by : Business, Featured Articles, May 2014

A Hybrid Record Label

A Hybrid Record Label

In February of 2014, Warner Music Group and Shazam announced that they would enter into a “strategic collaboration” in which Warner would have access to Shazam’s user data and Shazam would have access to exclusive Warner content. Currently, when a user hears a song that they like, whether it is at a restaurant or on the radio, they can open up the Shazam application on their smartphone and hold the phones microphone to the speaker which will then analyze and identify the song title and artist that the user is listening to.2  Once a song is identified, the app logs data such as the time of day the song was “tagged”, the song being identified, and even where the song was tagged (if the user has location services enabled).3  This is the sort of data that Warner plans to use not only for A&R, but also for marketing and promotion purposes.

Advantages

Primarily, Warner will use this deal with Shazam to start a new Shazam based record label called “Big Data” utilizing data collected by Shazam to find new artists to sign to the label. Shazam already has charts, available to the public, created by calculating which songs are tagged the most by its users. But most of the top hits there are artists who are already fairly well known.5  For example, Katy Perry’s “Dark Horse” was number two on the Shazam charts on March 26, 2014 while that same song was also number two on Billboard’s Hot 100 chart.6  This is not the type of data that Warner will use in order to find artists for its new label.  By using the data not readily available to the public on Shazam’s top charts, Warner will be able to analyze and recognize trends in upcoming, unknown artists.  Many independent artists register their songs with Shazam directly because the exposure of having their songs being recognized can lead to higher sales.7  Because Warner will be able to see how frequently an unsigned artist’s songs are being tagged, the risk factor of signing a new artist will be lower.  Warner will no longer have to put large amounts of capital towards promoting and developing an artist from scratch.  Instead, Warner will now have data that will allow them to know beforehand what type of popularity and sales to expect from an artist.

The other largely beneficial exploitation of this data comes from Warner being able to have detailed information about its current artists and songs.  First, the data will allow Warner to conduct control experiments to test the potential success for songs and artists.  For example, Warner will now be able to play multiple songs by different Warner artists at one specific venue.  Then, by comparing the amount of users who tagged each individual song, Warner will be able to identify which artist and song a particular test set of potential listeners would be more likely to purchase.  Secondly, because Warner will be able to tell at what time the Warner artists and songs are tagged, Warner will be able to identify another specific trait of its target market: if any songs are tagged past midnight, for example, it is likely that a younger crowd is involved. Lastly, the most beneficial use of the data is likely that Warner will now have access to where its content is actually being tagged (so long as the user has the location services turned on).  If a label can tell that a particular artist is being tagged in a particular region, then a label can plan tours, concerts, and other events, in that particular region.  The result would be a higher attendance rate at events leading to more album and merchandise sales.

There is one possible problem with the deal: In December 2013, Shazam provided an update which includes an “always-on” feature. Currently, Shazam has 88 million users worldwide which tag songs about 500 million times per month.9 While these large amounts of users can prove immensely beneficial, when users turn the always-on feature on, the app automatically picks up any song that it hears.  At that point, users no longer have to make an effort to tag songs that they enjoy.  Therefore, there is no way for Shazam to know if the 88 million users actually liked the song that they tagged or if the always-on feature incidentally tagged the song.  As a result, Warner’s data would lose a degree of freedom. The specific terms of the deal have not been disclosed so it is hard to tell how this issue will be addressed.

Implications

The Warner/Shazam deal can also be used as a model for streaming services that are looking to start creating in-house content. Shazam has access to data that shows which un-signed artists have the potential to be successful, but so do streaming services such as Spotify and Grooveshark. Given their quest to acquire more paying subscribers, the question is whether these streaming services will use the data to sign new artists or instead use it primarily for the benefit of their existing roster. Shazam reduces the risk of signing unknowns, but it is less clear that it will precipitate higher risk-taking overall.

