Spotify has artists playing chicken, but they can fight back if they can cooperate

The New Zealand Herald reported today:

Spotify has recently faced backlash over its newly-implemented Discovery Mode program.

The initiative, which gives artists greater exposure on the platform in exchange for a lower royalty rate, was announced during the company’s Stream On event in March 2021 and has continued to be criticised all the way up to its 2023 launch.

Under Discovery Mode, artists or their teams can submit tracks for consideration to be included on Spotify’s radio and autoplay features. In exchange for this greater algorithmic exposure, they agree to receive a lower royalty rate for streams of their music.

For some, it’s an inventive new way to link potential fans to new music, but others in the industry believe it to be yet another way to shave the pay cheque of hardworking musicians whose work is the lifeblood of an app that rakes in billions of dollars each year.

This is a smart ploy by Spotify. As noted by DJ Luca Lush on Twitter:

Ideally for spotify, EVERYONE opts in, they take 30% more revenue & no one gets more plays

It's not clear that every artist would opt into Discovery Mode though. To see why, consider the decision as part of a simultaneous game, played by some artist (Artist A) and all other artists. The game is laid out in the payoff table below, with the payoffs measured as a percentage of the 'normal' level of royalties. If all artists (including Artist A) choose no Discovery Mode, then they all continue to receive the normal level of royalties. If all artists (including Artist A) choose Discovery Mode, then they all lose 30 percent of their income (as Luca Lush noted). However, if Artist A chooses Discovery Mode and all others do not, Artist A benefits greatly (let's say that their royalties go up by 50 percent - in the New Zealand Herald article, Spotify says that "artists have seen an average 50 per cent increase in saves" when participating in Discovery Mode), and other artists are negatively affected, but only slightly (because even when Artist A's Spotify streams increase a lot, that doesn't much reduce every other artist's streams). On the other hand, if Artist A chooses not to participate in Discovery Mode and all other artists do, it is the other artists that benefit greatly, and Artist A is made worse off. [*]

To find the Nash equilibrium in this game, we use the 'best response method'. To do this, we track: for each player, for each strategy, what is the best response of the other player. Where both players are selecting a best response, they are doing the best they can, given the choice of the other player (this is the definition of Nash equilibrium). In this game, the best responses are:

1. If Artist A chooses not to participate in Discovery Mode, the other artists' best response is to participate in Discovery Mode (since a payoff of 150 is better than a payoff of 100) [we track the best responses with ticks, and not-best-responses with crosses; Note: I'm also tracking which payoffs I am comparing with numbers corresponding to the numbers in this list];
2. If Artist A chooses to participate in Discovery Mode, the other artists' best response is not to participate in Discovery Mode (since a payoff of 99 is better than a payoff of 70);
3. If the other artists choose not to participate in Discovery Mode, Artist A's best response is to participate in Discovery Mode (since a payoff of 150 is better than a payoff of 100); and
4. If the other artists choose to participate in Discovery Mode, Artist A's best response is not to participate in Discovery Mode (since a payoff of 95 is better than a payoff of 70).

Notice that there are two Nash equilibriums in this game - where Artist A chooses to participate in Discovery Mode, and every other artist does not, and where Artist A chooses not to participate in Discovery Mode, and every other artist does.

We could repeat this exercise for any number of additional artists, rather than Artist A. We would come out with the same outcome. We could even try this as a multi-player game. We would find something similar. The artists are all better off if they can participate in Discovery Mode, but not too many of the other artists do so. Every artist would want to be participating in Discovery Mode. However, if all (or a large proportion) of them choose to participate in Discovery Mode, then every participant is made worse off. This is an example of the game of chicken. Two drivers driving towards each other can choose to speed ahead, or swerve out of the way. Both prefer to speed ahead, because they are trying to win the game of chicken. However, if they both follow that strategy, it all ends in a fiery crash (for a more complete explanation, see this post).

Usually, in the game of chicken, a player can get the outcome that they prefer if they can make a credible commitment to their strategy. In the classic game of chicken, a driver could commit to speeding ahead by disabling their brakes and throwing the steering wheel out the window. That is a pretty showy way of demonstrating that the driver won't change their strategy of speeding ahead.

However, in the game that Spotify has set up, there are too many players for a credible commitment to scare others off. Most artists will instead be thinking, 'I'm sure that one more artist choosing Discovery Mode isn't going to be the one that destroys the payoffs for everyone, so why shouldn't I?'. That's the sort of thinking that ends in a fiery crash, with all artists earning 30 percent lower royalties.

A cynic would interpret this as Spotify's strategy all along. They are profit maximising by steering the artists into a game of chicken that leads to all participating artists receiving lower royalties. However, the artists can fight back. This is a repeated game. In a repeated game, the players can cooperate in order to obtain a better outcome for them all. By cooperating, and choosing not to participate in Discovery Mode, the artists would be made better off collectively. This is essentially what the artists who have spoken out against Discovery Mode are trying to do. They are trying to coordinate a cooperative response that sees all artists boycotting Discovery Mode, which would be for the betterment of them all.

This sort of cooperative outcome is only possible if the artists can trust each other. There is an incentive for any artist to cheat on the agreement. That's because, if Artist A (or any other artist) knows for sure that the other artists will not participate in Discovery Mode, then Artist A can participate and make themselves better off. Once that starts to happen, the cooperative agreement can quickly break down.

The questions now are, will the artists be able to agree not to participate, and if they do, will they be able to maintain trust and cooperation?

*****

Another way of thinking about the payoffs in this game is to recognise that Artist A is probably made wildly worse off by every other artist opting into Discovery Mode. The game with these new payoffs is shown below.

The best responses for the other artists are unchanged. However, for Artist A, the best responses are now:

1. If the other artists choose not to participate in Discovery Mode, Artist A's best response is to participate in Discovery Mode (since a payoff of 150 is better than a payoff of 100);
2. If the other artists choose to participate in Discovery Mode, Artist A's best response is to participate in Discovery Mode (since a payoff of 70 is better than a payoff of 25).

Notice that now, Artist A has a dominant strategy to participate in Discovery Mode. Participating in Discovery Mode is better for Artist A, no matter what the other artists do. They should always choose to participate in Discovery Mode. And this would apply to any other artist, if we replaced Artist A with them instead. This provides an even stronger incentive for artists to participate in Discovery Mode than in the chicken game shown earlier (it wouldn't be a chicken game any more, but much more like a prisoners' dilemma game with multiple players). However, the other points I make about the repeated game, cooperation and trust, all still apply to this version of the game as well.