Dr. Dre Has a Plan to Remake the Music Industry

The hip-hop mogul wants to do for online music what he did for headphones, but to make it work, he’s going to have to persuade people to start paying for a product they’re accustomed to getting for a free.

Ian Rogers, CEO of Daisy LLC, Dr. Dre, Founder of Beats Electronics, Jimmy Iovine, Interscope Geffen A&M Chairman and Beats Electronics CEO & Co-Founder, and Luke Wood, President & COO of Beats Electronics, arrive at the Beats by Dr. Dre CES after-party at Marquee Nightclub at The Cosmopolitan of Las Vegas on January 10, 2013 in Las Vegas, Nevada.
National Journal
Laura Ryan
See more stories about...
Laura Ryan
Jan. 20, 2014, midnight

Dr. Dre just per­suaded an en­tire gen­er­a­tion to pay more than $200 for head­phones dur­ing a bru­tal re­ces­sion. Now he’s set­ting his sights on a tough­er task.

The hip-hop mogul, backed by a co­ali­tion of high-pro­file mu­sic in­dustry vet­er­ans, is at­tempt­ing to solve a prob­lem that has thus far vexed the strug­gling mu­sic in­dustry: cre­at­ing a stream­ing mu­sic ser­vice that makes big money while still put­ting cash back in artists’ pock­ets.

Dre’s “Beats Mu­sic” stream­ing ser­vice — a name that builds off his suc­cess­ful “Beats by Dre” head­phones — launches Tues­day.

The stakes are high: Stream­ing has long been “the fu­ture” of the mu­sic in­dustry, as re­cord sales sag in fa­vor of on­line down­loads. Fur­ther adding to the in­dustry’s woes: Di­git­al mu­sic sales are down for the first time since iTunes launched in 2001 as cus­tom­ers turn to stream­ing ser­vices in­stead.

But while stream­ing has long been seen as the fu­ture of the mu­sic in­dustry, it has thus far been more po­ten­tial than profit. Stream­ing grew 32 per­cent in 2013, ac­cord­ing to the Nielsen Sound­scan, but the busi­ness’s big names — namely Pan­dora and Spo­ti­fy — re­por­ted an­nu­al losses. And it’s no pic­nic for artists either, who com­plain about the tiny re­turns they see when stream­ing cus­tom­ers listen to their songs.

Dre, nee An­dre Young, thinks he can turn the corner.

At first glance, Beats sounds pretty sim­il­ar to Spo­ti­fy. For $10 per month, Beats’ sub­scribers will be able to ac­cess a cata­log of 20 mil­lion-plus songs, a se­lec­tion ap­prox­im­ately the same size as Spo­ti­fy’s. Like Spo­ti­fy, sub­scribers can make their own playl­ists, or listen to playl­ists tailored for their tastes. Beats is made to the smart­phone age, with a sleek, mo­bile-first in­ter­face.

But what Dre, along­side part­ner and fel­low mu­sic biz whiz Jimmy Iov­ine, hopes will sep­ar­ate Beats from the com­pet­i­tion is its team’s deep un­der­stand­ing of mu­sic. While Pan­dora and Spo­ti­fy use com­puter al­gorithms to pick the next song on your playl­ists, Beats has a team of in-house mu­sic afi­cion­ados to back up its al­gorithms.

“It’s all about what song comes next,” Iov­ine told news web­site All Things D, “Every­one wants to know what song comes next.”

And then there’s Beats’ ma­jor dif­fer­ence: Dre isn’t giv­ing any­thing away for free.

Spo­ti­fy has over 24 mil­lion sub­scribers world­wide, but only a quarter of those are pay­ing sub­scribers. The rest use Spo­ti­fy’s free, ad-based ser­vice, which earns sig­ni­fic­antly less that its sub­scriber ser­vices. Beats, however, is bet­ting en­tirely on sub­scribers.

It’s hard to com­pete with free. Without a free, ad-based al­tern­at­ives, skep­tics ques­tion Beat’s pie-in-the-sky, en­tirely paid busi­ness mod­el and doubt its abil­ity to gain trac­tion.

Beats ex­pects to make up the dif­fer­ence through a mix of star power, cor­por­ate part­ner­ships, and ex­pan­ded demo­graph­ics.

