by : Business, Featured Articles, May 2012

Reassessing Spotify

Reassessing Spotify

The arrival of Spotify to the United States in July of 2011 brought a lot of attention – good and bad – to the newest music consumption trend of subscribing to services that provide massive musical libraries for a low, monthly fee. Although websites like Rdio and MOG had already been in place in the U.S. long before last summer, Spotify, with its backing from billion- dollar social networking company Facebook, promised to revolutionize the music industry and help propel it into a new and thriving digital age. However, as the months passed, many artists and record labels began to complain that the sums they were receiving from streaming services for the use of their music were minimal at best. This led to a wave of both major and independent labels/artists announcing that they would either be removing their music from the streaming services, or refusing to further release new albums onto the platforms.

The debate over whether current payout methods used by Spotify and other subscription models will help the sustainability of the music industry in the long term has to be explored before jumping to any conclusions about streaming’s importance in the revival of recorded music sales. Furthermore, by tackling the recent questions about the profitability and sustainability of Spotify in America, we can also ask exactly how the streaming service has affected music consumption and the music industry. Finally, we hope to suggest a way forward.

Meagre Payouts

The most prevalent problem being debated about online streaming services has to do with their current payout structures. Although the numbers vary from one site to another, and apparently from one artist/label to the next, many individuals have publicly released their royalty statements in order to help educate their fellow artists. This is the case with a group called Uniform Motion, which recently announced that they made only 4 cents per time their entire album was streamed on Spotify.i This amount seemed especially small when compared with the $8.59 obtained from a sale of the same album on iTunes.ii Another website called www.informationisbeatiful. com created a chart showcasing how much money artists earned from various streaming websites. Last.fm was paying out artists .075 cents per play, while Spotify only .029 cents for the same play per song.iii Such numbers make it extremely hard for any musician to earn a significant amount of money from these streaming services alone, no matter how famous they may be. A case in point is Lady Gaga: a 2010 article in the The Guardian claimed that the hit Poker Face earned a little over $167 for the 1 million plays it received on Spotify in 2009.iv

Streams vs. Downloads

At first glance, the meager amounts paid out to artists by streaming services may cause many to believe that subscription based websites are really no better for artists than illegal downloads. However, it is important to analyze what exactly constitutes a “stream” and how this differs from actually owning the music, whether in physical or digital form. Services like Spotify allow premium users to stream songs as many times as they want, so long as they are connected to the Internet. The user, in fact, simply pays for the right to play it and never actually owns the song . As soon as payment is stopped, the user is forced to temporarily listen to advertisements in order to retain access to the streaming service. Following this logic, it would only make sense that royalties from streams be lower than royalties received from physical/digital sales, as in the former case, users never become proprietors of the music.

Threat vs. Opportunity

The problem with the reduced royalty rate is that many artists claim it may not be sustainable for the industry as a whole, and that if streaming were to ever replace physical/digital sales, many musicians would lose a significant proportion of their income. The main flaw with the aforementioned claim is that it takes for granted that streaming music online is likely to ever replace the more conventional ways of selling music, when no evidence indicates as much.

In fact, many Spotify users would argue that the service is used as a cost-effective music discovery tool, which continues to complement physical/digital sales. While they enjoy the ability to have access to the millions of songs in an online catalog, many customers may continue to desire to own music. Accordingly, Spotify could act as a supplement to traditional music consumption (digital/physical sales) rather than as a substitute, meaning that it may not actually threaten physical sales of music, and by inference, overall artist income. Moreover, streaming services could be seen as promotional tools, allowing consumers to discover new artists, which could eventually lead to sales that would have never occurred in the absence of the streaming website.

Crossing the Mark

This strict differentiation between true ownership (a digital/physical sale) and temporary right to use recorded music (a stream) becomes blurred with Spotify’s implementation of the “locker.” Premium users have the right to create musical libraries, store them on their electronic devices, and access these same songs offline, so long as the device is connected to the Internet at least once a month in order to verify that the monthly subscription is still being paid. This means that songs no longer need to be streamed, as they can be accessed from users’ electronic devices offline, and can be listened to anywhere.

