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Monday, August 8, 2022
Home Technology How Our Convoluted Copyright Regime Explains Why Spotify Chose Joe Rogan Over...

How Our Convoluted Copyright Regime Explains Why Spotify Chose Joe Rogan Over Neil Young


from the one-of-them-is-a-lot-more-costly dept

Spotify’s decision to hitch its star to podcaster and font-of-COVID-misinformation Joe Rogan has sparked a wave of pushback from musicians, some of whom – among them Neil Young, India Arie, and Joni Mitchell – have pulled their music from Spotify in protest. Spotify, for its part, has stood firmly by Rogan.

That Spotify would stand by a show that consistently undermines vaccines and blithely spreads misinformation is disappointing – but, financially, it’s perfectly predictable.

The short version:

The law and economics of music streaming lead to one inevitable result: Spotify pays money when it streams music. It makes money when it streams podcasts. Therefore, Spotify has an incentive to keep people using Spotify – just not for music.

The legal regime around music licensing makes breaking even – let alone turning a profit – nearly impossible. Because the industry is notoriously secretive about its financials (a problem in and of itself), raw data is hard to come by. But the fact remains that investors (and industry observers) agree that music streaming as a loss-leader – something that incurs a net loss for the service doing it, in the hopes of potentially looping consumers into the parent company’s product ecosystem. Apple Music and Amazon Music, the second and third largest streaming services by market share, both operate at a loss. Spotify, which has been in the US market since 2011, turned its first profit in 2021. It is still unclear whether it will manage to repeat the achievement.

In short, experience indicates that a streaming service that plays only music will consistently lose money. And while this is a complex issue with many moving parts, one of the biggest is the law – the market it creates, and the behavior it incentivizes.

But First, How Does Music Copyright Work?

Each track involves not one, but two copyrighted works; the recorded performance (the “sound recording”), and the underlying composition (the “musical work”). Legally, these are two distinct things. This is partly a historical artifact; songwriting hit its stride in the very early 20th century, before mass distribution of recorded music was even a glimmer in anyone’s eye. Compositions got copyright protection in 1906 (and were thus given the now-confusingly-vague designation of “musical work”). Over the first half of the century, publishers and performing rights organizations sprang up to promote, distribute, and license songwriters’ work. It was not until mid-century that the recording industry began to flourish on its own, and sound recordings did not even gain copyright protection until the late 1970s.

Because of this history, the two industries – songwriting and recording – operate under wildly different licensing structures. Copyright is, at its core, a government-granted right to exclude; when one player starts to accumulate a high volume of those rights, the risk of abusive market behavior rises. The composition side of the equation messed around and found out early. By the 1940s, the government had intervened and set up a complex system of antitrust enforcement, rate-setting, and mandatory licensing regimes. The result was a market that, for all its faults, remains relatively stable and predictable for licensees (and, as a side benefit, provides some transparency on how songwriters are paid).

The recording industry, by contrast, gained its copyright (and thus its monopoly power) in the mid 1970s. By then, antitrust law was in the middle of a Chicago school backlash that considerably narrowed its scope and purpose and regulators had lost the taste for the kind of vigorous enforcement that marked the early part of the 20th century. While regulators in the 1940s were willing to go after the songwriting industry’s bad behavior (cartels, extractive pricing, strong arm tactics, etc) their counterparts in the late 1970s were less enthusiastic. And so, unlike their composition-side brothers, labels exist in an unconstrained free market.

Why It’s So Hard For Streaming Services to Make Money

As mentioned above, we have very little hard and fast data about how much labels are charging and what kinds of side deals they are striking to extract value from these services. But given what we do know about the industry – and what the US government has outright assumed is going on when doing things like setting royalty rates – we have a pretty good idea.

Because labels have no meaningful guardrails on their licensing practices, they are free to maximize their own profit however they see fit. When it comes to streaming, their ideal situation is to extract as much value as possible without forcing the service completely under. This means that licenses are priced with the assumption that the streaming service will have to take on some (ideally sustainable) amount of debt to cover their licensing obligations. The alternatives to this aren’t a whole lot better, either; things like equity stakes, sweetheart deals, and algorithmic preferencing or promotion are commonplace.

The result of all this is that it is structurally impossible for a streaming service to turn a profit using standard music deals alone. Labels are rational economic actors. Profit is value that is not being captured by labels; labels will rationally set prices to ensure that none of that value goes un-captured. Labels have the power to shut a service down simply by walking away from the table.

Why Spotify Can’t Quit Joe Rogan

It means that, despite being a music streaming company, music is (and will always be) a revenue loss for Spotify. To have any hope of turning a profit, it needs a low-cost, high-revenue offering. Enter podcasts – specifically Rogan’s podcast, which commands a minimum ad buy of $ 1Malong with a commitment to buy other ads on Spotify-hosted podcasts.

So, when forced to choose between retaining portions of its legacy music catalog and keeping one of the only offerings that actually makes the service money, Spotify made the obvious (if morally objectionable) choice. It chose Joe Rogan.

And barring a major overhaul of music licensing law, starting with sound recordings, this will keep happening. We’ll either end up in a world where all mainstream streaming services will be backed by deep-pocketed tech giants (such as Apple, Amazon, and Google), or where music services are stuck relying on non-music content to stay afloat- -even when that content is harmful.

Meredith Rose is Senior Policy Counsel at Public Knowledge

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Filed Under: business models, copyright, joe rogan, licensing, loss leaders, neil young, podcasts, streaming
Companies: spotify



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