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Is It Time for the Major Record Labels to Distribute Their Own Music?

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by Dan Runcie

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The major record labels want their music to rise to the top. They want platforms to play their songs and push them to users. Instead, they rely on platforms where Lady Gaga gets outstreamed by sleep music.

That’s the underlying challenge addressed in the recent letter by Universal Music Group CEO, Lucian Grainge. The labels are in a constant tug of war with digital streaming providers, who would rather their users listen to tracks that are cheaper to license, or podcasts with zero marginal costs.

This tension enabled the current reality.

Artists feel like they can’t break through. The labels can’t control their distribution channels. Digital streaming providers can’t build profitable standalone businesses. Everyone feels squeezed.

But any significant change starts with the record labels. After all, they are the rights holders for the most popular songs. It’s time to rethink how they could reshape music distribution.

How labels lost power to distributors

The music industry has previously tried (and failed) to own distribution. It’s been over 20 years since former UMG CEO Doug Morrisfailed attempt at online music with PressPlay. Many other competing services at the time failed. They were too early, and broadband technology wasn’t there yet in the early 2000s.

One of the reasons Spotify, which launched in 2006, fared better is because it met consumers where they’re at. Buying individual songs on iTunes was annoying. Downloading songs from Limewire was bound to screw up their computers, plus, the downloads were too unpredictable (not to mention, illegal). Despite Steve Jobs’ resistance toward paid music subscriptions as a model, it solved many issues for the post-CD era. It put a business model around the dominant consumer behavior.

But twelve years after Spotify’s U.S. launch, the ongoing tension with record labels and DSPs seemed inevitable. The tens of thousands of songs added per day on Spotify is a “flex” to try and weaken the power of the labels. From revenue shares to playlisted songs to algorithmic recommendations, everything is negotiated fiercely between each side. It’s easy to forget that the labels have equity in Spotify, but it’s not the same. The distributors still have power, have their own objectives, and they’re not afraid to push back.

The music industry didn’t own its distribution in the booming CD era days, but it didn’t need to. The labels had the power, and retail outlets took orders. If Columbia Records said that Mariah Carey’s Daydream needed to be front and center at every Sam Goody, Strawberries, and Tower Records on its release date, then that’s exactly where Daydream would be.

The labels owned the most profitable part of the business—the underlying music—but still had power over the less profitable part of the business—retailers. It was like Coca-Cola owning the higher-margin beverage production business, and contracting out the less profitable bottling service. It was a dream scenario.

A lot has changed since the 90s music industry, but two things are still true. First, the record labels have a beachhead on the music that gets listened to the most. Second, power laws still exist in music. The more options people have, the more they go back to the hits.

What would a world look like where the record labels owned distribution themselves?

Gaining control through label-owned streaming services

In my essay on exclusive audio strategies, I wrote about why consumers would be more willing to pay for multiple video streaming services but are less likely to do the same for audio. I still believe that’s true to an extent, but I didn’t take into account how quickly consumer behavior can shift, especially for something that people want.

When Disney first announced plans to explore their own video streaming service, it was easy to assume that they had missed the boat. Netflix had a head start on everyone, wasn’t letting its foot off the gas, and since password sharing was rampant, creating a new service seemed daunting. But in less than four years, Disney+ became the company’s direct-to-consumer channel. And while Netflix has more competition than ever, Disney+ has helped reinforce the famous Disney synergy map.

I would love to see the major record labels have their own synergy maps. They don’t need to own every business line outright, but if they don’t have control in areas that drive the business, (like streaming and short-form video) then they should consider what that could look like.

Let’s start with streaming. A record label-run streaming service would be a huge undertaking. It requires resources in areas that labels haven’t historically prioritized. But the advantages are high.

It’s an opportunity to exclusively feature premium content. Consumers like it when quality content is separated from the rest. It reduces decision fatigue, and they’re willing to pay for it. Shows like The White Lotus are on HBO Max for a reason. Everybody benefits. But if The White Lotus was on YouTube, competing for attention with Logan Paul videos and celebrity Mean Tweets clips, then it would be easier for the show to get lost in the mix. The same is true in audio.

A label-owned streaming service is also an opportunity to add more value to the artists. One of the reasons why more artists want ownership of their work is not necessarily because they’re dogmatic about ownership. It’s because the value they currently get in return isn’t enough to justify giving it up. If the labels owned streaming distribution, they could add more value to artists through prominent features, offering artists access to streaming insights, fan-club-streaming connections, and more.

On the consumer side though, the last thing people want to do is pay for another service. Consumers are price-sensitive and streaming payouts are low to begin with. But without a middleman to pay, the rights holder could retain that money to pay its staff, price a service competitively to grow, and bank on increasing profits since the company has what many consumers ultimately want. Again, Disney+ grew by making its service free for 6 months for Verizon customers and it’s still cheaper than Netflix. A similar structure could work for a label-owned streaming service.

For short-form video, it’s harder to compete with what TikTok has built. The power is in its flexibility. Triller has tried to push a more music-centric version but has had numerous problems over the years. I would be surprised if a label ever tried to build its own version, but given how quickly TikTok has grown (and how quickly it could shut down in the U.S.), it shows that music will always be integral in the evolution of social media.

The deals and acquisitions to make it happen

If anyone makes a splash soon, I would put my money on Warner Music Group. The label has made big investments and acquisitions in emerging technology. In recent years it has made investments in Roblox, Dapper Labs, media outlets like HipHopDX, and record labels like 300 Entertainment. Former CEO Stephen Cooper believed in the fragmented landscape and wanted Warner to have a hand in every pot.

Now, Warner has a new CEO, Robert Kyncl, who was YouTube’s former chief business officer. He’s the first big tech exec to run a major label and clearly wants to invest in technology and innovation. Len Blavatnik, who owns a majority of WMG and other media businesses, likely wanted Kyncl in charge given the work he’s done to monetize content distribution. I’m sure that 2023 will bring more big moves and splashes.

Building a streaming service from the ground up is tough work, especially for non-tech companies. But an acquisition may be a faster and cheaper approach. Apple acquired Beats by Dre largely for its nascent music streaming service, which was used to launch Apple Music.

The record labels could do the same. If they are willing to spend a few hundred million dollars on a publishing catalog, then they may be willing to spend the same amount on a streaming service.

The most attractive acquisition targets in music streaming are Tidal, SoundCloud, or Audiomack. Tidal was acquired from Block in 2021. I doubt that the business is for sale, but if the right offer comes along, I’m sure Jack Dorsey would pick the phone up and listen. Is the Universal-Tidal partnership on streaming payouts the start of more to come?

SoundCloud has continued to show strong numbers in recent years. It has had big investments from Sirius XM and other investors who may eventually want to see a return. But SoundCloud is more focused on independent artists than major label artists. The cultures may not line up. The same is true for Audiomack. It has a good advertising-based streaming business and strong growth in Africa. But any record label that acquires a company like that would likely try to turn it into a paid service, which would conflict with its current strategy.

For years, people have compared music to gaming as a lesson in monetization. The narrative is that music execs have tunnel vision on monetizing content, while gaming execs thought bigger and gave the content away for free, monetized the add-ons, and made more money as a result.

I previously thought the comparison was unfair and lacked context, but there’s something to be said for the mentality shift. Owning the distribution channels isn’t just about monetizing more content. It’s an opportunity to add more value to the business and to the artists who sign to these labels.

Music is always the first tech medium to be disrupted, but its companies are often the last to adapt to the changes. It could be time to flip that narrative, and it’s better late than never.

Dan Runcie

Dan Runcie

Founder of Trapital

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