By the end of the millennium, the music industry was jamming and record-industry executives couldn’t have been happier as the industry recorded its largest year of sales on record. Unbeknownst to all, a team of teenage Internet hackers in Boston were working on a program that would soon change the foundations of the industry forever — the now infamous Napster.
Shawn Fanning and Sean Parker, the masterminds behind Napster, created a peer-to-peer online program that provided easy access to share MP3 files between users, allowing people to download music without having to pay the recognized right holders. Napster became an immediate hit and their work ultimately triggered a series of events that brought the record industry to its knees.
However, the demise of Napster began after it was sued by the music industry and culminated when Apple introduced iTunes, providing a legal online music network. However, with Napster introducing the notion that music should be widely accessible and essentially free, many people were still reluctant to purchase music off iTunes and users continued using Napster or other services that followed suit.
By the late 2000s, the music industry was in desperate need of a new revenue model and in 2006 two young entrepreneurs, based out of Stockholm, took it upon themselves to create a solution. This gave birth to Spotify. Co-founded by Daniel Ek and Martin Lorentzon, Spotify is a music streaming platform that negotiated crucial licensing agreements with record labels that provided consumers with an infinite library of music. Spotify combined the power of an advertising and a subscription revenue model that paid artists royalties every time someone listened to their music. The company offered the major record labels — Sony, Universal, and Warner — a deal they couldn’t refuse, with 70% of streaming revenues (to be distributed to their artists) plus equity in the business, in exchange for the right to stream their music.
Fast-forward 15 years, music streaming has become a juggernaut of the music industry: in 2019, streaming accounted for almost 80 per cent of all music revenues in the US. In an era where Apple, Amazon, and Google are dominating the technology world, Spotify has managed to out-compete all of them in the music streaming industry. With 345 million Monthly Active Users (“MAUs”) and commanding a market share of ~36%.
Although Spotify has been invaluable to the resurrection of the industry, it has not all been scones and cream. Spotify faces criticism from some artists and producers, claiming they are being unfairly compensated for their work as music sales decline and music streaming increases. The streaming platform pays artists approximately $0.00437 per stream and despite being the most widely used platform, its royalty payout model lags many established competitors.
From vinyls to CDs to MP3 players, the way we have listened to music has constantly changed. Both Napster and Spotify have impacted the music industry in vastly famous and infamous ways. Although Spotify, amongst other streaming services, revived the music business; it remains unclear if the payout models provide an equitable resolution for artists. As streaming services continue to play a major role in connecting millions of musicians to hundreds of millions of listeners through a few clicks, many stakeholders are watching with intrigue to see if Spotify can deliver on its aim to provide “a million creative artists the opportunity to live off their art”.
Hamish Baillieu, Venture Capital
In 2020, the live online music company, MelodyVR announced that it was acquiring the music streaming company Napster for $70 million.
In 1992, Karlheinz Brandenburg developed a means to compress musical files into a size small enough to be transferred electronically rather than by conventional means (CD’s). While this was a revolutionary technology, it did not take off quickly as few accessible music files existed on the internet.
Malcom Gladwell’s, Tipping Point, analyzes how ideas gain popularity and remain relevant in society. Gladwell outlines social phenoms similar to Napster and provides a comprehensive way to analyze Napster’s growth.
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