A new Spotify initiative could spell trouble for record labels (or kill Spotify)

Billboard first let the cat out of the bag in June. In an exclusive, the publication revealed that Spotify had been chasing independent artists, offering sizable advances on future work as well as numerous perks, not the least of which was full control, and ownership, of their future work.

It works like this: Spotify typically pays a record label around 52 percent of revenue generated each time a user streams a song. Of what’s left, Spotify breaks off 15 percent for the artist, and pockets the rest, according to a New York Times report. CEO Daniel Ek has stated, repeatedly, that Spotify has no desire to be a record label. “Licensing content does not make us a label, nor do we have any interest in becoming a label,” said Elk on an earnings call in July. “We don’t own any rights to any music, and we’re not acting like a record label.”

But you have to wonder if, in Elk’s utopian vision of the future, record labels didn’t need to exist at all. What if it could book the 52 percent it was currently paying labels, thereby increasing revenue and offering artists a bigger cut of the pie — as well as exclusive ownership of their own work.

In past decades, record labels were arguably as important as talent itself. Moreso, in some cases. Clever marketing initiatives — or brute force, in some cases — led to name recognition, which in turn led to radio airplay, which led to album sales, chart-topping singles, and sold out arenas. And while there are thousands of labels, arguably, there are only three, the so-called “Big” Three, that matter: Universal, Sony, and Warner. Their usefulness, though, arguably, has waned. According to Statista, a marketing insight and analytics company, millennials in North America are streaming nearly two hours of music a day. Most of these streams, by the numbers, come from platforms like Spotify and Apple Music, both of which have built in means of marketing and distribution. 55 percent of the 2018 Grammy Award nominees were independent artists.

In 2018, it’s fair to question whether we even need major labels anymore.

Wooing up-and-coming artists early on, allowing them to make music on their own terms (and retain ownership of it), all while giving them the right to move on at any time (even to exclusive deals elsewhere) is a power move. Spotify has something the labels don’t, and that’s the ability to drive huge profits while offering artist-friendly terms.

Both Spotify and labels operate under the premise that there will be winners and losers in the music world. While most artists fail to ever really move the needle, a handful of successes fuels the entire operation, filling the coffers so that it can keep taking chances on new artists. And these new artists fail more often than not. But Spotify can scale this approach. It’s not developing artists; it’s distributing a finished product.

Currently, the relationship is a symbiotic one, despite what some would lead you to believe. But the problem with symbiosis is that it requires careful management. Subtle moves to one side or the other can quickly swing the balance of power. And Spotify, if it doesn’t tread lightly, could find this out firsthand.

Amy Young, a media analyst at Macquarie, told The Times:

They are treading carefully. They do not want the Big Three to shut them out from their library of content for the sake of signing deals with up-and-coming artists at a higher margin. That’s not an economic trade-off that you want to do.

While things could differ in the near future, Spotify, for now, still relies on the Big Three to bring eyes to its platform. It’s the Kanye West’s, Taylor Swift’s, and Beyoncé’s of the world, after all, that move the needle. These, and others, are the acts that bring attention to Spotify, if only to bring attention to the artist through Spotify. It’s a convoluted mess, much like the music industry itself. But the future could swing the balance of power, especially if Spotify’s gamble in new artists pays off.

If labels begin to think they’re losing more control, expect them to pull their catalogs, leaving Spotify looking something like SoundCloud, a place for independent and unsigned artists to share their latest creations. In turn, Spotify would have to lean heavily on developing and distributing new talent, making the streaming service that doesn’t want to be a record label exactly that.