Is Apple at antitrust risk from music streaming?

Just a decade or so since the music industry was disrupted by the digital world, it is well into another business model disruption over streaming. And like that previous disruption, it seems that artists are wondering where all the money is going. This was the topic of David Byrne’s New York Times opinion piece this weekend.

Everyone should be celebrating — but many of us who create, perform and record music are not. Tales of popular artists (as popular as Pharrell Williams) who received paltry royalty checks for songs that streamed thousands or even millions of times (like “Happy”) on Pandora or Spotify are common. Obviously, the situation for less-well-known artists is much more dire. For them, making a living in this new musical landscape seems impossible. I myself am doing O.K., but my concern is for the artists coming up: How will they make a life in music?

Byrne’s argument is quite nuanced but can be summarised quite simply: no one knows what the f**k is going on. Well, not no one. The streamers and the music labels do but there is a web of non-disclosure agreements that are preventing price transparency. And why is that an issue?

Musicians are entrepreneurs. We are essentially partners with the labels, and should be treated that way. Artists and labels have many common interests — both are appalled, for instance, by the oddly meager payments from YouTube (more people globally listen to music free on YouTube than anywhere else). With shared data on how, where, why and when our audience listens, we can all expand our reach. This would benefit YouTube, the labels and us as well. With cooperation and transparency the industry can grow to three times its current size, Willard Ahdritz, the head of Kobalt, an independent music and publishing collection service, told me.

Precisely. If we expect musicians to do their job, they need to have some understanding as to what will drive their pay.

And we have models that suggest that this can work well. Perhaps the greatest example is Apple’s App Store. It had a simple rule, Apple received a 30% cut of any revenue earned while it footed the bill for the cost of app distribution including for stuff that is free and where developers and others can earn all of their revenue elsewhere (from advertising or subscriptions initiated off the Apple platform). This model was so good that Google and everyone else have essentially the same model. And while some complain about Apple’s review rules, its rating system and also what gets promoted, it is all pretty transparent as these things go. Apple put in much the same system for its eBook store and the industry migrated there — although in that situation the path to that point was muddy, to say the least.

Apple hasn’t adopted a similar transparent system for music. This is because it had to negotiate with music labels and, as the recent ‘negotiation’ with Taylor Swift shows, they have some power. The music labels — like book publishers — aren’t that interested in an open, transparent platform. Why? Because they are not interested in people seeing the links between actions and pay. Part of this is a natural consequence of taking a portfolio approach to the management of essentially risk assets — the music rights. But the other part, we suspect, is that their own contribution to pay ratio would not look that pretty. Music labels are essentially credit institutions and so we should not expect we are going to understand the risk-adjusted compensation any more than we can understand it for investment bankers. Suffice it to say, both want to keep it out of prying eyes.

The result is confusion. As Byrne says, it should be a celebration. So why have music streaming revenues not been better for artists? While labels are one explanation, another issue relies in a fundamental misunderstanding many had to the industry prior to streaming where people owned their own music. Streaming is represented as bundling: you pay a monthly fee and you can choose anything from the menu. That means that if you are to choose a streaming service, you will consider what’s on the menu. Not surprisingly, if some artists withhold their dishes from some platforms, that alters who you might choose.

Previously, you didn’t do that. You went a’la carte. If you wanted to listen to a song or album you bought it. That is called unbundling but, in fact, it never was. To an economist, the music you own is an asset (or technically a license) which gives you a set of consumption goods that are time contingent. Thus, when you buy a Taylor Swift song you are not buying a song but the listens of that song on Monday, Wednesday and Friday followed by 50 times on Sunday after you wake from bad breakup on Saturday night. In other words, purchased music is itself a bundle of time contingent goods. And what is more, up until recently, the bundle was the only thing available.

The big unbundle brought by streaming is that you don’t have to own music to play music. That means that Swift isn’t selling a one price fits all model to all her listeners whether they have had a break up or not but instead, she earns more from those with break ups than those without who ‘over bought’ her music because of the bundle. In theory, that should make for a better assignment of value to consumers and more value around for everyone. The fact that that has not happened has been taxing all in the industry.

