Wednesday, 4 September 2013

Ministry of Sound sues Spotify over user-curated playlists

Ministry of Sound 2041
Source: Atatiwa, CC
If you have an interest in the music industry and its business models in the networked era, there's a couple of articles worth reading over at today that concern music streaming service Spotify. Spotify has been on the receiving end of negative criticism in recent months for the amount of money that artists receive from their labels for playback, as well as flak regarding the longterm viability and profitability of music streaming services. Some of the criticism may be fair but there are a few voices who think Spotify might actually be beneficial to the industry. Nevertheless, let's take a look at the Ministry of Sound case.

The first of which is by Stuart Dredge who reports that the some time night club and record label, Ministry of Sound, is seeking damages against Spotify for allowing its users to create their own playlists which ape the ordering of tracks that appear on their releases, and which may also include the name 'Ministry of Sound' in the title. This last point is significant as Spotify users can now search the service for such a term and easily locate these user-compiled playlists. The label's argument appears to be that these playlists are an infringement on their intellectual property.

It's worth noting that Ministry of Sound does not licence its releases to Spotify as the streaming service's business model seeks to remunerate the copyright owners of musical recordings, whereas compilations compiled and curated by Ministry of Sound would not benefit the label in question as many of the featured tracks are owned by other labels (which Ministry of Sound has had to pay a sum in order to licence for their
Ministry of Sound launched proceedings in the UK High Court on Monday, and is seeking an injunction requiring Spotify to remove these playlists and to permanently block other playlists that copy its compilations. The company is also seeking damages and costs.
Chief executive Lohan Presencer claims that his company has been asking Spotify to remove the playlists – some of which include "Ministry of Sound" in their titles – since 2012
So let's be clear here: 
  1. Spotify has agreements in place with the relevant owners of tracks that have also been used by the Ministry of Sound in a series of compilation albums. 
  2. Ministry of Sound and Spotify have no licensing agreements
  3. Users of Spotify have sourced licensed tracks and complied them in playlists using 'Ministry of Sound' as an identifiable search term
  4. These user playlists may feature tracks in the same order as the Ministry of Sound releases
  5. There's no guarantee that the tracks in these playlists are the exact same tracks (ie same track length, same remix, etc) that feature on the compilations.
The second article worth looking at is a blog post written by Lohan Presencer, written to accompany the announcement to sue Spotify. The article itself is riddled with errors or disingenuous claims:
iTunes is now the largest music retailer in the world with 575 million customers and annual sales of $23bn. It is the main source of income for every record company on earth. Not only that, Apple built its hardware business on an iTunes foundation – iPods, iPads, iPhones. Not a penny of the sales of which were shared with record companies. 
Forgive me for being pedantic here but this claim needs qualifying. Apple did not build its hardware business on an iTunes foundation - at least not exclusively. iTunes did precede the iPod by about 8 months (released in the US in 2001), however in its original inception it was a tool for moving files from one device to another. The iTunes Store was not created for some time after that, coming to the US in April 2003 and to the UK in June 2004. Granted, sales in the iPod began to grow rapidly after 2004 with the 4th generation of devices capable of storing up to 40GB of music - enough to carry most people's music collections. 

It was hardware iteration that was key to the success here. It seems bizarre that Presencer should claim otherwise whilst also going on to note that this hardware success was not shared with record companies. Should Denon or Technics share their hardware revenue with record companies because they facilitate the consumer in being able to play their CDs or vinyls? Similarly, the success of the iPhone and the iPad have very little to do with music and more to do with devices' multiple functionality (internet access, telecoms, applications, photography, etc).

Presencer goes on to critique Spotify for failing to make a profit despite being heralded as the 'ultimate counter attack to piracy'. Perhaps the company can be forgiven for struggling to make a profit 5 years after launch given the costs of launching a new business in 24 countries, with all the various regional licencing and legal costs associated with such a venture. Spotify claims to pay out 70% of all its revenue to rights holders. Given how notoriously difficult it has been for newcomers to enter the hermeneutically sealed world of the music industry, it's no surprise that profitability is an issue. Only time will tell as to whether or not the 24 million active customers can be converted to paying customers.

Presencer then goes on to critique Spotify for its PR strategy:
Spotify is addicted to PR, its oxygen of growth. Favourable comparisons to Apple and positive reports of industry data showing exponential growth of streaming revenue are its lifeline. Yet what the believers fail to tell you is that published streaming figures include advertising revenue from YouTube, the great hidden free music streaming service.
What is the purpose of this comparison to YouTube? Are they also to be criticised for under paying artists for streams? There's very little stopping users of YouTube from creating Ministry of Sound playlists on YouTube and inserting the brand 'Minsitry of Sound' into the title, for example:

Perhaps Presencer is unaware that this can and does already happen? I'm sure he can't be that naive. The difference with the YouTube model here is that many of the songs that appear in these playlists are ripped from radio shows or uploaded via users rather than having been officially licensed (as Spotify does). Is YouTube the enemy of piracy here?

The final point worth examining relates to how much Spotify contributes to the musical economy of the UK:
According to BPI annual figures, UK record company revenues in 2011 were £795m. Total paying UK Spotify customers at that point could be reasonably estimated to be no more than 250,000. At £10 a month that's total net income of £25m. About 55% of this is paid through to record companies, £13.75m - less than 2% of total industry income
Ignoring the envelope math here (is it 55% or 70% paid to labels) and the outdated figures (Spotify had only been in the UK for 2 years at this point so was a niche player), Presencer seems to have an issue with a young company generating 2% of the total UK music industry's revenue! This beggars belief. Would he be happier if this was revenue lost to piracy? Given that attitude and behaviour change tends to develop quite slowly, Spotify and services like it should be held in slightly higher regard for their attempts to provide a better (for the industry if not the artists) alternative to piracy against a background wherein it is very easy to access music without paying for it.

A solution?

Presencer's gripe seems to be more to do with the fact that compilation curators like Ministry of Sound do not benefit from streaming services because they don't fit the business model that seeks to reward the owners of the music. The simple solution is sue and hope for success so that a service like user generated playlists in Spotify has to removed, thus making the product inferior. Or at least, nuke the ability to search for use playlists. If this does happen, then it might damage the usefulness of Spotify and subsequently, its ability to generate revenue for an ailing industry. I hope this doesn't happen as creating and sharing playlists is part of what makes Spotify a service I'm willing to pay for.

A more complex solution would be to ensure that the Ministry of Sound has to be remunerated and they could do this by ensuring that their compilations featuring tracks that they own the rights to thus making it impossible for Spotify playlists to ever be exactly like the official release (not that this is guaranteed anyway - see #5 above). Ministry of Sound used to produce tracks - I know because I bought them in the 1990s when the brand was building on its 'super club' status. It's often said of the tech industry that companies become more conservative as they age, become less willing to take risks and are more likely to sue than to innovate. Companies in this industry need to be agile and innovative if they want to stay ahead. Maybe Ministry of Sound can go back to innovating.