Although extremely convenient for users, the “locker” service no longer fits within the traditional definition of an online stream, and therefore should be treated differently in terms of royalty calculations. One of the basic reasons why people continue to purchase both physical and digital works of music is for the convenience of being able to access it anywhere, at anytime. This is an important distinction to streaming, which was traditionally restricted to wherever an Internet connection could be obtained. In this case, instead of acting as a supplement to traditional music consumption, Spotify’s implementation of the locker function could very possibly threaten physical sales. Accordingly, industry professionals should attentively explore this issue in order to avoid further harming the already fragile recording industry.

One Size Doesn’t Fit All

Another issue that has been the center of numerous debates is the fact that there is no standardized royalty rate in place for any of these streaming websites. Different websites pay different rates using complicated customized metrics, which makes it extremely difficult for artists to keep track of how their royalty statements are being calculated. For example Rhapsody is said to pay 0.22 cents per stream,v Pandora pays 0.12 cents,vi Last. fm pays 0.075 cents, and Spotify pays 0.029 cents.vii These are only four of a very large list of streaming websites available to consumers worldwide, many of which may be unknown to artists whose music is being played. Much like in many other parts of the music industry, a standard royalty rate should be set for all streaming services and be regulated by an outside collection agency (instead of being released directly from the service to the artist/ label). Similarly to terrestrial radio, it is nearly impossible for an artist to monitor every time a song he wrote is played on any one of hundreds of streaming websites; for the artist, it is important and convenient that an outside collection agency monitors this usage.

Conclusions

While many musicians and record labels were quick to jump to the conclusion that streaming services were here to further destroy the already meager revenues received from record sales, it could be said that Spotify has the potential to improve the current economical situation if used properly. While there is no doubt that the current royalty rate paid per song is extremely low, Spotify continues to be used as a supplement to other forms of record sales (such as iTunes and physical records). It is far from being a substitute to such sales and it may actually increase the overall revenue generated from music consumption. Furthermore, by being treated as a music discovery tool, it could open an entirely new marketing tunnel for artists to further promote themselves in the cutthroat online world. The implementation of an outside, non-biased collection agency who sets a standard rate for all streaming services would also serve to make these websites more regulated and, by the same token, more artist friendly. With these changes in mind, although it may be exaggerated to say that subscription websites will revolutionize the music business, they may very well improve the current state of record sales, and act as one of many useful tools at the disposal of the ever-growing group of musicians.

By Frederic Choquette

 

Endnotes

i. http://www.digitalmusicnews.com/ stories/091311artistmakesii.

ii. Ibid.

iii. http://www.informationisbeautiful.net/2010/how-much- do-music-artists-earn-online/

iv. http://www.guardian.co.uk/music/2010/apr/13/spotify- songwritersv.

v. http://www.informationisbeautiful.net/2010/how-much- do-music-artists-earn-online/

vi. http://www.billboard.biz/bbbiz/industry/digital- and-mobile/business-matters-pandora-grew-like-gang- busters-1005205492.story

vii. http://www.informationisbeautiful.net/2010/how-much- do-music-artists-earn-online/

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Comments

  1. As long as there are high-quality streaming services like Spotify and MOG around, I will only ever buy my very favorite recordings. And I’m not alone among my friends in holding that opinion. If we are representative of a growing trend and payouts from Spotify are as low as claimed, most of the record industry has reason for concern. Why has no one emulated the business model of the defunct Lala.com? You could listen to any track once, pay 10 cents to “locker” it, or download an MP3 for a dollar. That allows for the music discovery consumers want but disallows the potentially industry-crippling smorgasbord that artists are complaining about.

  2. While there is no question that Spotify has developed a very user friendly service to stream music, there are numerous clouds and red flags surrounding their business dealings.

    1. 20% Equity Stake to Major Record Labels as part of their licensing negotiations.

