

“I see it as a licence. We have a right, we have licences that entitle us to sub-license to consumers… and that’s always been true with music,” she said, noting that the model applied to downloads in the iTunes era, but even to CDs.

“It was a piece of plastic and you were purchasing a licence to use the music on that piece of plastic in certain ways… It was the sale of a licence, I would say. This [streaming] is a subscription to a licence. I would say it’s more akin to a rental. I’m not going to comment on legal connotations of that.”

As for Firth, on the sale or rental question: “It’s very clear to me that it’s neither of those things. Streaming is something different, and trying to qualify it as something from the old world… it’s a classic square peg, round hole moment,” he said. “I think it is something different from either of those concepts.

A recurring theme of the session today were questions to Gutierrez about how the economic model for streaming was drawn up in its early days, when Spotify was negotiating its first deals. But it wasn’t a satisfying line of questioning, because he joined the company a decade later in 2016, so could only say variations on “I wasn’t there”.

He had more to say when asked about Spotify’s willingness to try user-centric payouts though.

“We would definitely be open to look for alternative models and considering them. In the case of the user-centric model, it is one that we are open to,” said Gutierrez, citing Spotify’s participation in a recent study of user-centric in France.

“It doesn’t really show a dramatic shift, the way that many thought that it might. But on the other hand, if musicians and artists in general prefer the model, we would support doing the additional research,” he continued, before adding a crucial caveat.

“It would require not only a decision on the part of Spotify. Every licence agreement that we sign with every rightsholder all over the world would have to be transitioned into that model, so it would not be a trivial decision.”

This was another topic that the session circled back to later. Firth said that Amazon would be “willing, and would actually be very keen” to explore new payout models. Not just user-centric, but the ‘artist growth’ system proposed by indie body Aim in its submission to the inquiry.

“We should take a look at a number of these approaches. They should be modelled,” said Firth. Segal also indicated willingness on Apple’s part to examine alternatives to the current pro-rata system.

“I think it’s certainly very interesting, and the key thing for us is there needs to be consensus among all licensors. It’s not a model you can apply to some licensors and not to others. Obviously the only way to reach consensus like that is to get together as an industry,” she said.

“Absolutely we would be open minded and willing to explore it and to work with others on it,” added Gutierrez. “It has to be a model that works at scale.” He also suggested that any such model would have to be able to work globally, rather than expect streaming services to operate different payout systems in different countries.

Spotify, Apple and Amazon saying they’re willing to explore user-centric is a step forward, and don’t forget that Universal’s Joseph also spoke positively of the model during the major labels hearing.

However, the inquiry hasn’t yet got to the bottom of why efforts to pilot user-centric – notably Deezer’s in France – have failed. Asking Deezer might have been fruitful. As things stand, by indicating their willingness to consider the model, the bigger DSPs are punting the ball back into the labels’ court.

For the artists’ rights campaigners whose campaign triggered (and adeptly steered) the focus of this inquiry, user-centric isn’t a primary goal. Radio-style equitable remuneration (ER) – where recording royalties are split 50/50 between labels and artists – is what they’re pushing for most, even if it just applies to the radio-like features of streaming services.

When asked, it was curious to see Segal saying “I don’t know the detail of the economics of broadcast radio” given that Apple Music has its own radio stations – and that in a previous hearing, PPL boss Peter Leathem had said that his society was talking to labels about collecting royalties under ER from Apple Music Radio – although he did make it clear that Apple wasn’t directly involved in those discussions.

She did say that if Apple Music was asked to separate out streams chosen by users and streams served to them by playlists or algorithms – a necessary step if ER were to be used for the latter – it would be possible.

“Theoretically yes. It’s not something that we’ve examined in detail, and I would imagine there would be operational complexities, but certainly we can identify where it [a stream] comes from, so yes,” she said.

Gutierrez offered a caveat, which was that the lines between user-chosen music and served-to-them music are blurring. “Increasingly there isn’t going to be just a single radio-style linear presentation of music,” he said. If a playlist is being personalised based on someone’s listening habits, for example, it’s arguably a less ‘passive’ (in terms of their input) experience.

Later, Firth came back to this point. “It’s much more interactive [than radio]. We will use data from what you’ve listened to before to select what to play you there. You’re able to skip, you’re able to pause, you’re able to rewind. You’re able to ask what the name of the artist is and go and explore their catalogue. So there are many ways it’s much more interactive than radio… but I do understand the point that’s being made here, some element of similarities that you’re highlighting.”

(Again, this comes back to the difficulties of trying to put streaming into an existing box: radio or sales in this case. It’s streaming, a different beast. That means a new box, and arguments about who constructs that box…)

Towards the end of the session, the three execs were asked again about their likely responses if the committee “recommended a legal framework that enabled the activities of your companies to benefit artists more equitably” – in other words, ER.

“I think we are supportive of any efforts that improve the equitable distribution of revenues in the industry, so we would be well disposed to engage in a discussion to that effect,” said Gutierrez.

