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SwiftGate And The Future Of Music

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Editor’s Note: Philip Inghelbrecht is the co-founder of Shazam, a paying Spotify subscriber, and former YouTube employee. Still working on becoming a Taylor Swift fan; his daughters are very adamant about it.

At last the dust is settling around SwiftGate. For those of you who missed (or avoided) the saga, it all began in early November when Taylor Swift pulled all of her music off Spotify. Spotify lightheartedly conceded, but battle lines were drawn in the press as music experts stunned by her move began questioning the company’s future.

Swift quickly explained her position in an exclusive with TIME; Spotify was an “experiment.”  In turn, Spotify CEO Daniel Ek weighed in with a constructive response.

Taylor Swift’s label, Big Machine, felt the need to set the record straight (no pun intended). Somewhere in the crossfire Grooveshark ended up as collateral damage. So, they too threw in their 2 cents. And let’s not forget about the musicians themselves. The Foo Fighters said they f*cking didn’t care (DigitalSpy) and her Tennessee bestie, Jason Aldean, found courage and followed in Swift’s footsteps by pulling his chart topper from Spotify, too.

Ms. Swift had already underlined the importance of getting paid for her work (or any musician’s work for that matter) in an op-ed Wall Street Journal piece. And according to her, Spotify didn’t bring home the bacon. It seems that her beef was mostly with Spotify’s requirement to be part of the free (or ad-supported part) of the service, and not just Spotify Premium. Competitors like Rdio or Rhapsody that are paid-only (for the on-demand component of their service) were quietly allowed to continue offering her (older) albums.

Throughout the debate, very little was said about YouTube.

For all intents and purposes, it’s the largest on-demand music service; and it’s entirely free.  To get an idea of YouTube’s scale, just look at the table below:

Example songs YouTube views to date Spotify playbacks to date
Shake It Off by Taylor Swift 280 million No longer available
Chandelier by Sia 351 million 176 million
Mirrors by Justin Timberlake 241 million 131 million
Dark Horse by Katy Perry 703 million 223 million
Wrecking Ball by Miley Cyrus 727 million 146 million
Just Give Me A Reason by P!nk 342 million 142 million
Bang Bang by Jessie J, Ariana Grande and Nicki Minaj. 141 million 120 milion

 

YouTube is at least twice the size of Spotify, and the real difference is likely even an order of magnitude bigger. Why? A lot of songs are available as UGC videos uploaded by fans and claimed by the rights’ owners (i.e. outside the VEVO relationship). Lyric videos, in particular, are popular.

Interestingly enough, YouTube’s monetization isn’t much better than Spotify Free. Here’s some back-of-the-envelope math: In the U.S., music videos enjoy advertising CPMs around $15.  Assuming a sell-through rate of 50 percent (you don’t get ads all the time) and 70 percent goes to the rights owners, each play yields roughly half a penny (or 0.5 cents per play). That’s roughly the same as Spotify claims to pay, 0.6 cents per play.

That’s a generous estimate. The monetization on the claimed UGC videos is likely a fraction of that enjoyed by official VEVO music videos. Furthermore, if we were to do the same math outside the U.S. (with lower CPMs), the picture isn’t getting any prettier.

Surely YouTube has underwritten its wheeling and dealing in the music industry with both a chunky investment in VEVO and (rumored?) guarantees towards the major record labels. Neither is likely so big that it stands head and shoulders above Spotify Free’s monetization. So why did Ms. Swift and Big Machine ignore the elephant in the room?

If there’s one plausible answer, it’s the music industry’s misunderstanding of YouTube. Music executives still seem to believe that watching music videos on YouTube is mostly coincidental in nature (as opposed to on-demand) and therefore promotional, just like traditional and online radio.

They compare YouTube to MTV and fail to see that, for teens, YouTube is in-fact a global on-demand music service (with the added bonus of a cool video). Don’t take my word for it; just go hang out with a few younger (cash-strapped) kids and ask how they listen to their favorite songs.

Google has long realized this and record labels have started to wake up to it. As such, and in order not to lose this privileged status, Google smartly added a new subscription component to YouTube — Music Key. It’s YouTube as we know it today, but without the ads, with higher sound quality, and the ability to play music on your mobile device in the background. For $7.99 a month, these hardly feel like killer features that will convert the (young) free audience to paying subscribers.

