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The unbelievable resilience of the music {industry}

In early January, Lucian Grainge returned from the vacations and fired off his New 12 months’s memo to Common Music Group’s employees.

As chief government of the world’s largest music label, Grainge holds a singular function within the {industry}, making his annual greeting one thing of a “state of the union” for the enterprise. In latest historical past, it has been a jolly message. After a protracted period of destruction, the music {industry} has been rising for eight consecutive years.

The start of this yr’s e-mail resembled earlier iterations, itemizing examples of UMG’s utter dominance of the music charts. However after a quick victory lap, Grainge’s tone swung to the sound of an alarm. “Unhealthy actors . . . have been swooping in”, he warned.

The very streaming improvements that introduced the music {industry} again to life had been now “flooded” with content material that “can barely cross for music,” he wrote. However beneath present royalty agreements, each recording is handled the identical. “We want an up to date mannequin.”

This week, that mannequin for music streaming arrived. After a number of months of negotiations, and rising questions from buyers, UMG launched the primary vital modifications to the royalty system since Spotify debuted in 2008.

The cope with French streaming service Deezer will divert extra royalty cash in the direction of skilled artists — outlined as these whose work attracts a minimum of 1,000 streams a month — and away from bots and white noise soundtracks. It pays extra for songs and artists that listeners actively search out.

Karlheinz Brandenburg and Suzanne Vega © FT montage/Bloomberg/Getty Photos

Key moments 1: Creation of the MP3

Within the Nineteen Eighties, German engineer Karlheinz Brandenburg and researchers with the Shifting Image Consultants Group checked out the way to enhance audio and video encoding, utilizing Suzanne Vega’s a cappella tune “Tom’s Diner” to work out which modes of compression traded off the very best sound for the smallest digital file. In 1995, they gave the optimum format the file extension .mp3.

Trade members say this can be a huge second, with UMG in impact pulling different main labels and platforms into a brand new section of streaming. “That is the most important change to the mannequin in 15 years,” says Jeronimo Folgueira, Deezer’s chief government.

Music tends to be an early candidate for disruption. Unlawful file-sharing started consuming into the music market after Napster launched in 1999, lengthy earlier than Netflix’s streaming service would begin to rattle tv. Whereas the recording {industry}’s friends in Hollywood are nonetheless in the course of a painful transition, with conventional tv in freefall and a once-in-a-generation labour strike raging, music corporations have arrived at a extra mature section of streaming.

But executives now imagine the phrases they laid out with streaming platforms greater than a decade in the past — when the {industry} was in a state of desperation — are outdated. “Music is the one {industry} the place all streams are valued precisely the identical, whatever the high quality,” says Folgueira. “A 30-second YouTube video isn’t value as a lot as an episode of Sport of Thrones.”

As know-how threatens to tear aside their enterprise once more — this time, within the type of synthetic intelligence that may make Frank Sinatra’s voice sing “Gangsta’s Paradise” — huge music is combating again.

JPMorgan warns that if left unchecked, Spotify’s platform may develop into suffering from AI-generated garbage, probably exploding from 100mn songs to greater than a billion in a number of years. UMG’s “artist-centric” mannequin will dissolve the monetary incentives for these AI tracks to proliferate, the analysts say.

Grainge’s proposed resolution will direct more cash in the direction of musicians but additionally in the direction of UMG, which controls almost a 3rd of the world’s music and takes a share of the earnings of a dizzying variety of superstars together with Taylor Swift, Drake and The Weeknd.

Shawn Fanning in 2000, with the interface and brand for Napster and brand for Limewire © FT montage/Limewire/CC

Key moments 2: Napster and the file-sharing revolution

In 1999, American faculty pupil Shawn Fanning created a program which allowed customers to seek for and share MP3s saved on their private computer systems over the web. Napster and peer-to-peer community rivals like Limewire modified the best way music was consumed as hundreds of thousands ripped their CDs into MP3 format and commenced unlawfully downloading different individuals’s music information of their flip. A blizzard of lawsuits adopted.

This week’s information prompted JPMorgan to boost its inventory forecast for UMG, estimating that, if broadly adopted, this new cost system would elevate subscription income by 9 per cent. If a “dystopian AI future” had been to materialise, flooding streaming platforms with clips, JPMorgan believes this new mannequin may increase UMG’s income greater than 20 per cent.

Deezer plans to implement these new cost phrases from October. UMG executives hope to announce offers with different streamers within the coming months. Collectively, these streaming providers pay the music {industry} $25bn in royalties a yr, the spine of the fashionable music enterprise.

It’s no thriller the place the stability of energy lies. “The labels management every part,” says David Turner, a former SoundCloud government who was concerned within the platform’s work with UMG earlier this yr. “When you don’t have the UMG catalogue, then your total enterprise collapses. You possibly can’t have Spotify with out Taylor Swift or Drake, so that you sort of all the time should take heed to what Lucian Grainge says.”

Now, the music {industry} desires to press that benefit. Having stabilised, it’s looking for to construct on latest positive factors. The streaming growth is slowing, and Common Music and rival Warner Music — each publicly traded corporations which depend Invoice Ackman and Len Blavatnik amongst their buyers — are beneath stress to maintain up momentum.

Till not too long ago, main label streaming income had been rising at a roaring tempo, with quarterly gross sales rising between 20 and 40 per cent yr over yr. However a couple of yr in the past, development slowed significantly.

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In 2022, the foremost labels’ streaming income was up solely 5 per cent from the yr earlier than, reaching $13.2bn, in line with Midia. Inside Spotify, the foremost labels’ share of listening has been eroding, from 85 per cent of streams in 2018 to 75 per cent final yr.