“Equitable is a very complex term. Reasonable people can disagree on what equitable means. Yes, we’re absolutely happy for the discussion from our standpoint. Artists should be paid for their work. Creators should be paid for their work,” said Segal. “We’re absolutely happy to have any discussion on what is and is not equitable. Because it’s not a straightforward question.”

Firth agreed, and stressed that any solution should make the industry “sustainable for the long term” for artists, songwriters, labels, publishers and streaming services alike.

The DSPs were asked why the basic price of a streaming subscription has been stuck at £9.99 a month since the dawn of the model, although Gutierrez was able to point to Spotify’s experiments in raising its price in some markets, as well as its plans for a more expensive Spotify HiFi tier later this year.

“Over time, the menu of options that are available to users is going to be more robust. There will be higher price tiers or offerings, and on the whole prices will rise. But we have to do that also being sensitive from the perspective of users,” he warned, while pointing to the competition with free music, by which he was referring to piracy.

“It is true as Horacio said that we are competing with free,” agreed Segal. “We have been competing with free… since the beginning of iTunes in 2003, or 2004 in the UK. And competing with free is always very difficult, because consumers have a choice to move to free.”

Netflix had been cited as a digital service that has raised its prices, but Segal pointed out that streaming music and streaming video are different beasts in market terms. Unlike Netflix, Disney+ and the video pack, music services all basically have the same catalogue. They all have all the music.

“Those things do make it hard to put prices up in a vacuum by yourself. People can just opt to go to free, or to other services,” she said.

A question about whether Apple and Amazon force owners of their smart speakers into their own music services was swiftly dispatched by Segal and Firth – HomePods and Echos both now allow other services to be set as the default – while Gutierrez fended off a question about Spotify’s profitability with relative ease too.

“We are still in expansion mode. We are launching in new markets, we are finding new users, we are developing new advertising revenue generating mechanisms, and we are working very hard to convert more of those users in the ad-funded tier into the subscription tier,” he said.

He did describe podcasts as having “a very different cost structure that we believe has the potential to put us on a more solid path” towards profitability, adding: “It is clear that the cost structure of the music streaming side of the business is very challenging. Over two thirds of every pound that we generate goes straight to rightsholders, and ultimately to the artists and songwriters.”

Surprise! The DSPs chose not to put the boot in – explicitly anyway – to their key partners, the labels. If you looked for it, there were a few nods in the direction of how royalties flow through to musicians once they’ve been paid out.

Segal’s claim that Apple has “gone further than anyone else in trying to ensure money flow” was one of those moments.

“There have been numerous ways in which there were complications moving to a legitimate digital world. You had lots of players who just were not ready for it in terms of receiving money and dealing with the money,” she said.

“We’ve worked really hard to push people to work with us on processes that enable money flows as best as possible from us on the composition side. For example from us to collecting societies to songwriters. We’ve done that because we don’t want to hold on to the money. We want the money to get to the people it’s supposed to get to.”

(This being a UK inquiry, unfortunately nobody chimed in at this point to ask all three DSPs about the “historical unmatched royalties” they had recently paid to the MLC in the US: $163.3m from Apple, $152.2m from Spotify and $42.7m from Amazon.)

Talking of putting the boot in, though: YouTube and the ‘value gap’ has been a recurring theme throughout the inquiry, with nearly every speaker (bar YouTube’s Oyama, obviously!) describing its safe harbour as unfair. Segal fielded a question about it today.

“As I said earlier, it’s challenging to compete with free. It’s always been challenging, whether it’s legitimate or illegitimate. And it’s challenging to compete on an un-level playing field,” she said.

What is un-level about it? “The fact that they don’t necessarily have licences for all of the music that they use, and they don’t need to. And even if they do have licences, the amount they pay because of the way their business model is set up, and the way the tariffs work, is less.”

Oof. The three execs were later asked whether their service would still have a free tier if YouTube didn’t exist. Gutierrez and Firth said they would. Apple Music has no free tier, but Segal was asked how a world without YouTube would look for her service.

“I think more people would probably be using Apple Music. It wouldn’t change our service,” she said. “We don’t think that an ad-supported service can generate enough revenue to support a healthy overall ecosystem. And it would also really go against our fundamental values on privacy.”

As the session progressed, Gutierrez offered a new (we think) figure from Spotify: €550m of royalties paid in the UK alone in 2020. Tactfully sensing the political climate in the UK, he even apologised for the figure being in euros.

He also provided another read-between-the-lines moment when asked about the reduction in music distribution costs between the physical era and the streaming era.

The question was seemingly getting at the idea that since the costs have shrunk, Spotify’s 30% cut is too much: that it doesn’t need to be taking a similar share to retailers in the past.

Gutierrez pointed out that a lot of the past costs of getting music to people – printing records, packaging and shipping them, and marketing them in stores – were handled by the labels.

“As the internet allowed for frictionless distribution… for the most part that has gone straight to the bottom line of labels,” he said, while noting that they have faced new costs and challenges too.

However: “The reality is that was not a cost saving that we realised. It was a cost saving that labels realised.” Not explicitly an argument that it’s labels whose share of streaming revenues should come down, but… Well, it will be interesting to see if the committee picks up on it.

