A ‘Complete Reset’ of the Music Industry? - Jay Chitnavis

Since their rise to ubiquity, streaming services like Spotify, Apple Music and Amazon Music have been controversial. In 2014, Taylor Swift even removed her entire catalogue from Spotify as a protest against paltry royalties paid to songwriters and publishers. The Department for Digital, Culture, Media and Sport (DCMS) estimates that from the revenues of a streamed song, the recording label receives around 55%, the streaming platform receives 30-34%, and the remaining 11-15% is distributed between the songwriter/composer and publisher, despite their centrality to the creative process.


To address this, the Digital, Culture, Media and Sport Committee of the House of Commons published a report, ‘The Economics of Music Streaming’ on the 15th of July. It recommends to the government a ‘complete reset’ of the music streaming industry. This article will assess the scope of the department’s proposed new legislation before commenting on its potential to increase competition in the industry, and also highlighting the potential role of lawyers throughout the process. First, it addresses the source of issues in the streaming industry and how they have aroused concern from competition regulators.


At the heart of the matter is the oligopoly of the big three recording labels: Universal Music Group, Sony Music Entertainment and Warner Music Group. Together, these retain over 70% of the market share of the music recording industry. They also control a 58% market share of the music publishing industry, which deals with the intellectual property of the music, which includes copyright of the lyrics, melody and of the general composition. Combined, this oligopoly holds immense powers of leverage and negotiation with streaming services for licensing contracts and playlist curation. This puts independent labels and artists at a significant disadvantage.

To be considered a concern for competition regulators, such as the Competition and Markets Authority (CMA), it must be shown that the oligopoly does not benefit the consumer. This is seemingly difficult as the monthly price of streaming services (£9.99) has remained constant against inflation for a decade. Furthermore, music recommendations are now more personal, varied, and widespread than ever before. Pricing parity, however, can reflect both a competitive market and an oligopolistic one, and in the long-term, the recording oligopoly will eventually lead to a reduction in choice for the consumer on streaming services. This is because of the ability of the major music companies to negotiate favourable terms from the mainstream streaming platforms. Non-exclusive licensing agreements between streaming services and labels and, consequently, similar content (which reflects the highly competitive streaming market), means that streaming services are yet to post consistent and sustainable profits. As the report concludes, ‘the danger is that without greater levels of revenue, some of the music they love may not be being made in ten years’ time.’

The major labels’ ability to negotiate non-exclusive streaming contracts and the pittance paid to publishers and songwriters calls into question a song’s value, and whether the market conditions are conducive to a correct valuation. In an interview with the Financial Times, the CEO of Taylor Swift’s label, Scott Borchetta, stated, ‘I have real concerns with the biggest companies licensing their catalogues to any streaming service that switches on…I think that devalues music, and so it’s really important that record companies and content providers around the world make sure that we’re holding on to...value...if we start giving it all away for fractions of pennies, we’re not going to be able to do it anymore.” Borchetta’s statement highlights the chain of negative effects of such an anticompetitive recording market on the consumer.


Paragraph 134 of the report addresses this issue of song value and refers action to the CMA: ‘Whilst the major music groups dominate music publishing, there is little incentive for their music publishing interests to redress the devaluation of the song relative to the recording…the Government should urge the CMA to consider how the majors’ position in both recording and publishing has influenced the relative value of song and recording rights’.


If the CMA finds that anti-competitive practices amongst the major record labels have devalued the song, and that this has negatively impacted the consumer, the action taken could be significant. Restructuring lawyers would be involved heavily at this stage to prove that their client is not operating anticompetitively. The outcomes are too numerous to mention, but one of the most severe would be the forced divestment of the publishing subsidiaries of the conglomerates: Sony, Universal and Warner. Lawyers from nearly every practice area would be involved as competitors seek to acquire the divested entities for the best price and the music companies seek to extract the most favourable terms.