Beats has a plum agree­ment with AT&T — a coveted cor­por­ate part­ner­ship for an in­dustry mov­ing to­ward mo­bile — that gives Beats dir­ect ac­cess to the tele­com’s 108 mil­lion cus­tom­ers, mak­ing it easy to bundle Beats’ fees with phone bills. A $15 per month fam­ily plan al­lows up to five ac­counts.

Beats has also partnered with El­len De­Generes and Tar­get, and it plans to run an ad dur­ing the Su­per Bowl.

Along with Iov­ine — who began his ca­reer as the sound en­gin­eer for Bruce Spring­steen’s Born to Run al­bum — oth­er mu­sic in­dustry vet­er­ans are get­ting in­volved in the mar­ket­ing, in­clud­ing Nine Inch Nails front­man Trent Reznor, Ian Ro­gers, a pi­on­eer of mu­sic tech­no­logy, and Luke Wood, a former mu­sic la­bel ex­ec­ut­ive. 

Mar­ket­ing on this scale is un­pre­ced­en­ted in the stream­ing mu­sic world, ac­cord­ing to Steve Marks, chief of di­git­al busi­ness and the gen­er­al coun­sel for the Re­cord­ing In­dustry As­so­ci­ation of Amer­ica. This kind of mar­ket­ing is a good thing not only for Beats but for the ser­vice in gen­er­al be­cause it has the po­ten­tial to edu­cate a new pop­u­la­tion, said Marks.

The stream­ing cus­tom­er base is cur­rently dom­in­ated by tech-savvy mu­sic con­nois­seurs on the two coasts, but Beats’ mar­ket­ing blitz tran­scends age, gender, and so­cioeco­nom­ic groups. Think moms, not hip­sters.

“Our angle on it was fam­il­ies,” said Dav­id Chris­toph­er, the chief mar­ket­ing of­ficer of AT&T Mo­bil­ity, told The New York Times. “We think there’s a big op­por­tun­ity here to change the way people think about mu­sic.”

But even if Beats can build cus­tom­ers, that’s only the be­gin­ning. Li­cens­ing fees and roy­al­ties are the No. 1 reas­on mu­sic stream­ing ser­vices are not prof­it­able.

Cur­rent mu­sic copy­right laws are com­plic­ated and of­ten an­ti­quated. The rules’ struc­ture dates back to ana­log CDs and ra­dio, and they don’t make any­one happy. As the mu­sic in­dustry moves to­wards di­git­al, copy­right laws are like a leak­ing buck­et that keeps get­ting patch­ing patched, but really needs to be re­placed.

Spo­ti­fy re­por­ted last month that 70 per­cent of the money it brings in goes right back out in­to the hands of the ma­jor re­cord la­bels. They are los­ing less money as their sub­scrip­tion base grows, but most of their con­sumers are signed up for their free, ad-based ser­vice.

Re­cord­ing artists are cry­ing foul as they watch their roy­al­ties dwindle from a few cents per song to a mi­cro­cent per stream.

Each time a song is pur­chased on iTunes, an artist gets 7 to 10 cents after roy­al­ties are di­vided up between the re­cord la­bel, pub­lish­er, and song­writer. Each time that song is streamed on Spo­ti­fy, an artist re­ceives between 0.64 cents and 0.8 cents per stream.

That seems like a massive down­grade, but ad­voc­ates for mu­sic stream­ing are play­ing the long game. Mov­ing to a mod­el based on mu­sic stream­ing re­quires a paradigm shift in the way the in­dustry un­der­stands its earn­ings, ac­cord­ing to ad­voc­ates. 

The stream­ing busi­ness is in its in­fancy, said Marks, and once it ma­tures, streams could be in the 100 of mil­lions. Pen­nies add up quickly. If stream­ing ser­vices can garner enough pay­ing sub­scribers to tip the scale, there could be enorm­ous rev­en­ue prom­ise.

The old mod­el was more like a lake”“a sig­ni­fic­ant amount of money from one­time trans­ac­tion between an artists and a con­sumer pooled up quickly. But in the stream­ing mod­el, like its name im­plies, artists’ earn­ings are on­go­ing.

Al­though Dre and Iov­ine are bank­ing on their repu­ta­tion among artists and re­cord la­bels alike to bring cred­ib­il­ity to the mu­sic stream­ing busi­ness, there isn’t much they can do to change how much artists earn. Even with deep in­dustry con­nec­tions, they will likely still have the pay the same up­front li­cens­ing fees to the ma­jor re­cord la­bels that Spo­ti­fy and the rest have to pay.