Common Music executives say that the issues they’re addressing are existential, and, having learnt their classes from the throes of the piracy period, they’re appearing early. Michael Nash, UMG’s chief digital officer, tells the FT: “that is fixing the roof whereas the solar remains to be shining.”

The Common playbook

The sunny state of the music {industry} in 2023 is a far cry from the darkish years on the flip of the millennium.

Then, unlawful downloads accessible by way of websites like Limewire virtually destroyed the music enterprise, and for greater than a decade there was no viable resolution in sight.

Within the mid-2000s, as a crop of latest music providers emerged making an attempt to repair the piracy drawback, Common Music noticed a possibility to flex its muscular tissues.

This energy was cemented with Grainge’s controversial 2012 buy of the ailing label EMI, giving UMG a market share of round 40 per cent — an unprecedented focus of energy that Sir George Martin, the well-known Beatles producer, known as “the worst factor that music has ever confronted”. It made Grainge the one particular person anybody hoping to launch a music platform wanted to get previous.

“The UMG playbook began then,” says Mark Mulligan, analyst at Midia. “That was when Common first began understanding it may have a market-shaping function.”

Steve Jobs with an iPod in 2004 © FT montage/Getty Photos

Key moments 3: iPods and the iTunes retailer

In October 2001, Steve Jobs launched the primary iPod, enabling shoppers to hold greater than 1,000 songs round with them. The iTunes Retailer, launched in 2003, let individuals purchase rights-managed music — principally at $0.99 a tune — and seamlessly add it to their iPod library. Apple was not the primary to introduce a digital music participant or a digital music retailer, nevertheless it was probably the most profitable

Every part modified with the appearance of Spotify, which was created in 2008 and launched within the US in 2011. Whereas some music incumbents had been sceptical, Grainge struck a licensing cope with Spotify founder Daniel Ek.

The monetary mannequin was easy. Subscribers pay Spotify $10 a month to take heed to music on-line. Spotify swimming pools all the cash it receives from subscribers collectively into one pot, after which divides it up in line with every musician’s share of listening. Spotify, and the opposite streaming providers that adopted, pay about two-thirds of each greenback they make again out in royalties.

This simplicity had been a advantage. Each stream was counted equally. Nevertheless it has additionally fostered monetary incentives to recreation the system, with an emphasis on racking up large volumes of streams. JPMorgan analysts crunched the numbers and located that if somebody uploaded their very own 30-second monitor to Spotify, after which programmed their cellphone to take heed to it on repeat 24 hours a day, they might obtain $1,200 a month in royalties.

Executives estimate that as a lot as 10 per cent of all music streams are “faux” — deriving from streaming farms, the place heaps of units run providers like Spotify on loop.

In a well timed illustration of their issues, Swedish newspaper Svenska Dagbladet this week reported that felony gangs had been utilizing Spotify’s royalty system to launder cash they created from drug offers and assassination missions.

Spotify informed the FT earlier this yr: “Synthetic streaming is a longstanding, industry-wide challenge that Spotify is working to stamp out throughout our service.”

The deal introduced this week may assist put an finish to this sort of content material farming. Nevertheless it additionally underscores simply how efficiently UMG has navigated the turbulence of the digital age. Valued at €6.4bn simply 10 years in the past, JPMorgan this week mentioned it “sees upside” to a €100bn valuation for UMG.

Setting the agenda

A lot relies on UMG now getting different streamers on board rapidly — particularly Spotify, the unequivocal chief in streaming.

Publicly, Ek has not precisely endorsed UMG’s “artist-centric” mannequin. When requested about it on a July earnings name, the Swedish billionaire mentioned that the artist-centric strategy “seldom results in these gigantic variations that most individuals understand it to do”.

“Clearly this can be a huge rivalry”, he added. “How can we make the financial mannequin honest for as many members on the platform?”

But the 2 sides struck a brand new deal over the summer season, and UMG made Spotify’s participation within the “artist-centric” course of a stipulation of that settlement, in line with individuals acquainted with the matter. A Spotify spokesperson declined to remark. Apple and Amazon are mentioned to be additional away from agreeing a brand new deal.

The 2 most-streamed artists on Spotify so far, Drake and Taylor Swift © FT montage/Getty Photos

Key moments 4: Spotify and the streamers

As high-speed web grew to become extra prevalent, MySpace and Pandora confirmed the urge for food for streaming new music on-line. Spotify, launched in Sweden in 2008, constructed a streaming mannequin the place customers both endure adverts or pay a subscription to entry an unlimited library of music. In flip the corporate pays royalties to the creators whose tracks are performed. Nonetheless there was controversy in regards to the degree of royalties paid and manipulated streams

Early outcomes from Deezer can be instructive. Deezer is a small participant in music streaming, representing only one or 2 per cent of the market, however it’s dominant in France, making it a helpful test-run for wider adoption. “It’s laborious to get massive organisations like Apple, Amazon, Google to maneuver. Spotify is just too massive and afraid to do one thing to threaten their place. So we moved first,” Deezer’s Folgueira summarises.

Some observers say UMG’s early success in its quest to reshape the enterprise is a present of the enduring energy of the handful of enormous conglomerates who’ve dominated the {industry} for many years.

At the same time as know-how giants have taken over distribution, the foremost file corporations — who’re a tiny fraction of the scale of Apple or Amazon — have managed to protect their grip, as personified by Grainge, whose maintain over the panorama resembles Bob Iger’s seat atop Hollywood.

“In case you are a file label, artist, songwriter or writer, there may be a whole lot of existential angst for the time being. You’re a slave to the algorithm”, says Midia’s Mulligan. “This can be a approach of claiming to {the marketplace}, each when it comes to buyers and [streamers]: really, rightsholders can nonetheless set the agenda.”

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