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If Spotify convinces Washington to act against “unfair” Apple Music, guess who suffers most: Artists

Spotify wants lawmakers to take a close look at possible antitrust violations from Apple -- and the outcome could be devastating for the music industry

By David Holmes , written on July 13, 2015

From The Music Desk

Here's a reliable rule of thumb: Whenever two giant entities butt heads in the music industry, artists lose.

So it is with the fight between Apple Music and Spotify, which has now reportedly spread to the halls of Congress. 

According to Politico, Spotify has "quietly" -- though apparently not quietly enough -- sent lobbyists to Washington in an effort to defend its position against Apple Music, the subscription streaming service which the mega-corporation launched last week. Sources tell the outlet that Daniel Ek's unprofitable, multi-billion dollar music startup hopes to arouse suspicions that Apple is guilty of anticompetitive behavior designed to squeeze out rival streaming services.

And Spotify is right: Some of Apple’s tactics do pose undoubtedly unfair – and possibly unlawful – threats to its competitors.

But Spotify’s idea of a “fair playing field” in streaming music -- an idea the company's well-greased lobbyists aim to lodge into lawmakers' ears like some insidously catchy pop song -- isn't fair to anybody. Except Spotify.

There are two big issues Spotify is said to be raising with regulators and lawmakers: The more serious of the two complaints is that Apple -- with its $700 billion market cap and a stockpile of cash exceeding that of any other US company -- had sought to strike deals with labels that smaller competitors simply couldn’t match. The negotiations between Apple and the labels, though conducted in secret, were the subject of numerous rumors – like that Apple had attempted to undercut competitors by charging $5 or $7 a month instead of the industry-standard $10 a month; and that Apple, which offers no permanent free version of the new service, had asked labels to remove their catalogs from Spotify if it didn't kill its free ad-supported option, to which 55 of its 75 million users subscribe.

Think about that: In one swipe, Apple could have eliminated nearly three-fourths of its biggest competitors’ user base.

The second issue is that when Spotify users pay for its premium service through the App Store, Apple – like it does with all App Store purchases -- takes a 30 percent cut. Streaming services have long tolerated this practice, either biting the bullet on lost revenue or charging an extra fee to users who pay for the service through the App Store instead of through the service’s website. Now that Apple itself has made a grand entrance into the streaming music fray, Spotify claims that the 30 percent cut constitutes an unfair advantage for Apple. Moreover, Apple forbids services sold through the App Store from including links or messages inside the app itself explaining how to circumvent the App Store and pay directly through the company website.

According to Reuters, the Federal Trade Commission has launched something short of a “formal investigation” into the App Store complaints. But while the unofficial FTC probe continues to dominate the micro-news cycle surrounding this story, I doubt much will come of it.

These App Store restrictions have existed for years and apply to every app sold on the platform, not just streaming services. Spotify and others have been more-than-willing to play by Apple’s rules up to this point for the privilege of being included on the most lucrative mobile app platform in the world. And although Spotify is barred from informing users within its app that they can pay through Spotify.com, the company can inform users of this option through other means, like email – which is exactly what Spotify did late last week.

Most importantly, even if Spotify convinces the FTC to open an official inquiry, and even if these complaints later reach a judge, plaintiffs may find it difficult to prove that antitrust violations took place.

When Apple was brought to court over fixing ebook prices, for example, the plaintiffs were required to show that Apple exhibited what the courts referred to in a 1984 antitrust case against Monsanto as “a unity of purpose or a common design and understanding, or a meeting of minds in an unlawful arrangement.” But because the 30 percent cut had been in place long before Apple entered the streaming music space, it’s doubtful that evidence exists of a focused and premeditated conspiracy to leverage the App Store’s requirements to bleed Spotify and Deezer dry, regardless of whether or not those requirements themselves are “fair.”

But while the App Store issue likely won't constitute an antitrust violation, the charges pertaining to Apple’s deals with record labels might. In fact, Spotify’s complaints surrounding these deals bear a striking similarity to the antitrust case leveled against Apple over ebook price-fixing – one in which the court ruled against the Cupertino tech giant. And if history repeats itself, and Spotify and others convince a judge that Apple displayed unlawful competitive behavior in its dealings with labels, creators may once again suffer most, just like they did in the wake of the ebooks settlement.

In April 2012, the United States filed an antitrust suit against Apple alleging that, ahead of a big iBookstore relaunch, six of the biggest book publishers in the country conspired with Apple to price ebooks higher than the standard $9.99 charged by Amazon, a company which at that point held a monopolistic 90 percent of the ebooks market. Instead of setting prices unilaterally, Apple granted publishers the right to price books however they saw fit, as long as they didn’t sell the same titles for lower prices on rival platforms like Amazon.

So rather than face losing titles that publishers wished to sell for over $9.99 on iBooks, Amazon abandoned its unilateral pricing model in favor of one like Apple’s, which gave publishers more control and in turn resulted in an 18.6 percent price increase across all books sold by the defendants. And taken with the body of conspiratorial evidence against the publishers and Apple, that real and measurable price hike was enough for Judge Denise Cote to find the defendants guilty of price-fixing. Never mind that the ruling helped protect Amazon’s near-monopoly on the ebooks market. When it came down to enabling a monopolist like Amazon versus sanctioning a price-fixing scheme, the court decided that enabling a monopolist was the lesser of two antitrust evils

But while this was good news for consumers who like cheap ebooks, the consequences for creators were not so pleasant.

