Does Spotify Deserve to be a Punching Bag?

ktw

Kyle T. Westra
Manager, Wiglaf Pricing

Published May 15, 2020

Examining the role of streaming services in the music industry (and sharing a new recording).

Spotify, the global leader in music streaming, could boast 271 million active users at the end of 2019, dwarfing competition from the likes of Apple Music (60 million) and Amazon Music (55 million).

But being the market leader comes with a downside: drawing the ire of those who decry the entire streaming business model. In this sense, Spotify is much less popular than its user numbers suggest.

Taylor Swift, one of the most successful pop musicians of her generation, famously feuded with Spotify in 2014 by pulling her back catalog from the service and refusing to release her new music on the platform.

She took to The Wall Street Journal to write:

“Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for. It’s my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album’s price point is. I hope they don’t underestimate themselves or undervalue their art.”

More recently, artists have been repurposing a Gillian Welch song to criticize streaming services. Welch’s “Everything Is Free” was originally written to decry Napster and the theft of a musician’s intellectual property:

Everything is free now
That’s what they say
Everything I ever done
Gonna give it away
Someone hit the big score
They figured it out
That we’re gonna do it anyway
Even if doesn’t pay

Today, musicians are applying that same criticism to Spotify. The company, in their mind, devalues their music and pays them pennies for their work.

As Rolling Stone notes, leading indie artists such as Courtney Barnett, Phoebe Bridgers, Julien Baker, Sylvan Esso, Conor Oberst, Anais Mitchell, and Father John Misty have all covered “Everything Is Free” in this light.

But does Spotify deserve this negativity from artists? Is streaming fundamentally a broken way to deliver music?

As a musician myself, I’m especially interested in the answers to these questions.

Spotify pricing - streaming as a pricing model

Photo by NeONBRAND on Unsplash

Streaming as a Pricing Model

In pricing strategy, we are always looking for ways to align the producer’s pricing model with the value delivered to the consumer. In this light, being paid per stream makes a lot of sense. It is reasonable to assume that a listener is getting more value from a song the more times they listen to it, and consequently musicians should get paid more too.

Paying a relatively high flat fee for an album without knowing how much you’ll like the content is like how we used to have to buy software: fork out for the license and hope that it’s actually useful. One reason SaaS (software as a service) subscriptions have become so popular is that it lowers the entry risk for the buyer while incentivizing the company to deliver a product that actually gets used.

The alignment of number of listens to artist revenue seems fundamentally fairer than an artist getting paid a flat fee for an album copy, regardless of whether it is played daily or simply gathers dust.

Spotify Revenue Share

If streaming as a model isn’t fundamentally unfair, then what about the amount of money that artists receive?

Spotify is a large global company, earning total revenues of $7.44 billion in 2019. It has had a few profitable quarters over its lifetime, but reported a loss of $85 million on revenue of $2 billion in Q4 2019. Spotify evidently isn’t even earning enough revenue to have a reliably sustainable business model.

What do we know about how it distributes the revenue it collects to various entities? Spotify pays 70% of royalties to copyright holders. Such low gross margins are one reason that streaming has struggled to achieve profitability.

Spotify pricing example - how do artists make money from streaming

It terms of what’s fair, compared to other organizations and industries in entertainment broadly, Spotify’s 70% share look pretty good. The NBA pays about 50% of its revenue to players; the WNBA, less than 25%. Film actors get roughly 5-8% of a movie ticket.

Comparisons are difficult to make, but at first blush Spotify’s 30% doesn’t seem to be an inordinate amount of revenue to keep.

Royalty Distributions

If Spotify redistributes the strong majority of its earnings to rights holders, then how come artists feel like they receive only pennies?

The answer to that relies on separating out who the actual rights holders are. Rights holders can be the artists, but also include songwriters, labels, and publishers.

How are royalties divvied up between those different entities? A 2015 analysis by Techdirt illustrates that labels in fact take nearly 75% of post-tax royalty payout:

Streaming music pricing - post tax royalty payout chart

If Spotify is passing on 70% of its revenue but only 3% (10% of the remaining 30%) goes to the artist, what is really at fault there? Perhaps the agreements that artists have with their labels.

