Hello, hello. New week, new newsletter. If you go to the Penny Fractions website, there’s now a new tab called “Selected Readings,” where I've handpicked a few themes from the newsletter and included additional readings. Let me know if you find it useful. This is also the last week of our advertising deal with Water and Music. As always, please recommend this newsletter to a friend if you enjoy it. Now, onto the topic of the music industry’s response to Russia’s war in Ukraine.
In late February, Vladimir Putin led an invasion of Ukraine, to the horror of the world. There was an international rush to condemn the war, aid the Ukrainian people, and make rapid political calculations for how best to intervene. The unexpected escalation to a full-blown war created pretty intense ripple effects across sectors one wouldn’t think to be immediately impacted by the conflict. The recorded music industry was no exception.
Universal Music Group announced on March 8th that it was “suspending all of its operations in Russia.” Sony Music Entertainment and Warner Music Group followed suit a couple of days later. WMG stated it was “suspending operations in Russia, including investments in and development of projects, promotional and marketing activities, and manufacturing of all physical products.” Kobalt and Downtown also announced a suspension of their businesses in the country. Again, to highlight the specific language, Downtown said: “This means we will not distribute any new music to Russian DSPs including Yandex, VKontakte and Zvooq, we will terminate all local music publishing royalty collection activities and we will exclude Russia from all worldwide synchronization licenses.” The step to back away from Russia wasn’t matched by all, however.
Spotify closed its Russian offices but stopped just short of shutting down the app in the country. Instead, the company demonetized its service. Music Business Worldwide reported that due to these measures, rights holders would still be paid by Russian users but Spotify itself wouldn’t be making any money, thus absorbing the financial loss. The company, on a call with Morgan Stanley, said it expects to lose 1.5 million premium subscribers, but quickly dismissed the impact on the company’s bottom line as being relatively minor. This feels notable given that no other major streaming platform made such a proclamation or hinted that they might follow suit in backing away from the region.
That tightrope walk was also seen in Believe, the large French independent label and distribution company, which remained committed to keeping its Russian offices open. The Guardian noted that ten percent of the company’s revenue comes from Russia and eastern Europe and that only a few months prior to the war, the company made a number of high-profile Russian executive promotions. Collection societies across the world also saw a similarly divided response, with some PROs like PRS Music and BMI taking a harder line stance in cutting off Russian artists, while the Confédération Internationale des Sociétés d'Auteurs et Compositeurs (CISAC), the worldwide trade group for PROs, stated it didn’t want to further sanctions that would hurt Russian musicians as they didn’t have a voice in the aggressive action of their country. Nearly all of the organizations and labels were quick to say they were donating money towards humanitarian relief or seeking to amplify Ukrainian artists, even without engaging in a full-on boycott of Russia.
One reason for the slow walking of some decisions is that in many instances it wasn’t immediately clear how these decisions would be executed. Billboard reported on how the suddenness of the decisions didn’t result in the swift removal of certain artists from Russian platforms, largely due to the system's inability to accommodate such a pivot. This sudden near-complete isolation is even provoking concerns about a return to piracy in what is still a growing segment of the global recorded music industry. That fear of piracy might help explain how record industry professionals perceived Russia, alongside India and others, as future pillars of global industry revenue.
In the book The Death & Life of the Music Industry in the Digital Age, Jim Rogers mentions that the immense potential of markets like Russia may be obscured by focusing too much on piracy. He writes: “Overall, the sheer size of the potential markets in Russia and China and the opportunities that come with them, all serve to paint a more optimistic picture than the official IFPI statistics on piracy there portray.” Western markets, with the decline of recorded music revenues, needed a potential lifeline. Rogers, and most industry commentators at the time, looked toward the BRIC countries of Brazil, Russia, India, and China to provide the next wave of digital music consumers. In the near-decade since the book’s publishing, the success of Spotify in places like Brazil, and the growth of native streaming platforms in Russia, India, and China, shows that the industry could adapt to the digital landscape, even while continuing to moan about piracy.
That’s why only two years ago, Spotify was making a bit of noise about launching in Russia with the telecommunications company MTS, which would offer six months of Spotify premium for free to its 78 million users. Last fall, Music Ally published an op-ed by a couple of Russian executives at Warner Music Group who foresaw that Russia could soon grow to be a top 10 global music market due to its fast growth on the digital side of music. The groundwork for this digital pivot isn’t new; major labels signed deals with the Russian social media site vKontakte back in the mid-2010s with understated, but fairly standard, guarantees of millions of dollars owed to the major labels for the ability to license their content. Though there wasn’t an expectation that Russia would represent a large chunk of global recorded music revenue in the near term, there was healthy optimism that it would be a leading force as streaming growth stagnated.
Predictions about Russia’s potential impact on the global music industry are certainly in flux at the moment. That being said, I wanted to summarize these last couple of months to tie the recent events back to my previous newsletter on Chinese streaming platforms. The record industry is globalized in 2022, though not through complicated supply chains that must produce music commodities (sheet music, records, CDs, etc.) and get them onto store shelves. Rather, it’s through these obscure dealings between global major labels, regional powerhouses, large tech platforms, and again more regional music platforms. So, when the three major global labels decide to suspend operations in Russia, it shakes the jobs of those at all of these companies and shifts power to those already in the market. The ongoing tragedy of war will ultimately shape many of the future decisions of these companies, but as has been the trend over the last few years, we cannot assume that the established trajectory of music is straight.
