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A Moronically Detailed Explanation
Buckle up, because the answer is complicated. In the first half of the twentieth century, there was a clear delineation between performers and songwriters. There were obvious exceptions like Duke Ellington, but writing and performing were considered separate roles. When recording, record labels would pair performers up with A&R men. The primary job of the A&R man was to select material for the performer, based on the performer's strengths and what they thought would sell. The repertoire largely came from American musical theater, and popular songs would be recorded by numerous artists. "Covers", as such, weren't really a thing in those days, as the earliest recorded version often wasn't the most well-known. For example "The Song Is You" is most associated with Frank Sinatra and his time with Tommy Dorsey, but it was first recorded ten years earlier. No one, however, thinks of the Sinatra version as a "cover" of a song by Jack Denny and the Waldorf Astoria Orchestra. Another way to think about it is that if the Cleveland Symphony Orchestra releases a new recording of Beethoven's Fifth next week, it won't be described as a cover of the Berlin Philharmonic's "original" 1913 recording. It's also worth noting that the heyday of the Great American Songbook was also the period when jazz was effectively America's Popular Music, and the focus wasn't so much on songwriting as it was on individual style and interpretation.
A critical factor in all of this is royalties. Every time a song is included on an album, played in public, played on the radio, etc., the songwriter gets a flat fee that is set by the Copyright Royalty Board. For example, if you record a CD the rate per track is 12.4 cents or 2.39 cents per minute of playing time, whichever is greater. So if a songwriter has a song included on an album that sells 40,000 copies, they'd get $4,960 in royalties. With the development of the album following WWII, the industry limited albums to ten tracks to keep royalty costs down. This is why the American versions of Beatles albums are significantly different than the British versions—the UK industry allowed 14 tracks. The Beatles hated this practice (and rebelled against it with the infamous "Butcher Cover"), and by 1967 they had enough clout to ensure that the American albums would be the same as the British albums.
The more important legacy the Beatles would have on the music industry was that they mostly wrote their own material. From the beginning, rock and roll musicians like Chuck Berry and Buddy Holly had been writing their own material, but the Beatles were making the practice de rigeur. A&R men were now called producers and were beginning to take a more involved role in the recording process. Beginning in the 1950s, Frank Sinatra was turning the new album format into a concept of its own. While most albums were simply collections of songs, Frank Sinatra had the idea to select and program the songs thematically to give the albums a cohesive mood. He also made sure his fans got their money's worth, and didn't duplicate material from singles. For the most part, though, albums remained an "adult" format, with more youth-oriented acts focusing on singles. While albums did exist, they were often mishmashes of miscellaneous material. A band didn't go into the studio to record and album; they went into the studio to record, and the record label would decide how to release the resulting material. The best went to single a-sides. Albums were padded with everything else—b-sides, material that didn't quite work, and, of course, covers recorded for the sole purpose of filling out the album. These would often be of whatever hits were popular at the time, and maybe a rock version of an old classic.
The Beatles and other British acts took up the Sinatra mantle of recording cohesive albums, but other musicians, particularly in the US, didn't have that luxury. The strategy of American labels in the 1960s was to shamelessly flood the market with product to milk whatever fleeting success a band had to the fullest extent possible. My favorite example of this trend, and how it interacted with the changing trends, is the Beach Boys. They put out their first studio album in 1962, 3 in 1963, and 4 in 1964. These were mostly short and laden with filler, but by the time of All Summer Long Beatlemania had hit and they were upping their game. As rock music became more sophisticated in 1965, Brian Wilson began taking a greater interest in making good albums, but Capitol still required 3 albums from them that year. By this time they were deep into Pet Sounds and didn't have anything ready for the required Christmas release. So they got a few friends into the studio to stage a mock party and recorded an entire album of lazy covers, mostly just acoustic guitar, vocals, and some simple percussion. It's terrible; even the hit single (Barbara Ann) is probably the band's worst. Two years later ripoffs like this were going out of fashion, but, with the band in disarray and no new album forthcoming, Capitol wiped the vocals from some old hits and released it as Stack-o-Tracks, including a lyric sheet and marketing it as a sing-along record. They were truly shameless.
