Weekly Update

Spotify’s message for artists: Do the math

With competition rising from the likes of Apple, Beats Music and, apparently, YouTube, Spotify wants artists to know it’s not the streaming service that’s ripping them off. Last week, Spotify launched a new website called Spotify|Artists, which contains a lengthy — if somewhat simplified — overview of how the service works, how it pays out performance royalties, and how those royalties are calculated. It also contains sections on best practices for “getting the most” out of having your music on Spotify, along with charts and other material.

The website is clearly aimed at softening some of the harsh criticism Spotify has come in for from artists who feel they’re being short-changed by streaming services, and to subtly point a finger at the record labels and music publishers as the real villains of the piece.

The core of the website’s message is that, on a per-user basis, Spotify monetizes music than nearly every other major online platform:

Spotify is paying artists more than 2x the amount that popular video services are paying out (supported by advertising) and significantly more than both online and terrestrial radio services.

Spotify is still a relatively small service, with only 24 million users around the World. By contrast, YouTube has 1B users and iTunes has over 575 million users, only about 75 million of whom pay for music. iTunes is also the preferred tool for listening to pirated music, which generates nothing for artists. When Spotify grows to even a fraction of the size of these services, for example to 140 million total users and 40 million paying subscribers, we will increase our total payouts by 5x.

Spotify’s high royalty payments in comparison to these other services means that if all of this streaming activity (from video and radio services) was through Spotify instead, then the amount of royalties generated in the US by streaming activity would more than double from $530m in 2013 (actual streaming royalties across all services) to $1.3bn (if all streaming occurred on Spotify).

The problem is, artists aren’t paid on a per-user basis, while the labels and publishers effectively are.

The overview walks users through Spotify’s business model, including how it generates revenue and how it’s own payments to the record labels are calculated. Like most subscription service providers, Spotify recognizes revenue on a per-user basis, and its growth depends on attracting more users (and converting them to paid) rather than on maximizing their activity once they sign up.

Its payments to record companies and publishers, meanwhile, are pegged to its gross revenue, and increase roughly in proportion to the increase in Spotify’s user base. Performance royalties paid to artists, however, are set on a per-use (in this case a per-stream) basis, not a per-user basis and is often a poor proxy for artist’s value to the service.

The availability of music in a niche genre, for instance, such as jazz or Bluegrass, may be a valuable selling point to a segment of the audience for the service, driving up the subscriber base, even if the number of streams they generate as a percentage of total streams is small. Worse for the artist, the per-stream payout they receive often seems minuscule in comparison with Spotify’s gross revenue.

The movie industry went through a similar experience with Netflix, where the value a studio’s content was adding to the service was not being returned to the studio. Initially, studios signed blanket, flat-fee deals with Netflix for the use of their movies. Like music artists, the studios had had little prior experience with ARPU-based business models. Movies were typically licensed on a per-use basis (e.g. for a certain number of showings, or for a certain type of venue ), any payments were calculated the same way.

The studios quickly realized, however, that their flat-fee deals with Netflix left them cut out of the upside their content helped generate by increasing the value of the service. Eventually, they figured out how to structure licensing deals with Netflix so that licensing fees increased as Netlfix’s subscriber base grew.

The problem for music artists, of course, is that they have no direct control over how their music is licensed to Spotify or any other service. That’s handled by the labels and publishers. Better aligning artists’ royalty payments with Spotify’s revenue and growth, therefore, would require restructuring their deals with their labels, something the labels can be expected to resist.

The labels, in fact, are probably just as happy to have artists griping about Spotify, Pandora and other streaming service providers instead of taking a hard look at their label deals. With it’s new artist-friendly website, Spotify is trying, subtly but unmistakably, to redirect artists’ gaze.