Is it good to have market power amongst music labels?

No.

That is usually a fairly obvious answer regardless of the firms involved but, according to Felix Salmon  the answer is, instead, ‘yes.’ Here is his argument:

Small labels are a real headache for digital music services, especially when they have ulterior motives, or are controlled by capricious artists. The majors can be counted on to drive a hard bargain but ultimately to act in their own best interest; with independents, that’s not always the case. What’s more, streaming contracts with big labels generally operate on a Most Favored Nation basis: whatever the label offers to one streaming service, it has to offer to everybody else. That’s good for competition and innovation — but again, it’s not necessarily something which happens as a matter of course with independent labels. (The Beatles, for instance, mightstrike a deal with Apple, but feel no need to commit to offering the same terms to Rhapsody.)

Put this way it all seems so innocent. If you are, say, a Spotify, isn’t it great if there are only three music labels, then there are only three people you have to come to an agreement with to get all the music in the world. How orderly a world that is? You know where you stand with these ‘chaps.’

The problem is that it is not good for Spotify and, therefore, ultimately, not good for consumers. This entire discussion has to do with Taylor Swift who not only pulled her new album from Spotify but the rest of her songs as well. She has her own label and can do that.

That’s why the fight between Taylor Swift and Spotify is worrying. It’s not because one of them is right and the other one is wrong; it’s because there’s no major record label capable of stepping into the fight and forcing these kids to play nice together. The fear is that this particular fight is only going to be a harbinger of things to come: more and more artists are going to want to take things into their own hands, rather than simply going along with what some big major label has agreed on their behalf.

Again, the plea for order.

Well let me provide some orderly thoughts. Salmon’s current ideal world involves three labels each of whom needs to deal with ‘retailers’ like Spotify in order to earn a stream of rents. If they don’t come to a deal, this hurts the label (none of their music is on Spotify) and it hurts Spotify (their customers have far less choice). That state of affairs gives the labels power to strike better deals for themselves, the costs of which are ultimately built into what Spotify charges customers and advertisers.

Now consider the same world where every artist has their own label, just like Taylor Swift does and they are negotiating individually with Spotify.  If they don’t come to a deal, this hurts the label (none of their music is on Spotify) and it hurts Spotify (their customers have a little less choice). See the difference? Spotify is not hurt as much by this state of affairs and so can strike a better deal for themselves, reducing costs and benefiting its customers and advertisers. To be sure, this all looks more cumbersome but when the world looks like that Spotify will offer deals to reduce transaction costs and it will only be a sticky issue for popular artists like Swift.

Salmon fears instead that what Swift might do is strike an exclusive deal wth just one retailer (or broadcaster or streamer or what have you) and we won’t be able to get our music in one place. This happens with video but the consequences aren’t too bad there — after all, we have always had to switch channels and I think in a little while our devices will make that easy too.

But for music, Salmon argues, the consequences are greater; Swift will go one way and some other artists will go another. Then consumers who want to mix and not have all Swift all the time, will be disadvantaged. But to me, that will reduce what people are willing to pay for any of these channels and end up hurting the artists more than the exclusivity could benefit them. There is a chance it won’t happen but if these consumer switching costs are large, that chance is very small indeed.

One final thing, that remark Salmon makes about ‘most favoured nation’ clauses being for competition and innovation is completely and utterly wrong. They are terrible because they drive all these services towards a common business model and diminish experimentation. When someone who does a deal with Pandora is forced to offer the same terms to Spotify, that doesn’t give Spotify room to move. It means the first service to strike a deal can mould the entire industry going forward.