During this period, there was still a large contingent of professional songwriters who specifically wrote for pop artists. The Brill Building held Carole King/Gerry Goffin, Barry Mann/Cynthia Weill, Neil Diamond, and Bert Berns, among others. Motown had its own stable of songwriters to pen hits for its talent (and when they had to put together albums they covered other Motown artists' hits, Beatles songs, Broadway tunes, and whatever else was popular at the time). But times were changing. By the time Sgt. Pepper came out in 1967, rock bands were thinking of themselves as serious groups who played their own instruments, wrote their own material, and recorded albums as independent artistic statements. What criticism of rock existed was limited to industry publications like Billboard and teen magazines like Tiger Beat; the former focused on marketability and the latter on fawning adoration. Rolling Stone was launched in 1968 as an analog for what Down Beat was in jazz—a serious publication for serious criticism of music that deserved it. Major labels clung to the old paradigm for a while, but would soon yield to changing consumer taste. Even R&B, which largely remained aloof from this trend, saw people like Marvin Gaye, Stevie Wonder, and Isaac Hayes emerge as album artists in the 1970s.
This was the status quo that continued until the early 2000s. Pop music meant rock music, rock music meant albums, and albums meant cohesive, individual statements. Covers still existed throughout this period, but the underlying ethos had changed. If a serious rock band records a cover, there's a reason behind it. The decision to record the cover is an artistic one in and of itself, unlike in the 1940s, when you recorded covers because you had no other choice, or in the 1960s, when you recorded covers because the record company needed you to fill out an album. At this time, the industry itself was in a golden age, as far as making money was concerned. The introduction of the CD in the 1980s eliminated a lot of the fidelity problems inherent to analog formats. When they were first introduced, CDs were significantly more expensive to manufacture than records. But by the 1990s, the price of the disc and packaging had shrunk to pennies per unit. The cost of the disc itself was no longer a substantial part of the equation. And the increased fidelity led to increased catalog sales, as people, Baby Boomers especially, began repurchasing their old albums. These were heady times indeed.
And then Napster came along and ended the party. The industry spent the next decade flailing, going before congress, sued software developers, sued their own potential customers, and implemented bad DRM schemes, all in a vain attempt to stop the tidal wave. Music was no longer something you bought, but something you expected to get for free. After a decade of this nonsense, the industry finally did what it should have done all along and began offering access to a broad library for a reasonable monthly price. For once, it looked like there would be some degree of stability; profits went up, and piracy went down. Which brings us back to those royalties.
Earlier I gave an example where a songwriter gets paid a statutory fee for inclusion of a song on physical media. This doesn't work for streaming; if I buy a CD I pay the 12 cents but I have unlimited access to the song. Streaming works different because I technically have access to millions of songs, but the artist only gets paid for the ones I play. Paying them 12 cents a song doesn't make sense. So instead, streaming relies on a complicated formula involving percentage of streams compared with total revenue blah blah blah. The thing about royalties is, they come off the top. If a label releases an album with 12 songs by 12 different songwriters, none of whom have any relation to the label, that's $1.44 right there. But if the songwriter is also the performer under contract to the label, then the label can negotiate a lower songwriting royalty (these are called Controlled Compositions). But it gets better. Songwriting royalties don't go entirely to the songwriter, but are split between the songwriter and the publishing company. An artist signed to a label is probably required to use a publishing company owned by the label, so there's a 50% discount right there. A typical record contract grants a 25% discount on controlled compositions, so that $1.44 the label owes in royalties is down to 54 cents if the artist writes all his own songs.
In the world of streaming, where the royalties are paid every time a song gets paid, this can add up quick. There's no real downside to releasing a few covers for streaming as album tracks or as part of a miscellaneous release because the streaming totals aren't going to be that high. The problem comes when the recording becomes a hit; when there's a lot of money at stake, being able to recoup 62.5% of the songwriting royalties you'd otherwise have to pay means a lot of money. To be fair, most labels use outside songwriters to pen hits for their pop artists. But these songwriters are almost always affiliated with the publishers owned by the labels, and are thus cheaper on the whole than going out into the universe of available songs and picking one you like. The Great American Songbook existed in an entirely different world, where paying these royalties was an accepted fact of the industry. After the Rock Revolution, this was no longer the case, but the culture still existed, and the industry was making so much money that it didn't care. After 2000, extreme cost cutting became the norm, and songwriting royalties were an easy target in a world that had largely moved away from outside songwriters.
BTW I thought that "Fast Car" cover sucked. First, the song wasn't that good to begin with, and Tracy Chapman is possibly the most overrated singer-songwriter in history (aside from her two hits her material is the definition of generic). Second, a cover should try to reinvent the song in the performer's image. Here, it sounded like Luke was singing karaoke.
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