While competition for Spotify has recently intensified — mainly because the type of competitors has changed from other startups to big tech companies —the Swedish service has still managed to outgrow competition. With 50 million paying subscribers it should now be approaching 50% market share in streaming.⁴

A Struggle for Power

That tilts the balance of power into Spotify’s direction (though the starting point was totally tilted in the labels’ favor). Assuming that the revenue Spotify generates for the labels is roughly proportional to its just-below-50% market share, it would contribute a significant chunk to the labels’ streaming revenue: In Q4 2016 alone, the big three reported a combined streaming revenue of $1.1 billion in total. Streaming thereby is the most important driver for the just rediscovered growth in recorded music.⁵ This kind of money is really hard to forgo if you are a record label.

Still, the labels own the most important asset in music: the music. Therefore, it remains true that streaming services aren’t highly differentiated. They try to convince users with things like specific usability touches, better discovery functionality, or other features on the software side. Yet, what users really care about is the catalogue. Do I find all the music I wanna listen to on your service? If so: great! Otherwise: Not so much. Because the big three’s catalogue amounts to 85–90% of the music on streaming services, having access to it is mandatory for any. It’s quite literally a matter of life and death.

What we are currently witnessing, thus, is a delicate balancing act. Both sides try to leverage their assets in order to create an advantage over the other. At the same time, they are so intertwined (including, again, an 18% equity stake the labels own in Spotify) and depending on one another, that pushing the other one down the rope is no option. Still, let’s see what it would look like.

The labels theoretical push is straight-forward: Shutting down their catalogues. But in the case of streaming services? Their move would be to turn into a “label”: working with artists directly in order to own the music and its distribution — without the labels participating at all. Let’s call this doing the Netflix, as the famous video-streaming platform has done exactly that.

Creating exclusive, even fully-owned content is great. Not only can you differentiate your service that way, but it also ends your dependence on licensors and is a much better business model in the long-run. However, streaming platforms have by and large shied away from attempting this. Spotify is even famously opposed to the concept (while that philosophy is certainly the most fan-friendly, I leave it to you to decide how much of that is PR rhetoric and/or the need to nurture the relation with its most important supplier and minority shareholder).

We have seen singular incidences of artists trying the streaming-only path — e.g. Chance The Rapper or Frank Ocean — but no full-blown efforts by the platforms to own exclusive music. Note that the latter would go way further than the marketing practice of (temporarily) having exclusive streaming rights. And labels even despise that! Likely because they regard the practice as a door-opener for more radical approaches.

So it’s obvious why streaming companies don’t force the issue: the labels would likely judge it as an attempted coup d’etat. Which no service would currently risk because catalogue! The labels only need to whisper the magic word and any service — barring suicidal tendencies — will stop thinking about it. However, there might be a tipping point: Once (and if) a streaming service manages to gain such a significant number of subscribers that the revenue it contributes is existential to the labels. That would cause the labels to at least think twice about cutting ties.

The counterargument goes like this: The lack of differentiation between streamers results in low switching-costs. That means, if Streamer A no longer offers your preferred music, you just use Streamer B. Presumably that’s generally true. But platform lock-in is likely higher in music streaming than in video. First, music is more of a social activity you share with friends (thus, btw, network effects). Second, creating playlists, building your collection etc. is key to the experience — and users invest their precious time in it. They would at least be offended if any label decided to pull its catalog off their service-of-choice. Is that enough to stop a label from doing so if push comes to shove? That’s certainly up for debate.

One final variable to consider when observing the current streaming wars is best summarized by the expression pick your poison. Assume users love streaming so much that even the labels recognize it ought to exist. Also assume that streaming is a winner-takes-all (or most) market. Which player would you rather see succeed if you are in the labels’ shoes: A tech giant with a stuffed warchest or a startup you even have a stake in?