Thanks for following us over the last six weeks as we journeyed through how technology is changing every facet of the music business. There’s one important area we haven’t touched upon yet: Music-industry media. The landscape has seen an unprecedented amount of consolidation over the past few years (read: the formation of PMRC) that warrants a serious look at different kinds of business models and incentive structures for music trade publications.
Water & Music is a paid newsletter and independent research collective building the innovator’s guide to the music business. We’re on a mission to empower music-industry professionals with the knowledge, network and skills to do more collaborative and progressive work with technology. We’re working to foster a media ecosystem that incentivizes quality over quantity, and encourages more transparent, fluid knowledge-sharing in a historically opaque, exploitative and low-paying business.
Last week, I mentioned that Spain was offering a culture voucher for young people, and a reader reached out to say that Italy also offers cultural vouchers for 18-year-olds. Back in the United States, New York State approved creating a $200 million fund for artists still trying to recover from the coronavirus pandemic. Huge congrats to the Music Workers Alliance, who were able to work with local politicians to secure aid for New York-based musicians.
Now, a couple of stories around labor and politics via Spotify. Parcast, the podcast production company, signed its first contract with Spotify. Shout out to those workers. Members of the United States Congress still don’t appear too happy about the payola-like implications of Spotify’s “Discovery Mode” product. It basically allows musicians, or their labels, to promote their music on Spotify at a lower royalty rate. Economically it tilts the scales even more towards major labels since they can afford the promotional opportunity and can take a hit on payouts (the pro-rata payout system favors large rights holders).
A Note of Financialization
Earlier this week, Music Business Worldwide confirmed that Deezer, the French music streaming platform, is looking to go public via a special-purpose acquisition company merger with I2PO. Reports say the company raised an additional €135 million from previous investors (“Access Industries, Universal Music Group, Warner Music Group, Orange, Kingdom Holdings, Eurazeo and Xavier Niel, as well as a group of long-term French and international investors including Groupe Artémis, Bpifrance and Media Participations.”)
SPACs haven’t had a great time lately and I cannot help but be skeptical that Deezer will reach a billion euros of revenue by 2025, especially when it’s currently at 400 million for 2021. I don’t even dislike Deezer; in fact, I respect them for attempting user-centric streaming years ago even if it didn’t go anywhere. I’m just highly skeptical of the streaming platform business when the company doesn’t really have too many additional paths to monetization beyond hand waving towards the metaverse, livestreaming, and whatever is capturing people’s attention right now.
Cinq Music received $100 million from one of its lead investors, GoDigital, explicitly for song rights investment. On the acquisition side, the songwriter Skyler Stonestreet sold her catalog, which includes songs by Justin Bieber, to Influence Media Partners, who recently received $750 million of investment from Warner Music Group and Blackrock. Now, a bit of news outside of the catalog world. Sony and KIRKBI, the family company of Kirk Kristiansen, former CEO of the LEGO Group, invested $2 billion into Epic Games, all under the guise of the metaverse. Then, Silver Lake Partners, Bond Capital, NEA, and Tamarack Global invested $150 million into the digital avatar company Genies, which already has deals with Universal and Warner Music Group. Get hyped for those digital avatars.
6 Links 2 Read
A tweet by the band Wednesday about the struggles of breaking even on tour struck a nerve within a certain cluster of indie rock Twitter. Though the coronavirus adds additional strain, these aren’t wholly new conditions, but the response to them feels different. Certain folks spoke in a hustle/grind mindset to make enough money to cover expenses, while others were frustrated that music alone cannot sustain them. Even if the perspectives differed, it seems pretty clear the conditions aren’t sustainable if these are the starting points of the conversation.
My skepticism about the impact of piracy on the record industry is well documented. So, I can’t be shocked that there's a small panic button being pushed on Discord and Reddit, as they’ve proven over recent years to be the most fun and persistent digital music communities.
The ongoing debate about mechanical royalty rates is given a simple solution by Chris Castle. He suggests pegging songwriter increases on mechanical rates to the consumer price index. One may quibble with the selection of the CPI, but considering the increased legal back-and-forth in these rate fights, perhaps it’s time for a new settlement.
Cat Zhang looks at the world of TikTok fan edits and how music can be both at the core and periphery of this particular content. The YouTube fan edit community isn’t given a lotta space here, but reflecting on it can help contextualize what is at this point a decades-old internet art form. (Here is a good YouTube essay on Anime Music Videos that I’d recommend.)
Why Are There So Few New Hits in 2022? - Billboard (Subscription)
A solid trend report on pop’s current stagnation. A few folks cite the lack of marquee artist releases as the reason that some hits from 2021, and even 2020, are still on the charts. That makes sense, but I liked the suggestion about TikTok’s waning influence to make songs go viral. The platform is now mostly absorbed into the traditional music marketing domain, showing a shift in its ability to influence the record industry. Certainly an important element, but streaming remains the end-all and be-all for the record business.
In Defense of the Irrational - Logic Magazine
My friend Will wrote a nice essay that argues against an overly tech-centered mindset.