The Industry in 2014: Digital Is the New Mainstream, Despite Taylor's Protestations

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John Ueland

Throughout the week, Billboard will be publishing pieces from our staff writers, each an outstanding authority on their specific area of coverage. From Nashville to Miami, the industry at large, publishing and retail, and the year in touring, we'll be taking comprehensive looks at the biggest stories -- good, bad and in between -- from 2014. Today, we begin with the analysis of Glenn Peoples, senior editorial analyst.

Billboard's 2014 Year In Music

It was a year of major companies and major artists making waves in the new music business. Apple, Amazon and Google made major strides into music streaming -- after letting the market develop and waiting for the right moment to pounce -- while Taylor Swift rebelled against one of the leaders in music streaming, Spotify. Just about any major event related to streaming merited attention in 2014. And why not? Streaming is a big cork for a record business trying to plug holes. According to the RIAA's mid-year report, subscription revenue was up 23 percent and SoundExchange distributions (mostly from webcasting) rose 21 percent through the end of June.

A handful of other events were either important or just plain interesting (but don't merit inclusion on my list). Rights reversion was a major topic, as publishers sought ways to extract greater value from digital services like Pandora. A string of hearings before a House Judiciary subcommittee highlighted an active year for music issues in the nation's capitol (although no legislation was passed). And SFX Entertainment lost much of investors' early enthusiasm: its stock is down 67 percent year to date.


Steve Jobs didn't believe consumers wanted subscription services. But when Jobs passed away in October 2011, download sales were still growing -- albums up 9 percent and tracks up 20 percent in the U.S., according to Nielsen Music -- and Spotify had just launched in the U.S. By the end of 2013, digital sales were sagging and Apple was without a clear streaming strategy.

The Beats Electronics deal gives Apple a valuable headphone line as well as a burgeoning subscription service with a unique approach. To be sure, Beats Music appears to be starting slowly. According to Billboard analysis of Nielsen Music data, Beats Music had a 1.5-percent share of top 50 song streams in the U.S. in October. It had surpassed some competitors but is far behind Spotify's 33.2-percent share. Apple's job is help Beats grab market share while helping grow the entire market.


It might have looked good on paper, but U2's giveaway of its new album, Songs of Innocence, via iTunes was a model in poor execution. Not only did the giveaway have a hint of desperation -- understandable given the difficulties older artists have selling new music -- it also lacked empathy. Both U2 and Apple failed to consider that millions of iTunes users might not like having U2's new album forced into their accounts. One is reminded of the saying, "It's better to ask for forgiveness than permission." Maybe so, but consumers didn't even get a sincere apology.

The giveaway didn't completely backfire. Roughly 26 million albums were distributed globally -- an imposing number even for a free album. But U2 and Apple probably could have found a less aggravating way to distribute a few tens of millions of albums. An opt-in freebie, trumpeted during Apple's press event and tagged in subsequent television advertising, could have driven fans to iTunes in record numbers and left a better taste in their mouths.


Spotify was plenty controversial before the reigning Billboard Woman of the Year pulled her catalog. The barbs issued via Twitter by Thom Yorke and Nigel Godrich received significant attention both within and outside the music community. But Swift v. Spotify was the most significant action ever taken by an artist against a streaming service. It's one thing to withhold a new release, it's another to withhold a new release and pull all previously released albums.

Swift's action -- followed a week later by country star Jason Aldean -- reignited the debate about streaming royalties and the role digital services play in supporting artists. It's important for stakeholders to talk through these issues. To that point, a coalition of creators formed the Content Creators Coalition earlier this year to insert creators' interests into discussions about copyright and licensing terms. "We are not going to be told to shut up and play," CCC co-founder Marc Ribot said in February. Whether or not digital services can pay much more -- if any more -- is a separate issue. But at least the conversation is taking place.


Federal copyright law sometimes has quirks. One of them says federal copyright does not apply to songs "fixed" before February 15th, 1972. As a result, some digital services did not pay performance royalties for these older recordings. Citing state law, the Turtles, the 1960s band behind hits like "Happy Together," took Sirius XM to court in New York, California and Florida -- and won in California and got a favorable ruling in New York.

Paying older artists for performances was a favorite cause in 2014. The RIAA sued Pandora over the matter in April. In July, Rep. George Holding introduced legislation, called the RESPECT Act, which would require digital radio services to pay royalties for the performances of pre-1972 sound recordings. SoundExchange followed with a marketing campaign, Project72, in support of the legislation. The RESPECT Act didn't become law, but expect the issue to be inserted into copyright reform conversations in coming years.


Internet radio company Pandora had always kept labels at arm's length, preferring to use a statutory license rather than negotiate with labels directly. That changed when the company inked a direct deal covering over 20,000 independent labels through independents rights organization Merlin. The agreement will give Merlin artists preferential treatment in algorithms that will result in additional streams. Given the size of Pandora's audience -- 76.5 million monthly users and a 9.1-percent share of U.S. radio -- the benefits could be substantial in exposure if not revenue.

The deal is not without criticism. Some argue Merlin artists are taking a reduced rate -- which is true only for incremental streams that wouldn't happen in the absence of the deal. And while it's true that preferable treatment of Merlin artists comes at an expense to other artists, competition in the zero-sum game of radio is nothing new. More than anything, the Pandora-Merlin deal marks a new era of harmony between services and rights owners.


What the streaming market needs is something different to bring on-demand streaming to a new audience. Enter Amazon's Prime Music, an on-demand service available to members of its Prime service. What sets Prime Music apart is its catalog: no new releases. Instead, Amazon has filled Prime Music with catalog titles with which it builds a wide range of playlists. 

New releases don't feel missed. Prime Music has the requisite curation, from "Artists to Watch" to "Best of the Year." And, given the time of year, Amazon has rolled out dozens of Christmas-themed playlists. Amazon was wise to integrate Prime Music into its digital music storefront -- music can both streamed and purchased from either artist or album pages. It's a smart approach for an audience that skews older, has money to spend and has already splurged on Prime to get free, two-day shipping.


It has nothing if not potential. YouTube is the biggest on-demand music service in the world. Parent company Google is the fourth-largest company in the world as ranked by market capitalization. Google's Android operating system had an 84-percent share of global smartphone shipments in the third quarter, according to Strategy Analytics. YouTube Music Key, a new music subscription service on the YouTube platform, has almost no reason not to succeed.

Two factors could plausibly hurt Music Key, however. One is the difficulty a corporate behemoth could face in dealing with a small and spunky startup that needs to focus on only one task. Big corporations -- Apple, Amazon -- may dominate downloads but standalone startups fare well in music streaming -- especially because smartphones are open to a variety of streaming apps. The other factor is a user base that for years has been conditioned to expect -- and receive -- free content on YouTube. As a point of reference, Pandora has roughly 3.3 million subscribers to 76.5 million monthly users. If YouTube can figure out how to get even a small portion of its viewers to subscribe, it will convert a huge number of free viewers into more valuable subscribers.


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