Free streaming contributes a pittance to the overall music industry. Â So why not just kill it?
Right now, the music industry is losing its war against YouTube. Â But maybe thatâ€™s because they havenâ€™t yet deployed the nuclear option.
That is, turning the lights off entirely on free music streaming.
According to separate sources at major music content groups, a free streaming shutdown is now on the roadmap. Â More specifically, the plan would involve a concerted effort by the â€˜big threeâ€™ major labels to terminate free access on both YouTube and Spotify.
The terminations would occur after an agreed-upon threshold of paying streaming subscribers is reached. Â In just 2-3 years, that threshold could materialize.
In order to enforce the transition mandate, the labels will threaten pullback on critical music licenses. Â That is proving a highly-effective tactic, and one used successfully against Spotify several months ago to implement â€˜windowingâ€™ for high-profile releases.
Accordingly, terminating free isnâ€™t a new thought â€” just as windowing was simmering for years. Â In fact, a second source said â€˜shutting it downâ€™ has been actively under discussion for years. Â But tricky politics between artists, YouTube, Spotify, and internal debate made that impossible.
On top of all of that, a faction within the industry has strongly felt that free streaming has marginalized piracy, and that this â€˜starvation processâ€™ should continue.
But not indefinitely.
Fast-forward to 2017, and piracy is waning. Â One industry source says itâ€™s become â€˜like speedingâ€™ for many rights owners. Â â€œItâ€™s always going to be there,â€ the source relayed, while noting itâ€™s â€œno longer the focusâ€ for many major label execs.
All of which is shifting the momentum towards streaming stage two, which involves a â€˜hard transitionâ€™ away from free tiers. Â And the logic behind the move is this: more and more people are paying for premium streaming accounts. Â At a certain point, those subscribers will be contributing enough money to keep the industry healthy.
So why not shut down the â€˜bad customersâ€™ and make them pay?
Actually, this plan isnâ€™t such a secret. Â Back in February of 2016, Sony Entertainment CEO Michael Lynton etched out the broader agenda. Â â€œI think [free access] stops probably when you get over a â€” I donâ€™t want to say the number, butâ€¦ many, many-fold bigger than what we have in the current paying subscription world,â€ LyntonÂ told Re/Code.
That was back when Spotify had 25 million paying subscribers. Â And for the record, Lynton also pointed to premium windowing as well. Â Several months ago, major labels started inking deals with Spotify that called for â€˜gated accessâ€™ to content from popular artists like Taylor Swift. Â Just like clockwork.
â€œTheyâ€™re going to window,â€ Lynton relayed. Â â€œSo youâ€™re going to first hear the music in a subscription service, and then later in a free service, rather than the other way around.â€
Bye-bye â€˜freemium funnelâ€™
And what about the â€˜freemium funnelâ€™? Â Historically, Spotify CEO Daniel Ek has reportedly been adamant about protecting the existence of freemium. Â Basically, the â€˜funnelâ€™ theory states that paid subscribers typically start as free users. Â According to Spotify, itâ€™s a critical stair-step towards getting people to pay. Â And thereâ€™s plenty of data to suggest that this is true.
Then again, Ek was also strongly opposed to windowing (at least according to our sources). Â Ultimately, he was forced to concede against heavy label pressure.
And major labels seem to be deciding whenÂ â€” not ifÂ â€” they should pull this trigger.
So whatâ€™s the magic number? Â At present, the industry counts more than 100 million paying subscribers worldwide. Â But what if Spotify itself had 100 million? Â Thatâ€™s just one â€˜sweet spotâ€™ that was tossed around.
Currently, Spotify has 50 million paying subscribers, a number that could theoretically double by 2019. Â At that stage, a massive percentage of music fans are paying. Â And it would offer ample justification to â€˜build the wallâ€™ a-la Apple Music.
The YouTube problem.
Actually, â€˜shutting down YouTube Musicâ€™ is easier than we thought. Â On Google Search, links to torrent hubs and MP3 download sites are difficult to scrub, simply because of DMCA abuse. Â Google removes a link, and it returns the next day. Â Itâ€™s a longtime loophole that Google protects with its life.
But on YouTube, a sophisticated ContentID infrastructure can both identify and remove content on the spot. Â And according to the tech CEOs weâ€™ve spoken with, part of the secret is simply knowing how to properly use ContentID (hint: the majors havenâ€™t really learned that part yet).
All of which opens the distinct possibility that YouTube will soon be forced to transition towards paid. Â Or, pay a lot more for the content theyâ€™re using.
But wonâ€™t shutting down free simply revive piracy?
According to our sources, thatâ€™s a serious consideration. Â But itâ€™s a counterargument getting overruled, especially since the industry will have more money to shut down pirates. Â Still, it remains uncertain whether a â€˜hard stickâ€™ enforcement regime can actually work. Â Just recently, a study concluded thatÂ major label anti-piracy efforts have had little effect on broader piracy levels. Â Instead, the â€˜fixâ€™ came from ad-supported streaming.
Enter the Nordic countries, which continue to offer an alternative glimpse at this future. Â According to a study just released,Â nearly half of the populations of both Sweden and Norway are paying for streaming music. Â Even more astounding is that more than 60% of them are using YouTubeÂ â€” concurrently.
All of which suggests that a free tier can coexist with profitable, robust paid subscription levels. Â Maybe thereâ€™s room between the extremes?