Could Taylor Swift Shaking Off Spotify be a Sign of a Bigger Shift for the Music Industry?

History has ultimately shown the music industry to be the first sacrifice made to the altar of the Internet, the first business to reveal the disruptive capacity for old media companies of a world where information could be shared freely over vast distances. Sure, print media ended up getting cut down even further in the long run, but music was the first salvo fired in a battle that still rages. The Napster debacle ultimately proved to be the first engagement in a war that would envelop virtually all of media and continues to rage on today.

That’s why Taylor Swift’s decision to pull her entire catalogue from Spotify on Monday could prove a pretty important moment in the course of the music business and how the internet and media interact in general. It could also be an isolated event that won’t have a huge impact in the long run; it’s hard to say at this point. But if Swift tells Spotify that they are never, ever, ever getting back together, it might mean that streaming services like Spotify, long considered the future of the music industry, are going to have to seriously adjust the way they do business if they want to survive.

Taylor Swift Tells Spotify "I Do Not Belong With You"

This may ultimately play as Spotify way, way overplaying its hand. Apparently, Swift, in a selfish effort to be the one making money off of her music, opted not to put her highly-anticipated new album 1989 on the streaming music service. Spotify, stuck in the unenviable situation of relying on artists accepting next to nothing in terms of compensation for people listening to their music and accepting the state of affairs because they don’t have other options, fired back with comments on Wednesday throwing her under the bus for holding back her next big thing.

"Due to a decision by the artist, Taylor Swift's new album 1989 is not available on Spotify or any other streaming music service," said a spokesperson for Spotify. "There are over 40 million music fans on Spotify and Taylor Swift has nearly 2 million active followers on [Spotify] who will be disappointed by this decision. We are working to bring this album to fans on Spotify as soon as possible."

So Swift responded with, and I’m paraphrasing, something along the lines of “Oh yeah?” and pulled her entire catalogue from the service. Whoops.

Screwing Artists Actually an Important Pillar of Spotify Business Model

Back when people still bought records or CDs or cassettes, things were different. Artists who moved records held a lot of sway and profits for the record companies were right there. Unfortunately for those reaping the benefits, though, the internet proved a pretty devastating moment. Getting someone to pay for a record was a lot, LOT easier when that was how people listened to music.

With the advent of the internet, people could basically listen to whatever music they wanted for free provided they were willing to dwell in a state of dubious legality. Record companies fought back but it was too late; the floodgates were opened and everything was clearly changing. The inevitable nature of the top of the chain holding total control over supply meant reacting to demand, leading to the rise of iTunes (AAPL) , then streaming music services like Pandora (P) , and ultimately Spotify, which combined the on-demand of Apple and the streaming of Pandora.

The complete collapse of the record company during this period was drastic, with three-quarters of the physical shipment value for the industry evaporating from 1999-2011. But, as much as record companies got hit hard, the artists were also taking one to the pocketbook. The system of royalty payments that supported armies of musicians and songwriters depended almost entirely on the easily-trackable system of record sales and radio plays.

Now? Spotify takes a lot of heat for paying artists basically nothing for their music. Rights holders get just $0.006-$0.0084 per play. And, as is the case most times you start dealing with fractions of a penny, the company’s getting accused of being pretty stingy about their payouts.

However, if Spotify has room to pay more, it’s hard to see where. The company has most-recently been valued at about $4 billion, but it’s currently losing money to the tune of $80 million in 2013. Granted, Spotify is offering a better deal than many other services, generating $6,000-$8,400 per million listens for its creators as compared to about $3,000 for YouTube  (GOOG) and $1,300-$1,500 for Pandora, but it’s also safe to say that this isn’t really making ends meet for most musicians.

Ultimately, whether or not Spotify is apt to admit it, almost no one is going to make a living by being popular on Spotify. Sure, a handful of wildly popular artists probably bank enough money from the service, but anyone with that level of popularity doesn’t really need their Spotify checks in the end.

Spotify is essentially offering the same service as YouTube: free publicity. You may never make much money from getting listens on Spotify, but having more people find your music can likely fuel a rise in popularity that will result in more ticket sales, merchandise sales, and, yes, even album sales.

This relationship may not be a comfortable one for Spotify, but it’s a reality in terms of what would motivate an artist to sell their music to the platform. The money is simply not going to be the motivating factor for the content creators. What’s more, Spotify’s business model appears to rely heavily on this reality. The company is already paying very, very little for the rights to the music it plays and still losing money. In order to make the money available to artists through its platform all that attractive, we’re talking doubling or tripling rates, something that it’s hard to see Spotify doing.