It’s evident that Google has no serious ambition to turn YouTube Music Key into a full-blown Spotify competitor. As a matter of fact, for that, they already have Google Play All Access. Or they could have simply added a feature to YouTube that bundles Music Key with your All Access subscription. *

Instead, Music Key is about safeguarding YouTube’s status as the world’s largest free on-demand service.  For all we know (and this may be a stretch), as part of the deal, YouTube may have obtained a guarantee from the music industry that their (free) videos will not be taken down. That was the very issue over which Taylor Swift and Spotify broke up. Ironically, the recording industry is dancing to Google’s tune. For Google, solidifying YouTube as the No. 1 video destination is worth every penny in VEVO investment and/or minimum guarantees.

Now back to SwiftGate. Amid all the press, I tried to get a temperature check from her fans by perusing Twitter. None seemed outraged. People have long accepted paying a premium for what’s new. Taylor Swift knows this, too. To buy a 2015 model car, you will pay over sticker price. For a little extra money, you can get the latest iPhone before most others on eBay. eBay in general is a great place to understand the value of new or early access (e.g. at one point a Google Wave early invite sold for a whopping $5,100).

So things worked out: Those who couldn’t do without Taylor Swift (happily) bought the album and 1989 became the first platinum selling album in years.

It won’t always work out this easily and consumers will eventually get tired of not getting “all you can eat” through their music subscription. So where do we go from here?

The answer lies in windowing, or creating “exclusivities,” a concept that I advocated in TechCrunch a few months ago. In this particular case, it’s about exploiting time-based price discrimination for music access. By charging a flat $10/mo for on-demand music, record labels fail to capture money from both those would are willing to pay more (the “consumer surplus”) and those who are only willing to pay less (the “producer surplus”)

I expect there to be soon a Premium “Plus Tier” for on-demand music e.g. $20/month.  It will give the subscriber full catalogue access, as soon as the CD or iTunes release hits (“day and date” release).

It’s a no-brainer. Record labels can further exploit this by cutting exclusivities between the various on-demand services. So music nuts like myself will take out Spotify “Plus,” Beats “Plus” and Rdio “Plus” ($60 a month?) at the same time. Look no further than the movie and TV industry to see how this works: I currently pay for HBO, Starz, and a handful of VODs each month.

More gutsy is a lower-price tier (e.g. $3 a month) that still gives catalogue access, but this time only for “older” music; and perhaps a few other “shortcomings” around quality, geography, etc. The casual music fan may find this price point sufficiently appealing and take out his/her first music subscription.

 The lower price point is scary for musicians and rights holders. Devaluing music is the last thing they want right now. Furthermore, there’s compelling data that a good chunk of Spotify users are “dormant” – they only stream a few tracks each month, nothing close to the value of the $10 a month they spend. The uncertainty on the upside (i.e. huge price elasticity unlocking millions of new streaming subscribers) doesn’t weigh up against potentially cannibalizing millions of existing paid subscribers.

For Spotify in particular, it may mean that the difference between free and premium is more than just ads, but a different music offering altogether. This would bring artists like Taylor Swift back. I believe Daniel Ek when he says that free ultimately drives paid premium subscriptions. I doubt, however, that a (slightly) different music offering would kill this dynamic. If anything, it may just be the opposite. Meanwhile, Spotify will smartly point to YouTube as to why it shouldn’t go there just yet.

Putting everything together, I don’t think Taylor Swift (and her record label Big Machine) meant to snub Spotify. They sent a message to the on-demand streaming industry. They want to get paid more. They want to party like it’s 1999 (the year the music industry peaked at $38 billion from CD sales).

It’s about accelerating windowing in music, and Taylor Swift just happens to have the clout and visibility to make it happen. That’s not necessarily a bad thing for music fans. If anything, it may be better to pay a little more for guaranteed access to the latest music. For Spotify, this would be a hard (if not unfair) thing to swallow if YouTube continues to stream the latest and greatest without having to pay the big bucks.

The ball is now in the court of the record labels and streaming services to make it happen. All they may need is a bit of “Swiftamine.” It’s the Saturday Night Live remedy to a special kind of vertigo, in this case a fear of the music industry falling even further. If you’re impatient like me for the record labels and streaming services to work it out, you can always buy the album 1989. Or better, click here and listen for free.

*Update: On November 12, 2014, Google did just that and began bundling Music Key and Google Play while doing away with the All Access subscription. 

Featured Image: Kevin Winter/Getty Images