Spotify doesn’t have the ability to define such agreements and so cannot be responsible for their outcomes.

Music Labels as Intermediaries

Music labels are a type of intermediary between artists and their listeners. What services do labels provide artists? Primarily three:

  • Creating the product: how can we take these artists and pair them with the most suitable cowriters and producers?
  • Marketing the product: contacts in radio, playlist curators, music journalists, etc.
  • Financing the product: fronting cash and assuming financial risk for album creation, touring, etc.

Those services can be incredibly valuable, in which case, labels should be paid commensurately. But if labels aren’t providing enough value, maybe they aren’t deserving of this large of a share of the payout. Maybe artists need to rethink their channel strategy.

Since 2014, Swift has made up with Spotify, not only releasing her 2019 album Lover on the service but also creating exclusive playlists and other material for co-promotion with her erstwhile enemy. That is, Spotify is performing many of the intermediary functions of a label. Lover is also her first studio album of which she fully owns the copyright; her regular label, Big Machine, isn’t involved.

Is it coincidence that removing the label from the royalty equation makes streaming more palatable to Swift? Or is it a tacit admission that the label is the problem with the equation, not streaming itself?

Spotify’s 2019 annual report illustrates that only a handful of labels have a large amount of power:

“The music industry has a high level of concentration, which means that one or a small number of entities may, on their own, take actions that adversely affect our business. For example, with respect to sound recordings, the music licensed to us under our agreements with Universal Music Group, Sony Music Entertainment, Warner Music Group, and Merlin, makes up the majority of music consumed on our service. For the year ended December 31, 2019, this content accounted for approximately 82% of music streams.”

Such consolidation is reminiscent of Amazon and Walmart for retail, where a small number of distributors can have inordinate sway in their channel relationships.

Music as a Business

The music industry is complicated and earning a living as an artist has never been easy. But basic facts about streaming revenue and royalty distributions don’t point to streaming services as the enemy.

Technology has always affected how music is created and enjoyed. Album sales used to be a reliable source of revenue until the internet took off. Now, streaming accounts for 80% of industry revenue. Artists then could depend on touring, where (depending on the arrangement) they could bank an average of 74% of the ticket price.

Now in our COVID-19 world, touring has fallen off a cliff. The internet and digitization have allowed artists to adapt, finding creative new ways to interact with fans, such as live streaming concerts and podcasts. Disruption is painful, but also holds promise.

Streaming services represent real change, but their vast popularity demonstrates that this is change that listeners and fans want. There are real benefits to such a world.

Reinterpreting “Everything Is Free”

In that light, I have recorded my own version of Welch’s “Everything Is Free”. You can listen to this version (on Spotify) here.

By starting the song on a major chord and adjusting the chord progression to match D major, the same lyrics that in the original are downtrodden and defeated take on a more wistful and inspirational air about freedom and the creative spirit.

The fiddle was recorded remotely by Nataly Merezhuk, a Baltimore-based jazz violinist, a feat made immeasurably easier by today’s music technology.

Hopefully, this version can contribute to a more nuanced conversation about the value of potential of streaming services, not only to the music industry but to musicians and their dedicated fans alike.

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About The Author

ktw
Kyle T. Westra is a Manager at Wiglaf Pricing. His areas of focus include pricing transformations, new product pricing, commercial policy, and pricing software. Most recently to Wiglaf Pricing, Kyle worked in project management, business systems analysis, and marketing analysis, starting his career in global strategy at a foreign policy think tank. He has extensive experience in ecommerce, sales strategy, economic analysis, and change management. His Amazon bestselling book about how technological trends are affecting pricing and commercial strategy is entitled The New Invisible Hand: Five Revolutions in the Digital Economy. Kyle is a Certified Pricing Professional (CPP). He holds an MBA with distinction from the Kellstadt Graduate School of Business at DePaul University and a BA in Political Science and Economics from Tufts University.