Spotify has over 40 million active users (active users meaning people who have used Spotify in the last 30 days), and over 20 million songs spanning 58 countries. There are playlists, recommendations, an option to follow other users or artists, integrated apps, radio channels, the ability to send other users tracks along with messages, an option to connect through Facebook, and even more useful capabilities. All of this creates a generally pleasant experience for users, which has made it extremely popular. It is the dominant music related social media platform, yet it has been seeing some serious issues with revenue losses.
The general idea of Spotify is that subscribers pay $9.99 per month for unlimited, commercial-free access to the Spotify music library. This, along with advertising, is where most of the revenue comes from. A problem for Spotify is that they are using ~70% of that revenue for royalty payouts to rights owners of songs they stream. The company is retaining less than 30% of its revenue once these royalties are paid, then Spotify must account for overhead costs. This means that even though the company seems to be very popular and successful, they are having a serious dilemma when it comes to getting ahead of their costs.
They paid out 500 million dollars in royalties in 2013 and have paid over 1 billion dollars in royalties to date. Though this is more than other streaming platforms contribute back to artists, many have complained that Spotify has been unfair in its payment methods. As a streaming platform it is reportedly paying artists twice the amount that video services like Youtube are paying out (which is supported by advertising as opposed to subscribers) and significantly more than radio services, both online and FM/AM streams.
Spotify projects that as it gains subscribers, the amount paid to artists will rise as well. Spotify is hopeful that they will grow their number of premium subscribers to 40 million in the next two years, and that this will significantly increase monthly royalties to rights holders.
This is all based on the formula that Spotify uses to measure how much an artist receives from them:
It multiplies the monthly revenue of Spotify (from subscriptions and ads), the market share or popularity of an artist on the service, the ~70% of gross revenues that is distributed to labels and publishers (this percentage is decided through negotiations with these labels and publishers in each country), and the artists’ contractual royalty rate that is decided upon by the artist and label or publisher.
This means that though the amount artists are making through Spotify right now may be much less than they made in the past when physical copies of music were the only option, there is hope that they will be able to make more money once Spotify grows. Even though many in the music industry are wary of Spotify, they should be encouraging it’s use, because it is only going to become more profitable for artists who are on it if it gains popularity. It is already a huge name in digital music, and the popularity of streaming music as opposed to buying albums or songs is only going to become more prominent. We’ve seen a huge change in how music has been distributed—examples include U2 and Jay Z.There are many lesser known streaming platforms like Soundcloud or Bandcamp, but they don’t offer the scope or capabilities that Spotify has. There is no way to know what’s going to be next for the music industry and the ever-changing digitalization of media, but I think that if Spotify can gain the subscribing user base it needs to get the artists and skeptics behind it, then it may just be the best option.