Taylor Swift: One of the Last Artists with the “Klout” to Do This

That’s why the power play by Swift could ultimately prove pretty interesting. Swift is, hands down, the biggest music star in the world at the moment. Her aforementioned 1989 is on pace to sell 1.3 million copies in its first week, the best sales over a comparable period for any album since The Eminem Show in 2002.

It’s also going to be the first platinum album of 2014. In November. Which should indicate that comparing the sales figures of 1989 to those of The Eminem Show doesn’t even begin to put it in an appropriate context. In 2002, all 10 of the top 10 albums of the year sold at least 2 million copies, which is good for twice-platinum. Now? Taylor Swift’s album sales, while incredibly modest by the standards prior to Napster, are a behemoth in today’s industry.

That’s why Swift pulling her entire catalogue from Spotify may be a bigger deal than just a tiff over royalties. At every turn, artists have ceded ground as the internet eroded their ability to profit from their craft. There simply wasn’t anything to be done, the tide of music sharing necessitating accepting less. Trying to seize greater control was just the fastest way to ensure a more-rapid decline in total market share.

However, Spotify may be pinning its hopes to a battle plan that the industry is appearing ready to evolve away from. For an artist like Taylor Swift, the pittance she can expect for her millions and millions of listens on Spotify (I mean, not a pittance in the grand scheme of things, but a pittance when gauged against her other revenue streams) may not be worth it. Why would Swift accept fractions of a cent for each listen on Spotify when she can maintain control and put the album on her website, for instance? If Swift really feels like she still needs the publicity, Spotify isn’t entirely necessary as the middle man. That’s the beauty of the internet, pretty much anyone can access their audience.

Spotify May Need a New Idea

So, in the event that this becomes a standard practice, where exactly does that leave Spotify? If other artists deem the convenience of Spotify’s platform isn’t close to being worth the tiny payouts they’re getting for their work, Spotify might start to see its massive catalogue start to shrink, losing the catalogues of those artists big enough to have other options. A significant number of classic rock titans still don’t use the service, including the one and only Led Zeppelin.

If more and more artists follow Swift’s lead and decide that Spotify just isn’t worth it for them, that may seriously hurt Spotify’s ability to keep growing. Sure, the service can be accessed for free, but if the music people actually want to hear isn’t on there, will they keep coming back?

Certainly, there’s going to be plenty of bands left that need the ability to reach new listeners and will be okay with effectively giving away their product to get there, but that makes Spotify’s pitch to users significantly different. That starts to push them towards more of a niche-service offering variety of not the precise thing you want rather than the sort of big-box store equivalent with a massive and comprehensive library it’s been pushing for.

If so, Spotify has every reason to be pretty concerned about the public nature of this flap. Especially if Swift’s move helps precipitate a lot more new thought by their content creators about the best way to reach fans. Because, at the moment, the service relies pretty heavily on musicians being willing to effectively give away their work for free. That’s certainly the zeitgeist, but it also seems possible that it's the first decade and a half of music on the internet creating an overreaction and we could be entering a moment where the pendulum swings back.

If Spotify has to start spending more to ensure that major artists like Swift don't bail on their service because they aren't actually providing her with any real value, it means adding a bunch more red ink to a balance sheet that's already covered in it. Which likely means it would need to raise the price of their services, whether that be from more ads or more paid subscriptions. And that, in turn, could likely slow the rate of growth that is precisely what got everyone excited in the first place. Everyone was falling over themselves to realize the new future of music with free/low-cost products offering vast music libraries to consumers, is it possible that everyone forgot to also check on the people providing the content to see if they were game? Did they start turning upfield to score the touchdown without first securing the ball?

Maybe the company can just keep rolling even with the handful of artists big enough to be able to ignore them doing so. The value of their service to the consumer could still be there even without the biggest names. But if Swift ends up being the beginning of a broader revolt that picks up steam, Spotify may find it more and more difficult to maintain its market share, let alone grow it. The company’s response to the news was appropriately flip, but it does seem to be hiding a deeper fear: that the very economy of music Spotify built its business model on is still in a state of flux and may settle somewhere other than what they had prepared for. If that’s the case, Spotify may find it difficult to shake it off.