Spotting the Technical Difficulties (Part 1)

Turn on the music and crank the jams. Music is a very prominent form of expression that has been woven into many people’s lives today. When I sit down at my desk to write this blog post, I instinctively grab my smart phone first and turn on some form of music. Whether it is music made solely from MIDI generated sounds or simply a musician with a guitar, I proceed to use electronic devices to produce the music that I love. But it’s not my Apple iPhone 5 that is giving me this music. It is an application called Spotify. This popular music streaming service was created 9 years ago by Swede, Daniel Ek and is now one of the most used streaming services in the music industry. On June 10th Spotify reportedly reached more than 20 million subscribers and more than 75 million active users. It has quickly become evident that Spotify has reached new heights of popularity and is continuing to grow. One can see Spotify everywhere from the inside of an Uber vehicle to the side of a Facebook page. The sensation is grabbing the attention of consumers all around the world… but how are the producers faring?

The first producer to look at is Spotify itself. The road to becoming known around the world hasn’t been an easy journey, which Ek talks about in the New Yorker. Many complications surround the market, an important one being the concept of streaming music. Until recently, streaming music has not been a legitimatized business within the music industry. The company to initially present this concept to world was Napster, created by Sean Parker. Napster was the first company to successfully offer consumers a way to access digital recordings on the internet. Though, this innovation didn’t last as record labels and major music publishing companies quickly shut it down. The music industry wasn’t quite ready to make the change to music streaming. But like most industries and markets throughout history, technology and innovation will change consumer behavior. Once the demand for music streaming was known, it was inevitable that other companies would attempt to satisfy the demand. And this is where Spotify came in.

Spotify legitimized what Napster was trying to accomplish by being able to negotiate licensing agreements with major record labels. E.M.I., Sony, Warner Music, and Universal are the titans that Spotify made deals with. This allowed Spotify to offer its customers access to the catalogs that these record labels owned the rights to. This is the fundamental difference between that companies who offer the streaming of music and those who don’t. Writer for the New Yorker, John Seabrook makes the point that “Spotify doesn’t sell music; it sells access to it.” The market seems to be changing in the direction of streaming as it is easier and relatively inexpensive, but the question is whether this business model is sustainable. The answer is yet to be definitive as Spotify calculated a net loss of 180 million in the year of 2014 and loss in previous years. The problem is in the fees that Spotify has to pay. Since contracts with major labels are negotiated every two to three years, the cost of access fees continues to increase as Spotify’s revenue increases. Spotify also increases the amount of fees as it looks to expand its catalogs and, like any profit-seeking company, Spotify is looking to grow. But it seems that expansion is pushing this company into a rut. The only way out is to eventually lower the costs of fees by renegotiating deals made with major labels. Daniel Ek isn’t too worried though, he is simply looking to expand and grow and hopefully the profit will come. Maybe with more influence in the market, and the music industry as a whole, Ek can find ways to improve the numbers.

No matter the outcome, Spotify’s story just goes to show the way in which industries have to adapt to keep up with the times. Spotify is being rejected by the music industry because it has a new product that is unfamiliar to the industry. But the industry is changing. Services like iTunes are becoming more and more obsolete while companies like Spotify, Rdio, and Rhapsody are growing. Ultimately it is the demand for the new product that will push the industry to change. Companies within the industry will realize the shift in demand and be forced to play the game. Spotify may be experiencing “Technical Difficulties” right now, but its future is bright.

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