One of the big early moments in this inquiry came when musician Nadine Shah talked about her financial struggles during the Covid-19 pandemic, despite the critical acclaim and awards nominations that her music has attracted.

Gutierrez was asked how he felt about that testimony: about as dangerous a question as a streaming exec can be asked. Push back, and they might seem like a heartless, artist-disrespecting monsters. Agree, and, well, they’d basically be saying streaming services are heartless, artist-disrespecting monsters. Pitfalls abound.

“It’s unfortunate that she feels that way. A couple of things that need to be clarified: I don’t know what agreements she has with labels and publishers. I don’t know what the economic terms are with the split of the revenue that she might have agreed to with her label,” he said.

“I know what we pay, and I know that close to 70% of every pound that we generate gets paid to those intermediaries that represent artists,” he continued, citing the figures announced at last night’s Stream On event – that more than 800 artists earned more than $1m last year in Spotify royalties, and more than 7,500 earned more than $100k.

Read between the lines again! “Streaming is having a positive economic impact on artists, but you have to recognise that when you look at the economics of streaming, you have to look at the different actors in the value chain, and how the money trickles down from what comes out of streaming, and ultimately makes it to artists.”

There’ll surely be some follow-on from these comments, from Nadine Shah herself and/or from her label or publisher. Saying we need to look at how money flows after it’s been paid out is uncontroversial in general, but riskier as part of a response to a specific artist’s complaints.

Gutierrez was at his most animated during this part of the hearing, when defending Spotify’s impact, though.

“We’ve paid over €20bn [in royalties] since the foundation of the company. We paid €5bn in 2020 alone. The payouts continue to grow. The streaming payouts are what’s bringing total music revenue up,” he said. “The streaming music paradigm is actually paying off, is contributing to bringing the music industry back into health.”

Cue the strange ‘Harry and Meghan’ tangent, with Gutierrez asked whether Spotify is paying the Sussexes for their new podcast on the service. Spoiler! “They’re not doing it for free.”

The angle of questioning was clearly whether Spotify paying big sums to celebrity podcasters is another way that it’s screwing artists – possibly with one eye on the UK tabloid newspapers’ eagerness for negative headlines about the Sussexes specifically.

They may struggle to turn this into a headline though. “There is a market for certain talent because they command a certain amount of consumption,” he said. “The podcast market is different from the music market. We don’t get to negotiate directly with artists in the music space the way we negotiate directly with podcasters… so the structure of that market is different.”

Gutierrez also put forward a familiar Spotify argument: that podcasts – and by extension, the big fees paid to big podcast stars – are good for music too, because they keep listeners engaged with Spotify, and thus makes them more likely to pay for the service, which boosts music royalties.

Harry and Meghan save the music industry, as the MP asking the questions drily put it. “That seems a little bit premature,” responded Gutierrez. “They’re not the only act that we’ve signed…”

Before the session ended, there was time for a question about the dynamics within major label groups between their recordings divisions and their publishing divisions – and specifically whether the latter have no power to agitate for a higher share of streaming royalties than their current 15%.

Do the label arms get the biggest, first slice of the pie, leaving publishing to take whatever’s left?

“It’s certainly not the way we’ve ever set things up. We’ve never gone ‘hey labels, how much do you want?’ and whatever’s left goes to the publishers,” said Segal. “From our point, publishing is just as important. We negotiate them separately… We’re generally negotiating with completely different people.”

Gutierrez was also asked the question that led to David Joseph’s sticky moment with the MPs: about whether a deal between Spotify and Universal Music lowering royalties if the streaming service hit certain milestones was damaging for artists.

He was in full general counsel mode when answering – saying “in general” several times to walk the line between not talking about a specific deal, and not getting shouted at for evasion by the committee’s chairman.

To paraphrase: his argument was basically that Spotify surpassed all its targets, so it paid more money to UMG (sorry, in general to labels) and thus artists made more money, even with any lower rate.

“If we do better, they will do better, and the artists they have signed will do better,” he said, before fending off some questions about whether Spotify’s new ‘Discovery Mode’ – where labels choose tracks to promote in the service’s autoplay and radio features in return for a lower royalty rate – is harmful for artists.

“Labels have had their streams grow by 30% when they use this, which means they obviously receive higher royalties when they participate in the program,” said Gutierrez, who also managed to squeeze in the point about Discovery Mode not requiring payment upfront like other advertising features. “In that sense, it could be a great equaliser for independent labels…”

The final question was about major label stakes in Spotify, and whether that gave them undue influence over its strategy.

Again, it was parried without much fuss: Gutierrez made the (correct) point that it’s not equity stakes that give labels influence over a streaming service: it’s the fact that they own huge catalogues of music, which they could remove from the service if agreement can’t be reached on a licensing deal.

And that was a wrap. No alarms and not many surprises, when all’s said and done. But some interesting nuance, and a growing picture of what the committee might recommend in its ultimate report from this inquiry.

Stuart Dredge

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