36 6.5 Influence of New Technology

The Post-Napster Universe: Gnutella and Kazaa

Napster’s initial success resulted in a wave of similar sites emerging throughout 2000. The creators of these new services recognized that Napster’s legal problems were the result of maintaining a central file server. By keeping a list of all the users on the network, Napster was able to control its users’ activities by blocking illegal downloads. When the court ordered the service to halt illegal downloading, the absence of a central database destroyed the entire Napster network.

To avoid a similar fate, new peer-to-peer (P2P) systems adopted two different approaches. The Gnutella network, which serves clients such as LimeWire, BearShare, and WinMX, avoided maintaining a central database. Instead, it dispersed information about file locations across computer “nodes” around the world. Users were able to find each other, but the service could disclaim the ability to prevent copyright infringements. The lack of a centralized server and multiple client base meant that, unlike Napster, it would be impossible to shut down the entire Gnutella network through a simple court order. Courts would need to block all Gnutella network traffic at the Internet service provider (ISP) level of the Internet, a far trickier prospect than simply shutting down a central database.

In addition to a lack of a central database, some P2P providers set up in offshore locations to take advantage of less-restrictive copyright laws and weaker enforcement. Kazaa was initially based in the Pacific island nation of Vanuata and operated out of Australia. However, the company’s offshore location did not protect it from copyright infringement laws. After a series of legal wrangles, Kazaa was ordered to modify its software in Australia in 2005 and agreed to pay $100 million in damages to the record industry. In 2006, the site became a legal music download service (BBC News, 2006).

Not content with pursuing providers of illegal music downloads, the RIAA also took legal action against the users of sites such as LimeWire and Kazaa. In 2003, the recording industry sued 261 American music fans for illegally sharing songs on P2P networks (Kravets, 2008). Although fines under U.S. copyright law can rise to up to $150,000 per illegally downloaded track, most of the cases were settled for much less. As of 2008, the RIAA had sued or threatened to sue more than 30,000 individuals for copyright infringement (Kravets, 2008).

The Advent of Digital Music Stores

With the closure of the Napster program and the crackdown on illegal downloading, a void in the music distribution market opened and was almost immediately filled by fee-based online music providers. This void helped to resurrect one company many feared was declining. Apple launched iTunes—a free application for the Mac computer that converted audio CDs into digital music files, organized digital music collections, and played Internet radio—and the iPod—a portable media player compatible with the iTunes software—in 2001, and both products have dominated the market ever since. In 2003, the company signed deals with all of the major record labels and launched the iTunes Store, a virtual store that enabled people to buy and download digital music on demand. Initially featuring 200,000 songs at a cost of $0.99 each to download, the store quickly revolutionized the digital music industry. Within a week, iTunes Store customers purchased 1 million songs (Apple). Six months later, Apple convinced the record labels to expand the service to Microsoft Windows operating system users, and by the following year, the iTunes Store had gone international. Within 5 years of its launch, the iTunes Store was the top music seller in the United States, and in February 2010, Apple celebrated its 10 billionth download (Williams, 2010).

Several companies have attempted to cash in on the success of iTunes, with varying results. In 2007, Internet giant Amazon.com launched the Amazon MP3 digital music download store that initially offered more than 2 million songs priced between $0.89 and $0.99 (Richardson, 2007). Amazon’s major selling point was its lack of digital rights management (DRM) software, which enabled music downloads to be played on any hardware device. In contrast, songs downloaded through the iTunes appliance program could only be played on Apple products. Apple removed these restrictions in 2009 after negotiating an agreement with the major record labels. Despite its efforts to topple Apple from the top spot in the digital music arena, the Amazon MP3 service only commanded 8 percent of the digital music market in 2009, compared with Apple’s 69 percent of the market (NPD Group, 2009). Napster has also stayed in the game by releasing a new design plan in 2009 after being purchased by Best Buy. The plan requires users to pay a fee to access all the music in its catalog. This plan has kept Napster in business; however, the company only had 1 percent to 2 percent of the market share at the beginning of 2010 (Weintraub, 2010). Other online music stores are operated by Wal-Mart, Rhapsody, and Yahoo! Music.

The Impact of Digital Music Technology

Once digital music technology was introduced to the world, its domination of the music industry was almost instantaneous. MP3 players have several key advantages over CD players. They are smaller and more portable, eliminating the necessity of lugging around bulky CD carrying cases. Whereas CDs can only hold a relatively small amount of data, MP3 players are able to compress thousands of songs onto a single device (this lack of packaging and manufacturing has caused disputes between artists and labels over royalties, which will be discussed later on). The lack of moving parts means MP3 players can be taken jogging or cycling without the risk of a song skipping every time the user hits a bumpy patch of road. Users are also no longer obligated to buy entire albums; instead, they can pick and choose their favorite songs from a catalog of online music.

