Do you remember the debut of Napster? Say goodbye to cds and tape cassettes (for those that still had that feature installed in their cars). With the invention of Napster, music was made available for free simply by streaming the music to shared folders on the computer. The age of digital music was born overnight. Napster exploded rapidly across the United States and around the world. The younger computer advance generation could not stream fast enough their favorite artist’s music to their personal music libraries. Napster was great. Who won’t like obtaining music for free?
Well, the musicians, their agents and recording companies did not like it one bit. How would you like working for free? Essentially Napster stole all their profits by generously making their music available to everyone without charging them a dime. Naturally, the music industry fought back. Napster was clearly violating copyright infringement laws protected under the Digital Millennium Copyright Act. Napster eventually lost the case and was forced to shut down in 2001 after not being able to comply with the Ninth Circuit Court of Appeals ruling to block access of 100% of infringing material when notified of that material’s location on Napster’s shared files.
Napster may have shut down, but the age of digital music streaming did not. In the past few years other digital music streaming companies have emerged. Pandora and Spotify are both popular music streaming services. Each of these companies still offers free music to their members. Have you ever wondered how these companies are able to offer you music for free like Napster did without running into the same legal trouble as Napster?
The difference between their companies and Napster is that these companies pay the artists per song stream. In order for the artist’s music to be made available to members, they need to first negotiate licensing agreements with the artist. The licensing agreements are based on monthly revenue, how many streams per month, how well known of an artist, and what country the stream is coming from. All these variables come into play when determining licensing terms.
How then do these companies make money? The model for generating money for these companies is the same. The companies let advertisers promote radio commercials onto their service in exchange for payment. Members who opt to receive the free basic membership are subjected to commercials periodically after several songs are played. If members wish to pay for an upgraded membership that allows them to listen to music without interruption of commercials, then these members pay an annual membership fee. This also helps contribute to the company’s overall revenue.
The digital music streaming business is constantly changing. As the technology advances and new applications are incorporated, the licensing agreements will need to evolve as well.