In early January, Lucian Grainge returned from the holidays and fired off his New Year’s memo to Universal Music Group’s staff.
As chief executive of the world’s biggest music label, Grainge holds a singular role in the industry, making his annual greeting something of a “state of the union” for the business. In recent history, it has been a jolly message. After a long era of destruction, the music industry has been growing for eight consecutive years.
The beginning of this year’s email resembled previous iterations, listing examples of UMG’s utter dominance of the music charts. But after a brief victory lap, Grainge’s tone swung to the sound of an alarm. “Bad actors . . . have been swooping in”, he warned.
The very streaming innovations that brought the music industry back to life were now “flooded” with content that “can barely pass for music,” he wrote. But under current royalty agreements, every recording is treated the same. “We need an updated model.”
This week, that model for music streaming arrived. After several months of negotiations, and increasing questions from investors, UMG introduced the first significant changes to the royalty system since Spotify debuted in 2008.
The deal with French streaming service Deezer will divert more royalty money towards professional artists — defined as those whose work draws at least 1,000 streams a month — and away from bots and white noise soundtracks. It pays more for songs and artists that listeners actively seek out.
Key moments 1: Creation of the MP3
In the 1980s, German engineer Karlheinz Brandenburg and researchers with the Moving Picture Experts Group looked at how to improve audio and video encoding, using Suzanne Vega’s a cappella song “Tom’s Diner” to work out which modes of compression traded off the best sound for the smallest digital file. In 1995, they gave the optimal format the file extension .mp3.
Industry participants say this is a big moment, with UMG in effect pulling other major labels and platforms into a new phase of streaming. “This is the biggest change to the model in 15 years,” says Jeronimo Folgueira, Deezer’s chief executive.
Music tends to be an early candidate for disruption. Illegal file-sharing began eating into the music market after Napster launched in 1999, long before Netflix’s streaming service would start to rattle television. While the recording industry’s peers in Hollywood are still in the middle of a painful transition, with traditional television in freefall and a once-in-a-generation labour strike raging, music companies have arrived at a more mature phase of streaming.
Yet executives now believe the terms they laid out with streaming platforms more than a decade ago — when the industry was in a state of desperation — are outdated. “Music is the only industry where all streams are valued exactly the same, regardless of the quality,” says Folgueira. “A 30-second YouTube video is not worth as much as an episode of Game of Thrones.”
As technology threatens to tear apart their business again — this time, in the form of artificial intelligence that can make Frank Sinatra’s voice sing “Gangsta’s Paradise” — big music is fighting back.
JPMorgan warns that if left unchecked, Spotify’s platform could become littered with AI-generated rubbish, potentially exploding from 100mn songs to more than a billion in a few years. UMG’s “artist-centric” model will dissolve the financial incentives for these AI tracks to proliferate, the analysts say.
Grainge’s proposed solution will direct more money towards musicians but also towards UMG, which controls nearly a third of the world’s music and takes a percentage of the income of a dizzying number of superstars including Taylor Swift, Drake and The Weeknd.
Key moments 2: Napster and the file-sharing revolution
In 1999, American college student Shawn Fanning created a program which allowed users to search for and share MP3s stored on their personal computers over the internet. Napster and peer-to-peer network competitors like Limewire changed the way music was consumed as millions ripped their CDs into MP3 format and began unlawfully downloading other people’s music files in their turn. A blizzard of lawsuits followed.
This week’s news prompted JPMorgan to raise its stock forecast for UMG, estimating that, if broadly adopted, this new payment system would lift subscription revenue by 9 per cent. If a “dystopian AI future” were to materialise, flooding streaming platforms with clips, JPMorgan believes this new model could boost UMG’s revenue more than 20 per cent.
Deezer plans to implement these new payment terms from October. UMG executives hope to announce deals with other streamers in the coming months. Collectively, these streaming services pay the music industry $25bn in royalties a year, the backbone of the modern music business.
It’s no mystery where the balance of power lies. “The labels control everything,” says David Turner, a former SoundCloud executive who was involved in the platform’s work with UMG earlier this year. “If you don’t have the UMG catalogue, then your entire business collapses. You can’t have Spotify without Taylor Swift or Drake, so you kind of always have to listen to what Lucian Grainge says.”
Now, the music industry wants to press that advantage. Having stabilised, it is seeking to build on recent gains. The streaming boom is slowing, and Universal Music and rival Warner Music — both publicly traded companies which count Bill Ackman and Len Blavatnik among their investors — are under pressure to keep up momentum.
Until recently, major label streaming revenue had been growing at a roaring pace, with quarterly sales rising between 20 and 40 per cent year over year. But about a year ago, growth slowed considerably.
In 2022, the major labels’ streaming revenue was up only 5 per cent from the year before, reaching $13.2bn, according to Midia. Within Spotify, the major labels’ share of listening has been eroding, from 85 per cent of streams in 2018 to 75 per cent last year.