Of the many brands of MP3 player currently available on the market, Apple’s iPod has been the dominant force in the digital music industry since its launch in 2001 (see Figure 6.15). Apple CEO Steve Jobs attributes the success of his product to its simple design. In a 2005 interview he said, “One of the biggest insights we have was that we decided not to try to manage your music library on the iPod, but to manage it in iTunes. Other companies tried to do everything on the device itself and made it so complicated that it was useless (levy, 2006).” The iPod has also reaped the benefits of a successful marketing campaign and constant reinvention of its original format. Customers now have the choice of several different iPod models according to their need for storage space and desire for additional services such as Internet access and video-playing capability.

Profit Division

One effect that Apple iTunes and other online retailers have had on the music industry is to shake up the way that profits are divided among artists and record labels. Because of the unanticipated boom in digital record sales, recording artists and their publishers were unprepared for the possibility that they might need to renegotiate their contracts to include digital downloads. Many artists discovered to their cost that their contracts predated the digital download era, leaving them open to exploitative royalty rates for digital downloads of songs and ringtones.

The very definition of digital royalties is still under negotiation—should a download be classified as licensed use of an artist’s music (which nets the artist approximately 50 percent of the download fee in royalties), or should it be classified as a retail sale (which nets the artist approximately 12 percent of the download fee in royalties) (Michaels, 2009)? The answer depends on the contractual agreement between artists and record labels. In 2009, rapper Eminem’s publishing company FBT Productions sued Universal Music Group for $1.6 million of unpaid royalties, arguing that the downloads should fall under the “licensing” agreements that cover physical releases such as CDs, rather than the “distribution” agreements put forth by Universal Music Group (Michaels, 2009). A jury agreed that a song sold online is no different from a song bought in a store and ruled in favor of the record label.

Because online retailers such as Apple are responsible for the marketing, management, and delivery of downloaded music, record labels’ overheads are much lower. This new industry trend has prompted many artists and publishers to demand a bigger share of labels’ profits. As of 2010, a $0.99 download from the iTunes appliance program generates $0.30 for Apple and $0.70 for the record label, of which $0.09 goes to the songwriter and publisher as a standard mechanical royalty (Albanesius, 2008).

Spotify Changes the Game – a profile by Statista

Published by 

Marie Charlotte Götting

 Feb 16, 2022

The Swedish tech giant Spotify has been the music streaming service leader for the last years, leaving market competitors such as Apple Music or Amazon behind. Since its foundation in 2006, the Stockholm-based company has provided a platform for a large variety of music content, as well as audiobooks and podcasts, establishing itself as the “go-to” option for many. As one of the main podcast providers Spotify saw itself involved in a controversy in early 2022. The most popular podcast host and Spotify exclusive “The Joe Rogan Experience” hosted a controversial anti-vaxxer and sparking a debate on the spread of false facts on the coronavirus, which caused music legend Neil Young as well as Jony Mitchell and other artists to request for their music to be removed from the platform of the streaming giant. With Spotify reacting to this by adhering to their request without releasing a statement, they seemed to have sided with Joe Rogan while many argue that this is due to the influence and profit Joe Rogan provides for the Swedish tech company. Even though Spotify has announced that they will now put warnings before Covid-19 related content, it will be interesting to see how the growing power of podcasts will influence how companies deal with the spread of fake news. 

While podcasts have become an increasingly popular format, Spotify is still making the biggest share of revenue through their premium subscribers rather than ad-supported content. In late 2021 the number of paid Spotify subscribers surpassed 180 million worldwide for the first time. Paying subscribers account for close to half of Spotify’s monthly active users, with the number rising from 286 million subscribers in the beginning of 2020 to 406 million at the end of 2021. At the same time, the premium average revenue per user has been steadily decreasing over the years, amounting to only 4.29 euros per user in 2021 compared to 6.84 euros in 2015.

