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Misaligned incentives make the music business a zero-sum game

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by Tatiana Cirisano

“Pop Stars Aren’t Popping Like They Used To”, Billboard’s Elias Leight writes in a recent article, in which record label executives stress over the struggle to break new artists. The article (or at least, the headline) stirred up a storm on Twitter — ahem, X — last week, where many users took the opportunity to slam record labels’ misguided focus on virality. The feeling was unanimous: cue the tiny violins.

However, the reality is not so black-and-white. Record labels are far from the only ones impacted by the fragmentation of listenership. It is becoming harder for everyone to break through the noise and even harder to create what we used to think of as mainstream hits. Labels are acting in response to the incentives that streaming created — sure, incentives that labels helped shape, but likely not with the consequences they intended. 

The wider problem is that nobody’s incentives are really aligned. This has turned the music business into a zero-sum game. 

Misaligned incentives

Labels are incentivised to grow market share at any cost

Under the pro-rata streaming model, where scale is the only thing that matters, labels are incentivised to grow their market share by any means possible. The reality is that labels can see more upside by signing a viral hit to a singles deal, than spending years developing an artist who may or may not be successful. As listenership grows ever more fragmented, labels are ever more incentivised to cling to anything that does get everyone listening at once. The result, as X users widely pointed out, is that artist development is suffering.

DSPs are incentivised to promote cheaper music

DSPs want to own the listener. Their challenge is that licensing music is expensive, especially major label repertoire. Spotify famously pays back nearly 70% of every dollar it earns from music back to rightsholders. It is in DSPs’ best interest, then, that consumers listen to more, cheaper music, like so-called “royalty-free” music, mood music, and generative AI music. The more this happens, the more DSPs gain leverage — but the quality of music on these services degrades, and both labels and artists lose out.

Artists are incentivised to build outside of the system

As more artists realise they cannot earn meaningful revenue from streaming, many are de-prioritising DSPs in their strategies. Of course they are still distributing their music to streaming, but they are concentrating promotional and monetisation efforts in other areas, like live shows, merchandise, brand deals, YouTube subscribers, etc. This reduces the cultural capital of streaming, because DSPs are no longer the spaces where music fandom and culture happen — they are merely the pipes for consumption. Moreover, in pursuit of all these revenue sources, many artists simply burn out.

What’s left?

If labels lose revenue, DSPs lose cultural capital, artist development suffers, and artists burn out, what are we left with? A new generation of artists who lack the support systems and monetisation pathways to get started in the first place, let alone break big. Yes, this is massively oversimplifying things. But it is hard to see a path forward in a system where every stakeholder’s gain is another’s loss. Unless (or until) streaming economics fundamentally change, stakeholders will have to go against the market’s guiding incentives to escape this zero-sum game.

Finding a way out

Labels are measuring the success of today’s artists against that of artists who broke big before the market became so fragmented. We may have fewer globally-recognisable icons today, but we have more mid-tier stars with devoted followings. It is entirely possible for an artist like Carly Rae Jepsen to be the biggest star on earth for a certain corner of the internet, but totally unheard of in another. Just ask 100 gecs, a duo with 1.7 million monthly Spotify listeners whose fans are bonded by the fact that outsiders do not really “get it”. We need a new definition for what it means to “break” an artist — and a way to do so without breaking artists. 

In her recent Embedded piece “Going viral sucks (even more now)”, writer Kate Lindsay explained how, by relentlessly focusing on discovery, TikTok’s algorithm can push creators away from their audience. This is in addition to all the other common side effects of virality: exhaustion, toxic comments, and general unpreparedness. Of course, TikTok has opened doors for many grateful artists. But why did we decide that skyrocketing to instant, fleeting internet fame is the best way to kick-start a music career?

Maybe managers should really be doing the opposite: ensuring that early-stage artists do not have viral moments (yet), so they can focus on developing their music before opening themselves up to the entirety of the internet. This is an opportunity for a brave company or executive(s) to focus specifically on artist development, even though it would mean going against the incentives guiding today’s industry. It may be no surprise that the artists that are still “breaking”, in the traditional sense, come from the K-pop world — where labels like HYBE spend literal years training groups before they release any music, disregarding the almighty algorithm. 

Everything is coming full-circle: labels went from developing unknown artists before releasing music, to, in recent years, signing artists only after they have already “broken”. Now, the pendulum is swinging back — not all the way, but perhaps landing somewhere in the middle.

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Madam Who?
I have been educating myself on the new music business since having jumped back in as an artist 4 years ago (I literally have a degree in the old one), and it is quite discouraging. Now the product that made all the money for the record companies (recorded music), has become a loss leader. It used to be that touring was the most effective way promote the newest release and it didn't generate a lot of income, but now touring IS your income (which is why I think prices are skyrocketing). Everything that was icing on the cake for the artist has now become the cake - merch, synch. Indie artists used to be able to fund their tour (gas, food, lodging) with physical music sales because small clubs never want to or can't pay a guarantee so if you are from out of town and no one knows you, no one is going to show up. I am computer savvy and have learned my way around Logic Pro, and have become proficient, so I don't have a recording cost. But that's just the start. There is still promotion. I either have to spend time or money to get the thing heard at all. Then you have to post on social media and have 7 or so people see it and even less respond. And I'm writing music to try to help and inspire people! I was even on Good Morning America this past January. I have a London indie label releasing the first single of the EP I did with them this Sept. 29. My debut EP was well received and garnered rave reviews. I've considered becoming a non-profit and touring women's shelters with donations that can be tax write offs. I just don't see any other way to support this endeavor because my upholstery business that has been funding this up until now has me tied down. I can't think of how it would be in anyone's interest to fund me other than that since there is nothing being sold and I can't in good faith sell it as an "investment".
Michael Hague
I have focused on giving development deals to artists for YEARS and still do. I was one of the last to do so in the industry and from what I hear, still am. I am also a lecturer at a well know music school and I have ALWAYS told my students to promo first with a lead in time and THEN when things are in place go for a full release on a DSP. Not to go straight to a DSP and release the track as that is, to me, essentially just a 'promo release'. And they are listening and are actually seeing things happen.
Marcus @estmcmxci
"Listeners aren't really 'stakeholders' in the way the others are" — what if they could be? Wouldn't that change the value chain of the industry overall? If it were possible, what emerging technology could repurpose the role of listeners from consumers to stakeholders?
I think your diagnosis is partly misleading because it visually puts on equal footage all the actors: labels, dsp, artists. But this is not true if you look at the half year financials that all the actors have published. While they are all navigating the same sea, they are not in the same boat. Labels are the clear winners (at least financially) of the current business model. Why would they give some money away to reinvest in a different business model? There is a fourth actor not referenced in the study, the public. The only way to make this change is for us to go on "music" strike and stop spending money until labels reinvest on artists .
Tatiana Cirisano
Thanks Frederic, these are great points! If I re-did this diagram, I would make the chain of power clear, from labels > DSPs > artists. Yes, labels are the winners of the current business model, but I don't think it can serve them in the long-term because 1. The fragmentation of listenership means it's getting harder even for major labels to create superstars and 2. Labels are deteriorating their own value proposition, since many artists now feel that labels are not providing enough to justify sacrificing a portion of their business. By the way, I only left out listeners because I was focusing on the supply side, not the demand side — listeners aren't really "stakeholders" in the way the others are.
Great point at the end, I've been kind of bemused reading all this handwringing as a long-time K-pop fan. But the ultimate test for whether that model still works here is the western, English-speaking groups a couple of the agencies are trying now. So far response to the first debut show launched (A2K) seems pretty good although it's not an instant breakout success.