Press Clipping
The Rise of the Digital Music Distributor

Hello! Yesterday, SoundCloud announced a move to a user-centric streaming model (SoundCloud coined: Fan-Powered Royalties) for the nearly 100,000 musicians that directly release through the platform. I rarely mention my SoundCloud job here but I’ve written about user-centric streaming for years and got to work on this project, so wanted to mention it. Many folks at the company worked on the project but I wanted to shout out Mike Pelczynski since he walked me through it a couple of years ago and I never stopped bothering him about it since. I’m very curious about the industry’s reaction but let’s hop into the world of digital music distribution!

A couple of years ago in Billboard, Cherie Hu posed the question: ‘Everyone Wants to Be a Music Distributor – But Is That Actually a Good Business Decision?’. She identified a number of music distributors (STEM, CDBaby, DistroKid, Ingrooves) and saw money entering into these companies but there was a lingering question about the sustainability of the business. My interest is far less in the viability of these businesses but I wanted to step back and understand what function they serve within music’s larger political economy.

Digital music distribution arrived in the 2000s, just as this new post-iTunes record industry was taking shape. These new distributors were not companies placing records into stores across the country or the globe, but rather commercial platforms to get music onto emerging online stores. (CDBaby, founded in 1998, just predates this trend and might be why it still offers physical distribution.) The early businesses tracked the rise of singles on the iTunes charts and with the rise of streaming, suddenly more attention was paid to Spotify’s play count. (Occasionally a release would break, see: Tunecore’s release of Nine Inch Nails’ Ghosts I - IV.) Throughout the 2000s (and even into the 2010s) artists could and would directly release music onto the internet perhaps through a mixtape site or even directly through their own website without any company between them and their fans. However, in 2021, the omnipresence of streaming, and mobile devices squeezed out that market, and thus if you want music within mainstream channels, largely dominated and established by major labels, these smaller distributors are here to offer a hand.

This is still a relatively new part of the record industry so many of these companies needed money and many found it from both established and new players within the space. Tunecore, founded in 2005 during the rise of iTunes, was bought by Believe Digital, which is right now looking to IPO perhaps to the tune of $2.4 billion. (Two backers of Believe Digital, the big champion of independent artists, are Technology Crossover Ventures and Xange Private Equity.) In 2018, Spotify invested in DistroKid, which got started in 2013, alongside previous private equity investors. The British music distributor Ditto Music, also founded in 2005, is making waves with what it calls a “decentralized finance” opinion for music. In far fewer flashy terms, it’s a fund of money made for and created by artists with some ties to blockchain technology, which is how Ditto is funding it with investments from BASIC, Borderless Capital, Elastos, Kosmos Capital, Somesing, and TrustVerse; a cluster of firms, many of which are backing blockchain technologies.
Last, STEM in 2020 received $12.5 million in funding from Scooter Braun and a number of other music industry players, after its earlier funding from Aspect and Upfront Ventures and a similar cluster of artist managers. Perhaps unsurprisingly with money coming from music’s elites and some lesser-known tech funders, STEM in 2019 announced it would pull back support of the open nature of its business so that it could focus on bigger name artists for distribution. The money flowing through music distribution isn’t extraordinarily high, which I’d credit to the business’ shaky underpinning arriving at the shift from physical to digital music but within a model made by and for large-scale rights holders, not small-scale distributors. That the money arriving into this space is centered on already-established big names and other forms of new investment money can help contextualize the constituents, not customers, of these companies.
How to Escape the Music Distribution Box?

Digital music distribution, either by providing a way to upload one’s music to digital music stores like Apple and Amazon or putting one’s music onto major streaming platforms like Apple Music, Spotify, YouTube, etc is limited in paths towards sustainable revenue. CDBaby charges per single and album with a tiered system where with extra money is put towards global registration and publishing; UnitedMasters, backed by Alphabet, Andreessen Horowitz, and 20th Century Studios, claims 10% of what an artist makes on what they distribute; others (see: DistroKid / Tunecore / Ditto Music) charge a flat fee for distribution and then tack on more for other “services” like publishing or worldwide royalty collection.

There is an endless trove of YouTube videos that litigate what is the best distributor for artists because of new players in the space and the chameleon-like nature of these businesses. More are looking into incorporating publishing, locally or globally; DistroKid may charge more for YouTube Content IDs, and others like STEM just recentered on higher-tier artists for distribution. The range of options being floated by these companies in a way illustrates that music distribution exists at the mercy of streaming. Either keep costs low and aim for scale or increase them and hope for more success for artists. Suddenly this starts to sound like the math of a record label.
This can be best seen in a recent op-ed by Lee Parsons, CEO of Ditto Music, who wrote in Music Business Worldwide a defense of music streaming from the #brokenrecord campaign and the tone of critiquing the streaming model. Parsons supports user-centric streaming (he and Mr. Gray, the man who started the #brokenrecord campaign agree here) and appears fine with poking the major labels, which he’s in direct competition with, so what exactly is the problem? Shawn Reynaldo in his newsletter First Floor offered an explanation:

Parsons isn’t alone either; in recent years, a whole cottage industry of Ditto-like companies has arisen, many of them glorified middlemen offering to “help” artists get their music on streaming platforms—for a small fee and/or a cut of the profits of course. These companies rely on volume, as bringing in $100 of revenue for a single artist isn’t much, but when that increases to 1000 or 10000 artists, it quickly starts to become real money.

The issue for Parsons or potentially other music distributors is that any change that could undermine the current streaming set-up is a concern for them. That could be why you see DistroKid named Republic Records, owned by Universal Music Group, as its first label partner where it’ll help Republic identify emerging artists for a small cut of that future artist’s success. STEM and Ditto are both interested in unique flavors of financial backing, the former going for more traditional advances and the latter blockchain-centered. The viability of these various strategies is a bit immaterial because the way they’ll be making money is ultimately through streaming revenue, which is a space dominated and negotiated by major labels.

Sony’s recent purchase of AWAL, a formally “independent” music distribution company, may help explain this web. The company’s aim wasn’t sheer scale but rather more closely mimicked a record label, not unlike EMPIRE or UMG’s recently renamed Virgin Music Label & Artist Services that was once Caroline Distribution. AWAL, again financed by Google Ventures and MSD Capital, points out that these firms often function as the tech and music elite’s farm team for the major label system. Though many of these companies are still privately held, unless there is a massive breakup of the major labels, they’ll remain subservient to them, which is why many are looking into new revenue streams (publishing, international royalties, blockchain, etc.). Suddenly, music distributors start to mirror major labels, and again, who are artists to trust: major labels or music distributors backed by private equity and venture capital? Hard to see how the best interests of artists can be served.