Spotify’s revenue amounted to over 9.6 billion euros in 2021, and the company also reported a net loss of over 39 million euros. This result is strongly influenced by Spotify’s cost of sales, which mostly comprises licensing expenses towards record labels, distributers, and artists. The company spent 912 million euros on research and development in 2021, has invested heavily in podcasts in recent years, and also grown its global cohort of workers: Spotify’s number of employees surpassed 6600 in 2021. All of this has allowed the company to ensure future growth and maintain its position, and although 2022 will be a hard year for many businesses, with so many strings to its bow, Spotify will likely remain the most successful music streaming service in the market for years to come.

CD Sales

The burgeoning popularity of digital music has drastically reduced revenue brought in from CD sales since 2001. Although many people have switched from illegally downloading to purchasing music on digital stores, paid digital downloads have not yet begun to make up for the loss of revenue from CD sales, and illegal downloads remain a problem for the recording industry. According to online download tracker BigChampagne Media Measurement, unauthorized downloads still represent about 90 percent of the market (Goldman). With album sales declining at a rate of 8 percent a year, music executives are trying to figure out how to stem the flow of money flooding out of the CD sales market. Former head of Yahoo! Music David Goldberg said, “The digital music business is a war of attrition that nobody seems to be winning. The CD is still disappearing, and nothing is replacing it in entirety as a revenue generator (Goldman).” After peaking in the early 2000s, CD sales have steadily dropped and are hardly existent as of 2020, as seen in this graph from Statista.

To partially make up for lost sales, the music industry has been generating revenue through licensing fees, including fees for ringtones, music played on Internet radio stations such as MySpace Music and Pandora, and music videos on the YouTube video-sharing website that is owned by Google. In 2009, digital licensing revenue reached $84 million and continues to grow (Goldman). Meanwhile, recording artists are focusing their attention on live performances and merchandise, which have become their main source of revenue.

Utilizing the Internet: A New Level of Indie

Artists such as Nine Inch Nails and Radiohead are abandoning the traditional music industry model in favor of marketing their songs directly to fans.

Wikimedia Commons – CC BY-SA 3.0; Wikimedia Commons – CC BY-SA 2.5.

Over the past few years, the Internet has begun to level the proverbial playing field between major and independent record labels. Exemplifying how smaller indie labels are able to latch on to trends more quickly than the Big Four, indies have embraced new technology, including blogging, online video sites, and online social networking sites, as a means of promoting their music, while the major labels have fallen behind the curve. With social networking sites enabling artists to communicate directly with their fans, the need for extensive financial backing or an industry middleman is all but eliminated. Now, artists can upload their music onto a social networking site for free and generate record sales purely through word of mouth.

Although a few indie artists have become household names entirely through the buzz generated on social networking sites, many others find that they need some guidance. The direct-to-fan business model has created opportunities for web-based companies such as Nimbit and ReverbNation, which provide software that enables independent artists and record labels to market their music online, keep track of sales, create demand for their music, and communicate with fans. The companies offer social networking applications that enable fans to purchase music directly from the artists rather than being redirected to a third-party website. Other advantages for bands include automatic updates to fans across a variety of networking sites, digital distribution through the iTunes appliance program and other stores, and real-time sales updates.

Many established artists have also embraced the direct-to-fan business model. In 2007, Nine Inch Nails frontman Trent Reznor announced that the band was splitting from its contractual obligations to Universal Music Group to distribute its next albums independently. Well known for his vocal distaste of major record labels and their profiteering, Reznor encouraged fans in Australia to steal his album Year Zero because he believed it was priced too highly there (SPIN, 2007). Commenting on the state of the music industry in a 2007 interview he said, “I’ve got a battle where I’m trying to put out quality material that matters and I’ve got fans that feel it’s their right to steal it and I’ve got a company that’s so bureaucratic and clumsy and ignorant and behind the times they don’t know what to do, so they rip the people off (Johnson, 2007).” Following the band’s split with Universal, they released studio album The Slip as a free digital download in 2008. Reznor stated, “This one’s on me,” on his website, thanking fans for their loyalty. The album was downloaded 1.4 million times within the first 6 weeks of its release (Kent, 2011). A similar technique used by tech-savvy alternative band Radiohead reaped even higher rewards in 2007, when its retail release of In Rainbows entered the album chart at No. 1 even though the digital version had been offered online at a price of the customer’s choosing several months earlier (see Chapter 11 “The Internet and Social Media” for more information about Radiohead’s In Rainbows release) (Brandle, 2008). The web-based direct release model allows bands such as Radiohead and Nine Inch Nails to obtain vital information about their fan bases—including e-mail addresses—that they can use for future promotions. Whether or not the practice proves to be a passing fad, the traditional music industry model is shifting as new technology makes it easier for artists to communicate directly with their fans.