If you are a frequent Spotify user, you’ve probably heard the ad that says “Piracy is so last year. Every time you listen to music on Spotify, you make money for the rightsholders and artists.” If you haven’t, you will; it is aired about once every two hours.
I am a frequent Spotify user, and I think it’s a fantastic service, offering free access to an ocean of recorded music, including recordings that are hard to find in record stores. It has revolutionized the way that people consume music and will likely be around for a long time.
But Spotify is a young product and a young company, and Spotify’s claim that it generates revenue for artists deserves thorough scrutiny. Does listening to music on Spotify really help support your favorite artists? Is Spotify really a better distribution channel than the best illegal filesharing services?
The short answer to both of these questions: Sort of, but only barely, at least right now.
Until Spotify came around, the best digital music distribution service had been Napster, the short-lived but rabidly popular filesharing service that let users share their entire digital music library – for free – with everyone who was logged in at the same time. This provided users with a virtually limitless music library. It was wild. At one point, I had 22 days worth of music downloaded to my college computer, including rare Beach Boys outtakes, out-of-print jazz records, and new music that was not available at the mainstream record stores. But Napster did not generate any revenue for rightsholders on its own, and was successfully sued by the Recording Industry Association of America and shut down in 2001.
Napster’s longest-lasting impact on the music business is that it showed that online distribution of digital music was the future of the industry. Several online services came about in Napster’s wake, but it wasn’t until Apple introduced the iTunes Store that consumers had a stable, safe, industry-sanctioned online music distribution service that rivalled Napster in its ease of use and breadth of content. Like Napster, iTunes Store users had hundreds of thousands of individual tracks they could search for and download. But unlike Napster, a user had to pay about a buck for each download. The success of iTunes’ pay-per download model created a swamp of copycat services including Rhapsody, eMusic, and a pay-service run by Roxio that was given the Napster brand after Roxio aquired it in bankruptcy liquidation.
Spotify operates as a bridge between the two models. Users can have free, ad-supported access to stream the entire Spotify catalogue, or they can pay about $10 a month to be able to download an unlimited number tracks from Spotify to their computer. Tracks downloaded through Spotify can’t leave the Spotify application, so there’s no risk of them being distributed any further, and rightsholders are paid a nominal rate every time someone plays one of their tracks using the Spotify service. This rate is exponentially less than what would be received for one iTunes download of the same track, but Spotify still has the full support of the Recording Industry Association of America, meaning it’s legal and it’s probably here to stay.
To give you an idea of Spotify’s payout versus iTunes and similar services, here’s the initial revenue report for Don’t Punch Your Friend in the Head, a song I wrote for my band Ramforinkus that we quietly added to several internet music services last April.
Since my band doesn’t have a record label or any other stakeholder taking a cut of the revenue, we receive the entire payout from each service:
iTunes (UK/EU) ~$1.22 / sale
iTunes (US) ~$.76 / sale
eMusic $.40 / sale
Rhapsody $.01 / stream
Spotify $.00378 / stream
So if you live in the US and purchased a copy of Friend in the Head on iTunes for 99 cents, we would receive about 77% of the sale. This could add up pretty quickly; if we end up selling 9,900 copies of our song on iTunes, we’ll receive about $7600.
Spotify has a completely different business model than iTunes in that it is a streaming music service, not an online store. As such, it pays rightsholders based on individual plays, not downloads, and its current rate is a little less than four-tenths of one cent per stream. That means an individual user would have to stream our song two hundred times in order for my band to receive the same 76-cent payout that would come from a single purchase on iTunes. Although four-tenths of a cent may be a fair rate for a single online stream, four-tenths of a cent won’t add up in any meaningful way until our song receives hundreds of thousands of streams, and my guess is it is unlikely that someone would listen to any individual track by any independent artist on Spotify enough times to match the revenue of a single iTunes purchase.
For the record: Four-tenths of a cent per stream is a marked improvement over the way artists were initially compensated by Spotify; Lady Gaga famously received only $167 after her song “Poker Face” was the first track to hit 1 million streams on Spotify in 2009, which amounted to 1.67 thousandths of a cent per stream.
This figure – .38 cents per stream – shocks a lot of people at first because Spotify’s entire business model rests on the fact that it’s supposed to generate revenue for rightsholders. Indeed, Spotify vigorously refutes the idea that they are anything other than the next great revenue source for artists. In a recent interview, a Spotify spokesperson said “Spotify is now generating serious revenues for rights holders; since our launch just three years ago, we have paid over $100 million to labels and publishers, who, in turn, pass this on to the artists, composers and authors they represent. Indeed, a top Swedish music executive was recently quoted as saying that Spotify is currently the biggest single revenue source for the music industry in Scandinavia.”
That claim is certainly impressive, but there’s a serious disconnect here between what Spotify says and what artists end up receiving per-play on the service. Most major labels keep a considerable cut of that less-than-four-tenths-a-cent payout, and independent artists who release their own material generally don’t attract the number of listeners it would take to make Spotify a better revenue generator than iTunes.
In fact, I might argue that fans who pirated Don’t Punch Your Friend in the Head could do more for us than had they used Spotify to listen to it. If 103 people had pirated Friend in the Head instead of streaming it through Spotify, those 103 people would possess a digital copy of the song, which means there are dozens of extra ways they could pass it along to others. They could burn it to CD and could email it to their friends; They could listen to it using any audio player, in any setting, and could easily transfer it between devices; They could convert it to any format, they could add it to a video, they could sample it, they could make it their ringtone, they could play it as house music at a theater or club, and they could broadcast it on their radio show. By listening to Friend in the Head in Spotify instead of pirating it, those 103 people could have shared the tune with other Spotify users and could have added it to their Spotify playlists, but there’s not much else they could have done that would help the song reach new people since music on Spotify can’t leave the Spotify application, and you can’t take the Spotify application with you without paying $10 a month for it. So as an artist in several independent bands, I don’t see how Spotify is really better for us than an equally accessible piracy channel would be.
I don’t mean to complain about Spotify as a service. Spotify represents the future of music consumption. We are a culture of convenience, and nothing is more convenient than immediate, cost-free access to every song you’ve ever wanted to hear. And I was always okay with small-scale music piracy, whether it meant taping songs off the radio, ripping a library CD to your computer, or making mix CDs for friends, so I am not writing this article to complain about music consumers who do not pay for all of the music they listen to. I am not only happy that Spotify is an option for my own music but I also use it several hours a day, both for fun and for work. The problem, as I see it, is that Spotify boasts that they have surpassed piracy and that you, the Spotify user, are supporting artists by using their service. I find this hard to swallow because they’ve released no data or projections to support these claims and their defense of their payout model is always presented in general terms. Spotify should not be advertising that their listeners generate revenue for artists; this could lead to someone choosing to listen to a song on Spotify instead of purchasing it on iTunes with the idea that they were supporting the artist either way. In reality, it takes nearly 300 Spotify streams for one member of an independent band to be able to buy a cup of coffee at a bodega, and probably many many more times if an artist has a record label.
If Spotify wants to change my mind, they’ll need to publicly release their payout model, and I’ll need to see concrete, verifiable data that can confirm that Spotify users listen to individual songs at a rate that will eventually surpass iTunes revenue. Until that happens, I will continue to look at Spotify as a free music service, like Napster and Grooveshark before it, and it should be known that the best way to support your favorite artists is to purchase their music at full-price – especially their self-released material - and to go to their shows when they’re in town.
Update (12/2012): In response to a few comments, I’ve expanded this article and have clarified some of the language. The underlying themes of the article are the same now as when it was first written. The original version of this article is available here.