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
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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.”

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