‘We’re So F-cked!’ Inside Industry’s Long, Slow Embrace of Streaming Music – RollingStone.com

In 2009, Rolling Stone contributing writer Steve Knopper published Appetite for Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age, a book that tracked the rise of digital formats in the record business â€“ starting with the development of the CD in the 1980s â€“ and laid out the myriad ways in which the major record labels contributed to their own struggles during the 2000s. 

Knopper found that the innovation-averse major labels repeatedly took the wrong approach to digital formats. Instead of seeing a potential ally in Napster, a digital distribution platform with a millions-strong user base, the labels shut it down. “That was the last chance for the record industry as we know it to stave off certain ruin,” Knopper wrote. Adding insult to injury, Apple then took advantage of the music industry’s intransigence, developing the iTunes store and the iPod and becoming America’s primary source of music sales.

Appetite for Self-Destruction came out just as the streaming services were starting to pick up steam – Spotify was beginning to gain traction in Europe – but long before the current streaming-happy age with Spotify, Apple Music, Tidal and more competing for subscribers. In a reissue of his book, out this week, Knopper adds a new chapter focused on the streaming revolution.

In this exclusive excerpt from the new edition, Knopper details how music business executives realized that they needed to embrace music streaming. As a result, the major labels cut a deal with Spotify, enabling the streaming service to launch in Europe in 2008.

Rob Wells was the perfect person for Spotify’s Daniel Ek to meet in the record business in 2006. Within Universal Music, Wells had a reputation for recklessness. Years earlier, as a young U.K. digital-music executive for BMG, the major label known for hits by Britney Spears and Christina Aguilera, he attended a management meeting every Friday morning at the stately Bedford House in central London. One day, after listening to the usual talks about market share and new-release strategies, Wells stood up to make a presentation of his own. 

“I was sort of light relief at the end,” he recalls. The subject he chose was Napster, at that point five months old and not yet the disruption machine that would make the cover of Time. He projected its search box onto a screen and asked the execs in the room to suggest a song title. Richard Griffiths, later a manager who would turn One Direction and 5 Seconds of Summer into superstars, came up with one by The Surfers, a band so obscure he was sure nobody would ever find it. But sure enough, as Wells recalls, “This cascade of results went down the page.”

“All media was getting hit then, and you were a super-whiny baby if you complained about it,” says one music exec.

Wells hadn’t been sure what to expect. Praise, maybe? Or enthusiasm.

“Fucking hell!” Griffiths said.

There was a pause.

“We’re so fucked!” a lawyer said.

Wells had intended to lead his colleagues to a new way of doing things in the record business – free distribution, marketing, publicity, all the benefits that would eventually come to pass through Twitter and Facebook, iTunes and YouTube. Instead, they saw piracy, chaos and doom, perhaps even a glimmer of urgent career rethinking. “There was this zoom-out moment, when I said, ‘Oh no, this is going the wrong way,'” Wells recalls. “At that point, I knew it wouldn’t be easy doing what I knew needed to be done.”

As Wells progressed through his record-business career, rising to a bigger label, Universal, he tried to ignore the frustration he felt from what he calls the “lobbying, legislation, litigation” response to digital music, from peer-to-peer renegades like Napster to legal streaming services from Pandora to imeem. Wells’ boss, digital-friendly Universal U.K. chairman Lucian Grainge, instructed him to create what he calls a “strike force” to make groundbreaking, innovative deals that could help the record business return to strength in the depressed, post-Napster era. He set out from Universal’s London offices to make deals barely known to top executives at the Vivendi-owned major record label. 

Upon hearing about Soribada, an illegal piece of music-download software undercutting CD sales in South Korea, Wells flew to meet founder Sean Yang and re-launch it as a legal, $5-per-month subscription company – and Universal’s business soon recovered, not only in South Korea but other parts of Asia. Wells struck a deal with Nokia to create Comes with Music, which packed new mobile phones with unlimited free songs. Within Universal, colleagues mocked Wells, insisting he would give away so much music that he would actually cannibalize legal CDs and download sales. Analyzing the Nokia data, Wells discovered the opposite – music fans only had so much time, and given the availability of every song ever made, at any moment, they would eventually move onto other things. “It was immensely lucrative, not just from a financial perspective, but from a data perspective,” Wells says.

Unlike the Napster people a few years earlier, Ek and Lorentzon found strong go-betweens to put them in the right meetings with London record executives. Fred Davis was a well-connected lawyer in music and technology; his father was Clive Davis, the famous record scout and longtime label chief who had discovered pop superstars from Whitney Houston to Alicia Keys, and he’d been quietly developing his own identity as someone who could convince reluctant record executives to make content deals with promising startups like MySpace and YouTube. He also found Ken Parks, a former EMI exec who met Ek and Lorentzon and decided Spotify had a chance. Even before they met with Universal’s Wells, the first major-label rep to pick up on the product was Stefan Blom, a Stockholm EMI exec who liked the interface so much he talked it up to others at the label. 

