Spotify vs Record Labels

Read the full interview HERE

We interviewed the Former CEO of EMI Group, one of the four largest record labels globally and now owned by Sony, on the structural changes in the music industry and Spotify's opportunities.

We explore:

Fundamentals of a music artist deal with a record label
Potential pressure on the economics of the record label business
Spotify's strategic options to increase gross margin
How Spotify can replace services that A&R houses traditionally offered artists
Strategic rationale of the Spotify Joe Rogan deal versus Pandora's Howard Stern deal

How have record labels changed, in organizational structure, culture, mindset? You mentioned how it was run by A&R people before, who pick music; how have you seen that evolve?

I don’t think it’s changed very much at all. The underlying economics of the record company is not sustainable, in my view. It has been sustainable, for a long time, but long term, it’s not. I’ll give you the classic story. When I first went to EMI, I had been in the movie business and so I didn’t really understand the music business. I said to my boss, the CEO, give me a sense of how the business works. He told me, if you have albums that you’re doing, or artists, you’re going to see about five of them lose money; they will lose a lot of money. Then you will have about three of them that break even and, if you are lucky, you have two that make money. You’re investing in 10 and two are actually going to make a profit.

It’s like a VC company.

Yes. My question always was, why can’t we do a better job of determining of what’s going to sell, what’s going to touch the consumer, in a way that makes them feel as if that is the song for them, or the album for them; how do you do that? The A&R thing is really all about, I’ve got the ear, I know what people want; I know that’s the thing. That whole sense of the world, it’s certainly not as virulent as it was when I was running these businesses, but it still is the concept. The underlying business model hasn’t really changed, except that now, their revenues are limited by having subscription models and they get their margin out of that.

It hasn’t changed very much and, in the latter period of EMI’s existence, we challenged that view and we used a lot of data, which is an anathema to A&R, and we understood how you have to move artists into cohorts of consumers. You then start to build more demand. We were able to move from two successes, to four. That’s why EMI, in those last years before it was sold, was the most profitable music business in the world.

How exactly did you look at doing that?

This is a while ago, so the technology and the understanding was pretty rudimentary. But we did huge amounts of consumer research, online. We looked at how we were touching the consumers. How does a consumer know that that music is there? How do we do that? We do that statistically.

That’s interesting because Spotify, obviously, own the customers now. They own the users. If you’re saying that the essence of the record labels was the A&R people thinking that they could choose music or understand the taste of the consumer, now the discover funnel actually lies with Spotify. How do you look at that shift in discovery and consumer data?

Spotify doesn’t make the music. They take the music that is made and make it available to a large number of consumers. There’s all sorts of statistical work that has been done on what does it look like, in terms of listens or sales? They do cluster at the top. What tends to happen and is happening, even today, is that music, basically, becomes stagnant. Everybody produces the music that was successful yesterday. It takes something to break away, to change the nature of what’s out there in the marketplace. I’m a true believer that you can keep doing that. You can keep moving with your consumer. Not that the consumer knows what they want, in a particular way, but there are ways of testing them and understanding whether you’ve got the right mix. That means you need to know who you’re trying to go after. Who controls that? Who knows that? Spotify knows that. Apple knows that.

Now, you’re captured again. I think that’s where the industry is. I think they are changing a bit; that doesn’t mean that they are not paying attention. A lot of A&R is now about looking at the charts of Apple and Spotify and looking at what’s moving and we’ll go get those people. We’ll convert them from indies to majors.

How do you look at the position of the labels, in the value chain, given that we’ve seen such a huge shift in usage and, arguably, the digital players owning the consumer?

I don’t think it’s necessarily true that it is inevitable that the digital players, the subscription players and others, have a unique way of understanding. You can deal with these things, even though they do. But they have a strength. One of the things that Spotify is talking about, as part of their economics, going forward, is using that knowledge and charging the record companies.

The marketplace?

Yes.

How attractive do you see that, for the labels?

I think it’s just one more step to saying that the major record companies are going to lose market share. If Spotify can help somebody understand how to position and where to position their music, and be able to look at that in real time, that’s really what the role of a major record company is. Their economic advantage is that they have huge catalogues. Those catalogues, based upon the economics that they represent, have very, very high margins. They’re able to buy successful artists. Therefore, their market share can be retained, but their economics is dependent upon history, not the future.

What I think will happen and is happening, is that so-called independents will continue to grow. In this world, it’s interesting how we describe independents. Independents are ones who do their own A&R and they have their own economics. But most of them are captives of the major record companies, because they provide the capital to do what I’ve just said. I’m talking about non-captives. Just like what’s happening in the music publishing business, given how robust the music business is, at the moment, the investments will start to calm and there will be alternatives, with sufficient enough capital, to drive companies into being competitive.