In the wake of the ruling, Amazon has become all the more aggressive in its dealmaking with publishers, often at the expense of authors. Last year, Amazon went to war against Hachette Book Group, one of the publishers found guilty of price-fixing alongside Apple, after the pair failed to agree on distribution terms. Throughout the dispute, Amazon pulled tactics like removing preorder buttons from Hachette titles and ceasing to recommend Hachette authors to consumers. The two finally reached an agreement in November 2014, but not before Amazon proved that it wasn’t above exploiting authors as pawns in its behind-closed-doors dealmaking. According to a Fortune article by Roger Parloff, Amazon’s bullyish bargaining tactics were “only fortified” by the Apple ruling. 

Which brings us to Spotify’s grievances with Apple.

Spotify’s share of the streaming market is nowhere near the monopoly Amazon had on ebooks prior to the iBookstore relaunch, but the Swedish startup still has far-and-away more users than any other on-demand subscription music service. Spotify’s dominance thus far is no accident: It built an enormous user base by offering a free ad-supported version of its service, not unlike Amazon’s willingness to undercut competitors with comparatively cheap bookprices – prices with which publishers and authors had grown increasingly unsatisfied.

Meanwhile, labels are perhaps even more unsatisfied with Spotify’s free streaming option -- as they should be.

According to the International Federation of the Phonographic Industry (IFPI), the annual revenue created in 2014 by the estimated 400 million people who listen to music for free on ad-supported services offered by Spotify, YouTube, and others was $610 million. That sounds like a lot until you realize that the mere 41 million people who pay to use services like Spotify’s premium tier was almost three times that, coming in at $1.6 billion. As I wrote when Apple Music was finally unveiled, “That means each paying customer created 26 times more revenue a year than each free customer.” 

Spotify knows this.

That's why it pays labels – and, by extension, artists and songwriters -- upwards of ten times more per stream when the listener is a paying customer. If Spotify eliminated free ad-supported streaming tomorrow, labels and artists might suffer a small, short-lived dip in revenue, as listeners who refuse to pay even a dime for music abandon the service. But without free options on the table, consumers would sign up for paid services at a faster rate than they do today, leading to fatter royalty checks.

That’s why Apple – which, again, offers no permanent free version – reportedly thought it could convince labels to withhold their catalogs from Spotify unless it transitioned to a pay-only model. Without question, Apple had its own interests at heart – it’s much easier to attract customers to a paid service in the absence of free options. But in the interest of keeping artists’ careers afloat and the broader streaming industry sustainable, I had not-so-secretly hoped that Apple would be successful in pulling this gambit off, dirty or not.

The trouble is, the tactic might be more than a little underhanded – it might be illegal. That’s the argument Spotify, with this lobbying push, is hoping to incept into the brains of regulators and Congress-people. Spotify’s business may depend on it: If labels, with Apple’s blessing, are successful in pressuring Spotify to eliminate its free tier, it’s easy to imagine a scenario where Apple simply crushes Spotify with its virtually limitless resources.

Would that be bad for competition? Maybe. Though considering the immense dysfunction at the heart of the music industry – a dysfunction that threatens artists' livelihoods and thrives in large part due to Spotify’s insistence that streaming can survive even when most users pay nothing – it’s hard to argue that the playing field today is anywhere close to fair.

But there's a second, more convincing antitrust argument in Spotify’s favor: Are Apple’s tactics bad for consumers?

The answer is yes, at least in the near-term. Having unfettered – and legal -- access to millions of songs, for the low low price of tolerating the occasional advertisement, makes Spotify one of the best consumer bargains in the modern era.

But perhaps nowhere are the interests of consumers and creators less aligned than in the music industry. Artists and songwriters are rightfully livid over the laughably low royalty checks that have become the new normal in the Internet age. And while the labels deserve the lion’s share of the blame for doing the same thing they’ve done for decades – screwing musicians out of royalties – convincing users that unlimited streaming is something worth paying $9.99 a month for would increase industry revenues enormously. You know what they say about high tides, and widespread paid streaming would undoubtedly raise all ships -- for labels, streaming services, and artists.

Of course the biggest difference between Apple’s ebook antitrust case and the charges leveled by Spotify is that Apple did not succeed in convincing labels and creators to abandon free streaming. But that doesn’t mean the possibility of Apple succeeding at this in the future isn’t very real. That's why Spotify will continue to “educate” decision-makers in Washington so that if Apple and labels do pull the trigger on this scheme, antitrust enforcers will be waiting to pounce.

If that happens, regulators would have strong legal precedents and justifications to go after Apple. But while the idea of one mega company destroying a rival at the immediate expense of customers sounds like a truly awful thing, is it worse than the reality of the music industry today? An industry where revenues were literally cut in half in the years since Napster blew up everything? And one that, barring a major consumer recalibration pertaining to how much people are willing to pay for virtually every song in recorded history, shows no sign of bouncing back?

If Congress and the FTC heed Spotify’s lobbying efforts, preserving its right to give away more music legally than Napster ever did illegally, expect to hear cheers from consumer advocates and opponents to the massive tentacle power of corporations like Apple.

But just like in the wake of the Apple ebooks ruling – when, thanks to Amazon, life became that much harder for publishers and authors – the real loser if Spotify gets its way will be creators.

Like I said at the beginning of this piece, "Whenever two giant entities butt heads in the music industry, artists lose."

Though even that is a tautology. Here's a shorter version for you:

"In the music industry, artists lose."