In February of 2013, Netflix premiered “House of Cards”, its first in-house series.10  Since then, it has been developing series for the purpose of getting more subscribers to its service (the series can only be viewed exclusively on Netflix, which requires a user subscription).  The strategy has worked well for Netflix, whose user base has grown considerably since. In particular, streaming services could use the Netflix model as a way to benefit from the data they collect. For example, Spotify could potentially sign an artist that has proven successful and pay for that artist to record an album exclusively for Spotify.  Then, the album could be exclusively put on Spotify and only be available to users who pay for the subscription service.  Therefore, the monetary benefit to Spotify would be measured by the growth of its subscription base.

It should be remembered that the amount of subscribers to streaming services has grown from 8 million in 2008 to 28 million in 2013 and there has been a 51% increase in subscription revenues just in 2013. These figures seem to indicate a watershed of change in the business and invite further reflection.

In particular, streaming services could act as traditional record label. They could find an unsigned artist and sign her to a record deal. Streaming services as ‘labels’ would then be able to license masters, manufacture and distribute physical copies of albums, and even possibly get a piece of the touring and merchandise pie.  They could track song analytics, a selling proposition that traditional labels could not match in cyberspace, and because they would keep all the profits from distribution (Apple currently takes 33 cent out of every dollar of a download), there would be the likelihood of better recording contracts all around.

The Warner/Shazam deal appears to have allowed Warner better risk control in signing new artists and has the potential of breaking the shackles of business as usual. This is because the real kicker is that it may be providing a hybrid model for other companies to follow, where the old guards of the record business meet the wiz kids that stream and together they prosper.

By Zach Rickers

Endnotes

1. Pham, Alex. “Warner Music’s Shazam Deal: What It Means For Music.” Billboard. http://www.billboard.com/biz/articles/news/digital-and-mobile/5915488/warner-musics-shazam-deal-what-it-means-for-music (accessed March 31, 2014).; Snider, Mike. “Warner Music taps Shazam for new record label.” USA Today. http://www.usatoday.com/story/tech/personal/2014/02/19/warner-music-shazam-new-record-label/5605405/ (accessed March 31, 2014).

2. Jacobs, Bryan. “How Shazam Works To Identify (Nearly) Every Song You Throw At It.” Gizmodo. http://gizmodo.com/5647458/how-shazam-works-to-identify-nearly-every-song-you-throw-at-it (accessed March 31, 2014) (accessed March 31, 2014).

3. Pham, Alex. “Warner Music’s Shazam Deal: What It Means For Music.” Billboard. http://www.billboard.com/biz/articles/news/digital-and-mobile/5915488/warner-musics-shazam-deal-what-it-means-for-music (accessed March 31, 2014).

4. Pham, Alex. “Warner Music’s Shazam Deal: What It Means For Music.” Billboard. http://www.billboard.com/biz/articles/news/digital-and-mobile/5915488/warner-musics-shazam-deal-what-it-means-for-music (accessed March 31, 2014).

5. “Shazam Top 100 Worldwide.” Shazam.com/charts. (accessed March 26, 2014).

6. “The Hot 100.” Billboard. http://www.billboard.com/charts/2014-03-29/hot-100 (accessed March 26, 2014).

7. Snider, Mike. “Warner Music taps Shazam for new record label.” USA Today. http://www.usatoday.com/story/tech/personal/2014/02/19/warner-music-shazam-new-record-label/5605405/ (accessed March 31, 2014).

8. Thayer, Katheryn. “The Always-On Auto Shazam.” Forbes. http://www.forbes.com/sites/katherynthayer/2013/12/19/the-always-on-auto-shazam/ (accessed March 31, 2014).

9. Sisario, Ben. “Warner in Deal to Sign Acts Found on Shazam.” The New York Times. http://www.nytimes.com/2014/02/19/business/media/warner-in-deal-to-sign-acts-found-on-shazam.html?_r=2 (accessed March 31, 2014).

10. IMDb.com. “House of Cards.” IMDb. http://www.imdb.com/title/tt1856010/ (accessed March 31, 2014).

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