    2. Every time the floor gets lowered in the valuation of music licensing it only drives the value down further.

    3. The founders of Napster are both involved with Spotify; one on the board the other an investor. For those who miss the irony. Napster opened the doors to a twelve year slide in the valuation of music and are now reaping the benefits.

    4. Spotify has recently announced advertising/cross promotions with AT&T, McDonalds, Nike etc. to offer apps so these mega corps can get around licensing fees to stream music.

    Will Buckley, founder, FarePlay.org

  3. Music Business Connoisseur says:

    This article raises some very important debates for researchers. Firstly, how will people listen to music in the future? In Australia the roll-out of the National Broadband Network will give extraordinarily high bandwidths to every citizen. This will mean that high quality streaming will be available to anyone with a data plan (mobile or stationary). This asks the question, will streaming become like owning? Secondly, and if streaming becomes more the norm as part of the buying/ownership process, have streaming websites already made the jump on pricing? This suggests a third area of investigation being that of policy. Regulation of on-line streaming is already overdue. Do policy makers have to become more agile and how will they control a global market?

    Sorry only questions…not answers.
    PS – Thanks for the MBJ

  4. J Joseph Taylor says:

    Hmmm, this article leaves a bit to be desired analytically. The first point is to consider what the consumer is really purchasing when they buy a Spotify membership. In my view the customer is getting a blanket license from the record labels and sundry sound recording owners and a somewhat weakened blanket (perfomance) license from the PROs per the middle man work of Spotify. Given that the rights and utilities granted to a proprietor of a stream are virtually the same as those to a proprietor of a physical or digital copy why not deem such a subscription ownership of a vast body of music? Outside of some ostensibly philosophical point of jurisprudence respecting property law (which I might add gets little hazy with copyright) to which I’m not privy I see no reason why they shouldn’t be. Consider the following:

    1. One can play a song/album as much as you want through the device(s) that the sound is to be mechanically reproduced on (admittedly cellphone and lap-top instead of CD and cassette tape)

    2. You were never allowed to give away copies, which Spotify prohibits by virtue of it’s design.

    3. Share the music within the confines of lawfully use (e.g. you can still hook up your phone or lap-top to speakers and DJ a party or play it in your car for everyone to hear)

    4. You can still make mixtapes…I mean playlists

    5. Destroy the song by deleting it from your playlist or consciousness as it were

    6. Such a subscription could be gifted two individuals by virtue of some agreement could theoretically share a subscription and joint own the catalog access

    The prevalence of data plans, as well as the new locker functionality underscore this. Rather, one might argue that Spotify subscriptions should be far more expensive or that should it utilize the method that terrestrial radio uses to calculate performance royalties or perhaps even that it should switch to mechanical royalty and make its money on the software.

    To the point of discovery, I personally (not that I am representative of the entire population) find that i don’t discover new music on Spotify unless it’s some new artist being pushed by a major label (e.g. Brandon Hines from Epic). That said, I am a musician and music historian. It has been my experience (and that of many others) that when one is seriously interested in a style, genre, or artist one will hear about other artists through research (reading bios and interviews and hearing about the artists influences or the genre’s stars). So, to infer that Spotify alone would be responsible for some significant increase in sales is troubling if only on the grounds that it overlooks the seeming proclivity of contemporary consumers to download the new music illegally instead of buying it.

    In closing I won’t conclude that Spotify is here to further “break” the industry but saying that it could help it’s financial situation is conjecture given the dearth of useful information on how different populations actually utilize the service. Until there is a recognized and efficient tracking protocol (this needs to happen for terrestrial radio as well) with an attendant collection agency, and upgrades to the current copyright law are enacted to regulate the fair royalty rate of a stream no such allusions to Spotify’s efficaciousness in helping the industry can be seriously entertained.

  5. Shock says:

    The old distribution models are siphoning the artists and labels, I think with payouts like this it’s unmanageable. Tho theres some new sites like fametune.com where artists can set their own streaming royalties and sale prices and can take a way bigger slice of the pie then on other platforms. Also it’s a good addition, that listeners can spread the word about tunes for rewards, so they can actually earn what they would spend on music.

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