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Musical Innovation and the Winners and Losers of Spotify's Business Model

Posted By Heather Marchione, Mar 11, 2013

Spotify is one of the newest methods for accessing digital music and allows customers to stream millions of songs on demand for free or for just a low monthly fee. Spotify's business model is a freemium-to-premium business model. This model works by converting free users on the desktop who have to listen to ads to users willing to pay a monthly fee to stream without ads or on their mobile devices. Spotify appears to be doing a heck of a job at converting free to paying customers! Currently, around 8,000 users convert to a monthly payment plan per day and because the subscription revenue is recurring, Spotify's revenue is growing faster than the cost of licensing the music to the free users.

Consumers love Spotify as they now have access to Spotify’s entire music collection by just taking the time to create a free account. For just $9.99 a month, they can extend that access, ad-free to their mobile devices for listening on-the-go. Another attraction for consumers is that Spotify is legal yet gives free access to millions of songs thereby avoiding the sticky moral and legal issues associated with piracy. With these benefits, Spotify would seem like a consumer’s dream, but it could lead to a precipitous decline in musical innovation, thereby limiting the amount of tracks created by artists in the future. See, while Spotify decreases the need for piracy, it also decreases people’s desire to buy songs - why pay for what you can get for free. This begs the question of whether an increasing dependence on the streaming provided by Spotify would lead to a diminished incentive on the part of artists to create new music for which they would only be paid a pittance.

To understand how Spotify could lead to a decline in musical innovation, it's necessary to understand that the purpose of copyright law is to promote creativity and to prevent others from copying a creator's copyrighted work. At the heart of copyright law is a quid-pro-quo: the public gets the societal benefit of the work in return for the copyright creator getting the benefit of excluding others from copying his work. Because only the creator can copy the work, the creator can more effectively monetize the work for his benefit. In the past, institutions like the RIAA argued that piracy would kill innovation. The public could download an unauthorized copy of the copyrighted work for free thereby undermining the quid-pro-quo aspect of copyright law and preventing the creator from fully monetizing the work. The argument goes that if the artist doesn't get any benefit from his work, then that artist would just stop producing works in the future.

It could be argued that Spotify is akin to legal piracy because users can stream millions of tracks on demand for free. The difference, however, is that Spotify must pay for each of those streams. In three years since launching, Spotify announced that they paid out $500 million to rights holders, but it is unclear what percentages of this artists are making. While Spotify's payouts per stream are cloaked in mystery, a few bands have released figures. Parks and Gardens, an unsigned band, posted on their Twitter account that they make $0.00966947678815 per stream. iTunes, meanwhile, pays out 70% per tract to rights holders. Assuming the artist has a publisher, artists on iTunes make 12% of that 70%. For a $1.29 song, a signed artist makes about $0.10836 and an unsigned artist would make about $0.903. For an unsigned artist, 94 plays on Spotify equals one iTunes download. Is Spotify just legal piracy when 1,000 streams equals just $10 back to the artist? To address this issue, it is essential to look at the winners and losers of Spotify's business model, especially as it concerns the artists, and see how that might affect future musical innovation.

Music labels and publishers are the big winners in Spotify's business model. Hands down, no contest. See, Spotify does not "own" any of the music featured on its site. Instead, Spotify must go to publishers and pay them millions of dollars to license the music they stream to their customers. As Spotify's number of paying subscribers continues to grow, music labels could charge Spotify more money to continue access to the music. This is what happened in 2004 when the labels pressured Apple to increase prices for single track downloads and albums. If Spotify doesn't agree to the higher costs, then it could potentially lose millions of tracks instantaneously and, consequently, thousands of subscribers along with it. Thus, the labels are the ones with the most leverage in the Spotify business model and can really set the tone and pace for the cost of the service, which would affect Spotify's attractiveness to consumers.

Artists can be divided into two general camps: signed and unsigned. A signed artist has virtually no control over whether his or her music is featured on Spotify, but an unsigned artist has a choice in the matter. Unsigned artists have the power to refuse to license with Spotify and promote their music on sites like iTunes and YouTube where the pay may be more and the artists have more control over their music. Some argue that small artists must be on Spotify because Spotify has the benefit of allowing users to discover and listen to a small artist's music. There is not enough conclusive evidence, however, that Spotify is able to get smaller artists more well known that a popular YouTube video. Gangam Style, for instance, had over 1 billion views on YouTube and garnered the artist Psy international acclaim. Justin Bieber is another great example of small artist becoming a break-out hit due to YouTube. Currently, there is no data suggesting that an artist has had their initial breakout propelled forward due to Spotify's streaming service.

Spotify's impact on large artists, most of whom are signed, is mixed. On one hand, these artists are subject to the same paying scheme, so they make less from Spotify than they would from iTunes. Some artists are taking advantage of their large fan base and are releasing their newest tracts first on iTunes and then on Spotify after sales taper off. This appears to be the reason why Taylor Swift's newest album Red is conspicuously absent from Spotify. On the other hand, Spotify may aide large artists by decreasing the amount of illegal downloading, which in turn puts more money in artist pockets. A NDP survey recently announced that the number of people using piracy sites dropped 17 percent in 2012 compared to the previous year. It will be interesting to see whether this figure continues to shrink as Spotify continues to grow.

Consumers want access to their favorite tunes and Spotify is changing the way music is available. Yes, it pays much less when compared to other music providgangers, but these numbers are not set in stone. Publishers have the power to increase what Spotify pays and what those publishers will return to artists. The truth is that Spotify and publishers cannot exist without music artists, but artists can exist without publishers or Spotify. Therefore, if Spotify or publishers fail to compensate artists for their creations, artists will find other music providers and publishers more attune to their needs such as YouTube or iTunes. Thus, concerns over the decline of musical innovation are over stated as long as artists continue to have access to services that allow artists to gain exposure with consumers and fully monetize their works.

Source (MediaDecoder): http://mediadecoder.blogs.nytimes.com/2012/07/25/digital-notes-spotify-reveals-some-numbers-but-hides-much-more/

Source (BusinessInsider): http://articles.businessinsider.com/2011-10-12/research/30269526_1_spotify-revenues-cost/2

Source (TheRegister): http://www.theregister.co.uk/2004/05/07/apple_itunes_price_rises/

Source (TechCrunch): http://techcrunch.com/2012/10/24/taylor-swift-doesnt-want-me-to-listen-to-her-new-album-on-spotify-not-so-swift/

Source (United States Copyright Office): http://www.copyright.gov/circs/circ1a.html

Source (DepthofProcessing): http://depthofprocessing.blogspot.com/2010/10/how-much-does-artist-make-on-itunes.html

Source (FastCompany): http://www.fastcompany.com/1816582/why-spotify-turned-down-adeles-21

Source (TheVerge): http://www.theverge.com/2013/2/26/4032510/peer-to-peer-music-sharing-dropped-17-percent-last-year