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Originally published Saturday, November 29, 2014 at 8:01 PM

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Spotify snub by Taylor Swift part of music-industry battle

How music-label executive Scott Borchetta and the exceptionally successful Taylor Swift are challenging the business model of the ailing record industry.


Bloomberg Businessweek

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The business model and concept are still relatively new and, well, they are always changing as is the music industry.... MORE

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Scott Borchetta, founder of Big Machine Records, Taylor Swift’s Nashville-based label, picks up a deluxe edition of “1989,” the singer’s current hit record.

He carefully slips the white case off the special-edition CD, which fans can buy exclusively at Target for $13.99. Inside, in addition to an actual CD, is a packet of Polaroid pictures of Swift in various states of dreamy repose.

There’s one of her riding the ferry in New York Harbor, another in which she’s lounging wistfully in bed, and a third of her posing in a purple long-sleeved shirt, a version of which (the shirt, that is) fans can buy on her website for $60.

At the bottom of each shot there’s a handwritten line from one of the album’s songs. Borchetta says the Polaroid gimmick, created by Swift’s marketing team, led to a flurry of online love between Swift and her fans.

On Oct. 27, the day of the album’s release, Borchetta says Swift called to say she’d been retweeting fans’ pictures of the Polaroids. “She said, ‘Oh, my God! We’re just having so much fun!’ ” Borchetta says.

It’s a Friday afternoon in early November, 11 days after the debut of “1989,” which Swift, who came up in Nashville’s country-music scene, described in an August Yahoo! Live stream as “her very first, documented, official pop album.”

In “1989’s” first week, 1.29 million copies were sold. That was 22 percent of all album sales in the U.S., according to Nielsen SoundScan. It’s the largest sales week for a record since Eminem’s “The Eminem Show” in 2002.

Swift’s success is an anomaly in an ailing industry that’s been in decline since 2000. Last month, the Recording Industry Association of America (RIAA) reported that sales of CDs for the first half of 2014 were down 19 percent from the year before, to 56 million. In 2002, total album sales in the U.S. hovered at 681 million.

For a while there was hope that digital downloads would make up for low album sales, but the RIAA reports that sales for this format declined by 14 percent in the first six months of 2014. Meanwhile, revenue from streaming services like Spotify rose 28 percent. Yet artists are often paid only a fraction of a penny each time users stream a song.

“For a digital download, Taylor Swift will probably take home 50 percent of retail,” says Alice Enders, a London-based music-industry analyst. “So that’s 50 cents or 60 cents, a lot of money compared to a fraction of a penny.”

For that reason, Borchetta and Swift initially withheld “1989” from Spotify.

“We’re not against anybody, but we’re not responsible for new business models,” Borchetta says. “If they work, fantastic, but it can’t be at the detriment of our own business. That’s what Spotify is.”

Spotify released a statement suggesting that Swift was giving the back of her hand to her followers on the service. “There are over 40 million music fans on Spotify, and Taylor Swift has nearly 2 million active followers who will be disappointed by this decision,” a Spotify spokesman said.

Swift and Borchetta then pulled her entire catalog from the service Nov. 3. Borchetta says it was a short conversation: “I went to her and said, ‘If we’re going to make a statement, let’s be very specific and bold. All of your music has value.’ And she agreed.” (Swift declined to comment for this article.)

Her decision prompted a long and impassioned essay by Daniel Ek, Spotify’s chief executive, who said his service was on track to pay Swift $6 million in 2014 (and has already paid $2 billion in total royalties) and argued she was encouraging music piracy by not sharing her songs via the accessible and popular Spotify.

“In the old days, multiple artists sold multiple millions every year. That just doesn’t happen anymore; people’s listening habits have changed — and they’re not going to change back. You can’t look at Spotify in isolation,” Ek wrote.

Borchetta isn’t swayed.He says that if he had his way, he would take another of his big acts, Florida Georgia Line, off Spotify, though he can’t because of a deal with Universal Music Group’s Republic Records.

Spotify pays 70 percent of its revenue to record labels and music publishers, a large part of which goes to three major companies, Sony Music Entertainment, Warner Music Group and Universal.

The impact of pulling the catalog isn’t yet clear, though it may have helped move some physical CDs. Other artists and managers are paying close attention. Clarence Spaulding, a prominent Nashville manager, says his client Jason Aldean, one of the biggest-selling country-music acts, is one of them.

“He is very seriously contemplating the same thing right now,” he says.

All of that is a pretty good week of work for the 52-year-old head of Big Machine, a record company most people haven’t heard of.

The week of “1989’s” debut, the Big Machine Label Group had eight songs on Billboard’s Hot Country Songs chart, more than its better-known competitors, including Capitol Nashville and MCA Nashville.

Big Machine bills itself as an indie label, though since launching in 2005 it has evolved into a company with 88 employees who work in music publishing, management and merchandising, and occupy four buildings.

The business has multiple record labels. Two of them, Big Machine and Valory Music, are controlled entirely by Borchetta and his partners. (Borchetta owns 60 percent of Big Machine; other reported equity holders include the Swift family and country singer Toby Keith.)

Despite their respective success, Borchetta and Swift describe themselves as outsiders. Swift, who splits her time among homes in New York, Nashville, L.A. and Rhode Island, has a net worth of $200 million, according to Forbes.

His father, Mike Borchetta, was a country-music record promoter.

In 1981, he visited his dad and his stepmother in Nashville and never left. He played for a while in country bands, and when he wasn’t touring, he worked in the mailroom of his dad’s company, making calls to radio stations on behalf of acts like Ronnie Milsap and the Oak Ridge Boys.

He was better at peddling music than playing it. In 1991, he got a job in promotions at Universal’s MCA Records label, home of Nashville icons like Vince Gill and Reba McEntire. Borchetta worked with McEntire, and the singer introduced him to his future wife, Sandi Spika, who designed her dresses.

At MCA, Borchetta was an involved manager, choosing singles and dispensing advice. He could be overbearing, and he still can be, according to colleagues.

“There are days when I would like to choke Scott Borchetta,” says Spaulding, the Nashville manager of Aldean whose clients also include Rascal Flatts, now with Big Machine. “But it’s hard to be upset with the guy. When Scott truly believes in a record, he’s able to turn the tide at stations that might not have believed in it.”

MCA fired him in 1997, though he soon landed at the Nashville division of DreamWorks Records, where he hawked records by Toby Keith and Randy Travis. It was fun until Universal bought DreamWorks in 2004 and Borchetta found himself working for his old bosses from MCA. So he decided to start his own label. Before he left, he struck up a relationship with Swift, then a teenage singer-songwriter shopping songs around town.

The success of Swift also established Big Machine as a force in Nashville. The following year, Borchetta added a second imprint, Valory (“The name stands for fierceness,” he says), and signed another singer, Jewel.

He also negotiated the first deal with Clear Channel Communications, now iHeartRadio, enabling his record company to collect royalties when its artists’ songs play. Traditionally, radio stations pay only music-publishing companies that represent composers.

“Scott doesn’t follow the past,” says Bob Pittman, CEO of parent iHeartMedia. “He looks to the future and finds new ways of doing business.”



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