Because of the highly competitive nature of the streaming market, the report also notes the danger that streaming companies ‘may leverage other aspects of their business or elsewise use vertical integrations to gain a competitive advantage’. Apple and Amazon are particular targets in the streaming market as they have already integrated with their other services to increase efficiency, widen their audiences and decrease production costs; Apple platforms Apple Music on its devices and Amazon promotes its streaming service as an included division of Prime.

Indeed, Spotify filed an EU antitrust complaint against Apple in March 2019, which was formally filed by the European Commission on 30 April 2021. Spotify initially complained that Apple’s app store policies ‘purposely limit choice and stifle innovation’ to benefit its streaming service. In September 2020, it further criticised the proposed ‘Apple One’ bundle subscription: ‘We call on competition authorities to act urgently to restrict Apple’s anti-competitive behavior, which if left unchecked, will cause irreparable harm to the developer community and threaten our collective freedoms to listen, learn, create, and connect’.


The irony is that Spotify has its own bundle subscription in the form of deals with Samsung, AT&T and Hulu, albeit not Spotify-owned subsidiaries. Whilst more potent in the larger tech companies, antitrust concerns are universal in the music industry. The report seeks to address this by mandating in Paragraph 111 that the government provide the CMA with all ‘resources and staffing’ necessary for them to complete a full investigation.


The majors’ ability to negotiate preferential streaming rates to independent artists and smaller labels is also an abuse of their dominant market share. The DCMS’ report records academic evidence in support of this from Dr Franco Mariuzzo and Dr Peter Ormosi at the Centre for Competition Policy. After qualitatively analysing the market, they concluded that there is a ‘difference in the distributional characteristics of major and independent record label streaming data…major songs feature on popular Spotify playlists at a disproportionately higher rate than independent songs…[this] resembles more a vertically integrated part of major record labels’. They argue that this is because the labels maintain both direct and indirect ownership of streaming services’ playlists through leverage over Spotify.

The ability to control playlists resembles a superpower in the music industry somewhat, as the playlist has risen in importance to become one of the most effective ways for artists to gain popularity and acclaim. Paragraph 150 considers the ‘self-fulfilling cycle’ that emerges when major label’s music is included in many playlists, which then becomes popular and subsequently dominates other playlists, preventing independent music from gaining traction. This, in turn, widens the profit margins of the major labels and fuels an anticompetitive market.


The DCMS’ report states, ‘It is important that the UK has a regulatory regime to respond to these challenges. We are encouraged that the CMA has already launched its Digital Markets Unit…but to ensure proper compliance the DMU needs to be put on a statutory basis as soon as possible’. By recommending that the DMU possess a legal basis for regulation, it suggests, again, a relatively disruptive approach to increasing competition.


Antitrust lawyers would need to prove that their client (either streaming or recording companies) does not maintain a dominant position in the market or conduct anti-competitive business practices. They would also be responsible for ensuring that their client complies with the new legislation. Disputes lawyers would also be involved in defending their clients against any litigation, such as those defending Apple in the claim brought by the European Commission on behalf of Spotify.


Overall, the potential impacts of the proposed new legislation from the DCMS are vast and widespread. Arguably, this is appropriate given the endemic competition concerns amongst both recording and streaming companies. Regulators are in a difficult position, however, given the complex network of relationships between the music recording, publishing and streaming industries. Streaming services have given a new lease of life to the music industry after piracy was rife in the twenty years before, but regulators must be careful not to displace the balance too much such that streaming becomes more expensive and piracy escalates again. They must also foster a more sustainable market that compensates and nurtures artists adequately, creating more choice for the consumer. Though the result remains to be seen, it will be the negotiations between lawyers that eventually birth the new music streaming market.



 

Digital, Culture, Media and Sport Committee, Economics of Music Streaming, 15th July 2021, HC 50 2021-22


J Stone, 'The State of the Music Industry in 2020', Toptal.com.


R Cookson, 'Taylor Swift removes music from Spotify', 3rd November 2014, Financial Times.


D Elk, 'Consumers and Innovators Win on a Level Playing Field', 13th March 2019, Spotify Newsroom


'Spotify criticizes Apple services bundle on antitrust grounds', 15th September 2020, Reuters


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