But if Dre and Iov­ine are able to rep­lic­ate the suc­cess of Beats Head­phones, they might be able to move the needle on the copy­right con­ver­sa­tion. Power is in num­bers.

In this grow­ing eco­sys­tem of ser­vices, a Beats vic­tory is a vic­tory for the en­tire stream­ing in­dustry.

“Some people think the ser­vice pro­viders are afraid of com­pet­i­tion,” said Greg Barnes, gen­er­al coun­sel and dir­ect­or of gov­ern­ment af­fairs at the Di­git­al Me­dia As­so­ci­ation. “It’s the ex­act op­pos­ite. We wel­come com­pet­i­tion. As the eco­sys­tem grows, there are more con­sumers to be­gin to ques­tion why this eco­sys­tem looks this way.”

What We're Following See More »
When It Comes to Mining Asteroids, Technology Is Only the First Problem
1 days ago

Foreign Policy takes a look at the future of mining the estimated "100,000 near-Earth objects—including asteroids and comets—in the neighborhood of our planet. Some of these NEOs, as they’re called, are small. Others are substantial and potentially packed full of water and various important minerals, such as nickel, cobalt, and iron. One day, advocates believe, those objects will be tapped by variations on the equipment used in the coal mines of Kentucky or in the diamond mines of Africa. And for immense gain: According to industry experts, the contents of a single asteroid could be worth trillions of dollars." But the technology to get us there is only the first step. Experts say "a multinational body might emerge" to manage rights to NEOs, as well as a body of law, including an international court.

Obama Reflects on His Economic Record
1 days ago

Not to be outdone by Jeffrey Goldberg's recent piece in The Atlantic about President Obama's foreign policy, the New York Times Magazine checks in with a longread on the president's economic legacy. In it, Obama is cognizant that the economic reality--73 straight months of growth--isn't matched by public perceptions. Some of that, he says, is due to a constant drumbeat from the right that "that denies any progress." But he also accepts some blame himself. “I mean, the truth of the matter is that if we had been able to more effectively communicate all the steps we had taken to the swing voter,” he said, “then we might have maintained a majority in the House or the Senate.”

Reagan Families, Allies Lash Out at Will Ferrell
2 days ago

Ronald Reagan's children and political allies took to the media and Twitter this week to chide funnyman Will Ferrell for his plans to play a dementia-addled Reagan in his second term in a new comedy entitled Reagan. In an open letter, Reagan's daughter Patti Davis tells Ferrell, who's also a producer on the movie, “Perhaps for your comedy you would like to visit some dementia facilities. I have—I didn’t find anything comedic there, and my hope would be that if you’re a decent human being, you wouldn’t either.” Michael Reagan, the president's son, tweeted, "What an Outrag....Alzheimers is not joke...It kills..You should be ashamed all of you." And former Rep. Joe Walsh called it an example of "Hollywood taking a shot at conservatives again."

Clinton No Longer Running Primary Ads
2 days ago

In a sign that she’s ready to put a longer-than-ex­pec­ted primary battle be­hind her, former Sec­ret­ary of State Hil­lary Clin­ton (D) is no longer go­ing on the air in up­com­ing primary states. “Team Clin­ton hasn’t spent a single cent in … Cali­for­nia, In­di­ana, Ken­tucky, Ore­gon and West Vir­gin­ia, while” Sen. Bernie Sanders’ (I-VT) “cam­paign has spent a little more than $1 mil­lion in those same states.” Meanwhile, Sen. Jeff Merkley (D-OR), Sanders’ "lone back­er in the Sen­ate, said the can­did­ate should end his pres­id­en­tial cam­paign if he’s los­ing to Hil­lary Clin­ton after the primary sea­son con­cludes in June, break­ing sharply with the can­did­ate who is vow­ing to take his in­sur­gent bid to the party con­ven­tion in Phil­adelphia.”

Movie Based on ‘Clinton Cash’ to Debut at Cannes
2 days ago

The team behind the bestselling "Clinton Cash"—author Peter Schweizer and Breitbart's Stephen Bannon—is turning the book into a movie that will have its U.S. premiere just before the Democratic National Convention this summer. The film will get its global debut "next month in Cannes, France, during the Cannes Film Festival. (The movie is not a part of the festival, but will be shown at a screening arranged for distributors)." Bloomberg has a trailer up, pointing out that it's "less Ken Burns than Jerry Bruckheimer, featuring blood-drenched money, radical madrassas, and ominous footage of the Clintons."