Which brings me to antitrust. Alexa Klebanow and Tim Wu have a new paper that outlines essentially an antitrust case against Apple (and perhaps music labels) for how they are trying to deal with the disruption going on. They argue, rightly, that exclusives for individual artists for short periods of time are unlikely to be antitrust violations. By contrast, they are worried about moves against advertising supported free streaming models. They are worried that Apple has been seemingly promoting paid streaming models and been supportive of the concerns of artists — notably Taylor Swift — against freemium services. Apple, in fact, tried its own version of this with Apple Radio but it didn’t take off. Instead, services such as Spotify appear to be winning the day.

But Klebanow and Wu are worried. They believe that Apple’s moves here are being done to eliminate competitors. Their concern seems founded in this assertion.

Music is strategically important to Apple because it helps keep users locked-in to Apple’s highly profitable iPhone, iPad and computer products. Consider the fact that it can be harder or inconvenient for a user to switch, for example, to an Android phone made by Samsung when their music was already purchased from Apple and remains most easily accessible from an Apple device. In contrast, a Spotify user can switch between different operating systems and still access the same music. Because music allows Apple to attract and retain customers throughout the hardware upgrade cycle, Apple is extremely eager to meet the competition from the streamers.

In other words, for consumers who have bought into the Apple eco-system for music, Apple want to lock them in so they don’t switch to Android.

Apple could attempt to weaken competitors by pressuring labels to ban their “free” options. Products like Spotify’s “freemium” (ad-supported) tier pose a real challenge to Apple as it launches its own streaming service. As a result, Apple has reportedly placed pressure on the music labels to refuse to sell content to streaming companies who then make the music available on an ad-revenue basis. That is, Apple could attempt to force its competitors to abandon an entire business model (ad-share revenue) in order to maintain the dominance of downloads and aid its own version of streaming. Given that Apple remains the dominant seller of music, the successful elimination of a business model relied on by competitors would have clear consequences for competition in the industry.

But how does this make any sense? Let’s suppose that Apple is successful and there are no more freemium music services. Then what? Then every streaming music service is paid and so if a consumer wants to switch from iPhone to Android, it has to continue paying for streaming. But compare that with now. If a consumer prefers a freemium model, then it can get that on iPhone or Android. To be sure, the model for music has changed but how this impacts on the choice between iOS and Android has not. Consumers are unconstrained.

In order for their to be an issue, it has to be the case that this change in business model — should it occur — has to asymmetrically favour users on iOS over Android AND has to do it more than is occurring at the moment. Here is what they say:

The banning of a freemium or ad-revenue model, in its most serious form, looks like the following. Apple individually pressures each label, using carrots and sticks, to refuse to deal with any streaming service that relies on an ad-based revenue model. The carrots and sticks available include better or worse treatment on iTunes or Apple Music, payment terms, or others. As such, if Apple’s strategy is successful, the labels may all end up jointly refusing to deal with the streamers in their advertising-based mode, thereby eliminating a form of lower-priced competition to Apple Music and iTunes

This is the evil plan apparently. But here is the thing, it appears to have nothing to do with the basis for Apple’s market power — its high iOS market share. It seems to be something to do with Apple’s presence in music that has been eroding over time. And, if it is to do with that, why, for goodness sake, is Apple Music going to be available on Android?

The Klebanow-Wu piece is tortured in its targeting of Apple when it is surely clear that moves away from advertising based streaming have everything to do with the entire music industry far more than Apple itself. To be sure, Apple have an interest in that industry making money but far less of an interest than the industry itself. The proper way to view the “pressures to change business model” is to focus on the role of the music labels. And as Byrne points out, that whole are is a big mess.

Personally I worry about business models being pressured out of the market. I suspect there are many artists for which an advertising supported model will work better for them and I don’t want to see that go. However, I also know that with enough imagination and some good economic approaches to transparent pricing, it is possible for both models to co-exist, perhaps on the same platform. Right at the moment, however, my guess is that the old dogs in the industry — the labels — aren’t quite up to the task and trying to get the government to target Apple isn’t the way to clean the industry up.