Universal Music executives say that the problems they are addressing are existential, and, having learnt their lessons from the throes of the piracy era, they are acting early. Michael Nash, UMG’s chief digital officer, tells the FT: “this is fixing the roof while the sun is still shining.”
The Universal playbook
The sunny state of the music industry in 2023 is a far cry from the dark years at the turn of the millennium.
Then, illegal downloads available through sites like Limewire almost destroyed the music business, and for more than a decade there was no viable solution in sight.
In the mid-2000s, as a crop of new music services emerged attempting to fix the piracy problem, Universal Music saw an opportunity to flex its muscles.
This power was cemented with Grainge’s controversial 2012 purchase of the ailing label EMI, giving UMG a market share of around 40 per cent — an unprecedented concentration of power that Sir George Martin, the famous Beatles producer, called “the worst thing that music has ever faced”. It made Grainge the one person anyone hoping to launch a music platform needed to get past.
“The UMG playbook started then,” says Mark Mulligan, analyst at Midia. “That was when Universal first started understanding it could have a market-shaping role.”
Key moments 3: iPods and the iTunes store
In October 2001, Steve Jobs introduced the first iPod, enabling consumers to carry more than 1,000 songs around with them. The iTunes Store, launched in 2003, let people buy rights-managed music — mostly at $0.99 a song — and seamlessly add it to their iPod library. Apple was not the first to introduce a digital music player or a digital music store, but it was the most successful
Everything changed with the advent of Spotify, which was created in 2008 and launched in the US in 2011. While some music incumbents were sceptical, Grainge struck a licensing deal with Spotify founder Daniel Ek.
The financial model was simple. Subscribers pay Spotify $10 a month to listen to music online. Spotify pools all the money it receives from subscribers together into one pot, and then divides it up according to each musician’s share of listening. Spotify, and the other streaming services that followed, pay about two-thirds of every dollar they make back out in royalties.
This simplicity had been a virtue. Every stream was counted equally. But it has also fostered financial incentives to game the system, with an emphasis on racking up huge volumes of streams. JPMorgan analysts crunched the numbers and found that if someone uploaded their own 30-second track to Spotify, and then programmed their phone to listen to it on repeat 24 hours a day, they would receive $1,200 a month in royalties.
Executives estimate that as much as 10 per cent of all music streams are “fake” — deriving from streaming farms, where heaps of devices run services like Spotify on loop.
In a timely illustration of their concerns, Swedish newspaper Svenska Dagbladet this week reported that criminal gangs were using Spotify’s royalty system to launder money they made from drug deals and assassination missions.
Spotify told the FT earlier this year: “Artificial streaming is a longstanding, industry-wide issue that Spotify is working to stamp out across our service.”
The deal announced this week could help put an end to this kind of content farming. But it also underscores just how successfully UMG has navigated the turbulence of the digital age. Valued at €6.4bn just 10 years ago, JPMorgan this week said it “sees upside” to a €100bn valuation for UMG.
Setting the agenda
Much depends on UMG now getting other streamers on board quickly — especially Spotify, the unequivocal leader in streaming.
Publicly, Ek has not exactly endorsed UMG’s “artist-centric” model. When asked about it on a July earnings call, the Swedish billionaire said that the artist-centric approach “seldom leads to these gigantic differences that most people perceive it to do”.
“Obviously this is a big contention”, he added. “How do we make the economic model fair for as many participants on the platform?”
Yet the two sides struck a new deal over the summer, and UMG made Spotify’s participation in the “artist-centric” process a stipulation of that agreement, according to people familiar with the matter. A Spotify spokesperson declined to comment. Apple and Amazon are said to be further away from agreeing a new deal.
Key moments 4: Spotify and the streamers
As high-speed internet became more prevalent, MySpace and Pandora showed the appetite for streaming new music online. Spotify, launched in Sweden in 2008, built a streaming model where users either endure ads or pay a subscription to access a vast library of music. In turn the company pays royalties to the creators whose tracks are played. However there has been controversy about the level of royalties paid and manipulated streams
Early results from Deezer will be instructive. Deezer is a small player in music streaming, representing only 1 or 2 per cent of the market, but it is dominant in France, making it a useful test-run for wider adoption. “It’s hard to get large organisations like Apple, Amazon, Google to move. Spotify is too large and afraid to do something to threaten their position. So we moved first,” Deezer’s Folgueira summarises.
Some observers say UMG’s early success in its quest to reshape the business is a show of the enduring power of the handful of large conglomerates who have ruled the industry for decades.
Even as technology giants have taken over distribution, the major record companies — who are a tiny fraction of the size of Apple or Amazon — have managed to preserve their grip, as personified by Grainge, whose hold over the landscape resembles Bob Iger’s seat atop Hollywood.
“If you are a record label, artist, songwriter or publisher, there is a lot of existential angst at the moment. You’re a slave to the algorithm”, says Midia’s Mulligan. “This is a way of saying to the marketplace, both in terms of investors and [streamers]: actually, rightsholders can still set the agenda.”