Soon everybody was playing with it. “Just the usability of it, and its response time, was fantastic,” recalls Barney Wragg, an EMI digital exec in London who worked with Blom. Similar enthusiasm was spreading at other European labels. At Sony, Ian Henderson, head of a small digital-business development team, showed up abruptly at his colleague Ulrich Jaerkel’s desk with Spotify and used the expression “fucking mind-blowing.” The U.S. record executives would soon have misgivings about Ek’s personality, but their European counterparts were taken with him – they saw him as a deal-making Jobs, not a pirate Shawn Fanning. Jaerkel called him “a very laid-back dude, very likable and convincing that he could help the music industry grow again.”

In earlier times, record labels were exciting, vibrant places to work – A&R scouts in the 1980s and 1990s said their job titles stood for “artists and restaurants,” considering the many acts they wooed with fine wine and gourmet dinners. By 2008, labels had crashed so thoroughly that the broader U.S. recession the same year felt like a mere aftershock. At Universal Motown Republic, the first two rounds of layoffs during this period did not affect executive vice president Cameo Carlson’s small digital-music team – her staff represented the future of the business, after all. But one day she received a spreadsheet, directing her to eliminate employees from her team, even though they were mostly young and making less than $30,000 per year. “It wasn’t fun to be at a record label,” she says. “People’s houses are being foreclosed on and the banks are messed up. Those were the hard days. You’re losing your job, and it’s a weird job to begin with, so replacing that job is not easy.”

The digital-music wars had been fought, and the labels lost.

Like Wells, and other tech-friendly employees at labels, Carlson had a rebellious streak. She showed up at meetings and loudly suggested top executives forfeit 1 percent of their salary in order to stave off the job cuts. She also declared aloud that labels think about phasing out CDs, in favor of iTunes and streaming services. This was in 2008, five years after Apple had launched its download store, and she was shocked to find colleagues with “this desperate need to hang onto CD sales by any means necessary.” She kept having to listen to veteran sales and promotions managers lecturing about their songs airing in clubs and strip bars. 

The digital-music wars, Carlson knew, had been fought, and the labels lost. They’d spent precious years frittering away opportunities – to make a deal with the original Napster, to create their own digital-music service, to not sue their own customers for illegally downloading music. “It sucked,” Carlson says. “All media was getting hit then, and you were a super-whiny baby if you complained about it.”

By this point, labels had made so many mistakes in the digital age that other industries were learning from them what not to do. “The Motion Picture Association of America learned that it’s best to use the FBI to go after as many pirates as they can – and don’t sue your customers for downloading,” says Tom Pollock, a former Universal studio executive who today runs Montecito Pictures with director Ivan Reitman. Yet top record executives were beginning to understand the business had changed, permanently, from selling expensive compact discs by the album to selling cheap digital downloads by the song. Top music executives who’d perceived Napster as the devil, end of story, were coming around to a new way of thinking. At Warner Music, chairman Lyor Cohen became enlightened over several lunches with Alex Zubillaga, the company’s top digital-music executive, who convinced him that CDs may have been temporarily profitable, but the overhead expenses from crates and warehouses and forklifts and record stores were unnecessarily cumbersome in the digital age. 

“I was also defensive,” recalls Lyor Cohen, chairman of Warner Music during this period. “There’s a lot of danger, and a lot of peril, but if you actually did close your eyes and imagine an industry that was free of the CD, you could imagine something so valuable and incredibly good for the artist, great for the record companies and better than great for the consumer.” Tom Corson, general manager of Sony-owned RCA Music, put it more simply: “Over the last five years, we got religion,” he said in 2009. “We realized we have to try things.”

Ek had a brilliantly simple idea: “freemium,” in which new users get hooked on the free portion of the service and enjoy it so much they pay to get a superior version. That made things easier for record executives – given decades of radio and MTV, labels were comfortable with a model of giving away something for free to persuade people to buy something later. The idea convinced the executives to move forward, although they wanted incentives built into the contract to encourage Spotify to convert free users into paid users. And, of course, labels wanted equity – in the end, a bit less than 20 percent in combined ownership of the company, according to sources and media reports. The rates Spotify paid labels for content were undisclosed, a long-kept secret that Ek would only partially disclose, later, when he announced that Spotify paid 70 percent of its revenues to rightsholders, including labels and publishers. 

“It was a fairly complicated deal,” says Sachin Doshi, a Universal business-development director who would jump to Spotify to be vice president of content and distribution. “Spotify was rewarded for converting more and more users.” The negotiations were long and complex and, recalls a source close to Spotify at the time: “We were constantly on the fence of disaster.” But they worked.

On October 7th, 2008, Spotify launched in the U.K., Germany, France, Italy, Spain, Norway and Sweden. The service was popular right away, especially in Ek’s home country, but conversions from free to paid were slow. The press hadn’t quite come around, either, as the few articles written about Spotify in those early days lumped the service with not-exactly-household-name models like We7, Comes with Music and MySpace Music.

But nearly a year later, in September 2009, Spotify added a mobile client, giving users of the newfangled iPhone a kind of super-transistor radio to access any song ever made in seconds. “This is when Spotify saw its first real subscription growth,” Doshi says. Within months, that growth became so explosive that Pelle Lidell, a Universal publishing executive in Stockholm, would recall to the New Yorker: “We were an inch away from being buried, and Spotify single-handedly turned that around.” 

The only thing left for Spotify to do was conquer the U.S. And that was difficult.

From Appetite for Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age by Steve Knopper. Copyright Â© 2017. Reprinted by permission.

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