Is Spotify the Best Option for Distributing Music?

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.

Payments-per-1m

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.

Relative-fig-est (1)

This is all based on the formula that Spotify uses to measure how much an artist receives from them:

Spotify-Royalty-Formula

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.

8 comments

  1. Very interesting blog post. I’m one of the few wimps who’s never illegally downloaded music – I guess the Orientation talk about BC Police tracking our Internet activity really stuck with me. I have always been an active Pandora user but I just joined the Spotify cult a month ago when someone finally explained the platform to me. With the college discount it’s basically $5/month for unfiltered iTunes access so I’m still kicking myself for taking this long to upgrade. Obviously, this is not my comfort zone. I don’t know much about sharing music so I’ve never considered the lucrativeness of the industry. How can a platform that rivals Twitter in popularity be struggling? It brought up some really interesting questions about financial drivers in social media. By inviting subscribers, Spotify forgoes their right to make money through advertisements. Clearly the loophole of spamming non-subscribers is not enough in its own right. I am curious about these repercussions and what it means for the future of music sharing. Jay-Z and U2 shattered expectations but how many more of these stunts can happen before it’s mainstream? We’ve seen platforms like Spotify fail before…do you think there’s a way to turn the tide or is the site destined to stay barely afloat? If so, what does that mean for its future?

  2. Great post Olivia. I’ve been on the fence about signing up, but this post and Kendall’s comment makes me think I’m ready to ditch Pandora and dive in. Not hearing constant advertising is probably worth $10 a month to me. (And Pandora is awful at ad targeting; I get ads in Spanish for Los Angeles theme parks.) I like the business case laid out here. One possible comparison is Amazon. This behemoth has huge revenues, but never turns a profit. Some analysts think their strategy is to grow market share, kill off competitors, and some day when they’re the only player left, raise prices. Its possible Spotify could someday have the same clout as a music distributor as Walmart does- play to their terms or miss out on lots of listeners.

  3. Cool blog, Olivia. I think freemium business models are fascinating and the industry shift to stream, rather than own, music has placed Spotify in a compelling position. I was exploring the sustainable success of the industry a while back and came across this Business Week article (goo.gl/aj8YtM) that shed some light on the situation. The article noted serious research that concluded: “Our analysis is that no current music subscription service—including marquee brands like Pandora, Spotify, and Rhapsody—can ever be profitable, even if they execute perfectly.” The further explanation of this point can be seen in the article that is worth a read. I’m also interested to see how Apple will try to enter the market, presumably employing some technology from Beats under the iTunes brand.

  4. I never realized Spotify was paying so much! Quite an insightful blog. I agree that the industry needs to recognize that the growth of these streaming platforms will ultimately generate revenue for the whole industry… and other industries are recognizing the penetration of Pandora/Spotify too. I think T-mobile came up with an offer recently where music streaming does not count towards your data cap. So more streaming, more time spent on the platform, and subsequently, more data collection on what people are listening to, what they are sharing with friends.

  5. alliemanning · ·

    Olivia, really interesting post. I have always wondered how the platform creates revenue. I have been a loyal Spotify listener for over 2 years now. I joined when I decided that iTunes really wasn’t worth the cost anymore. Spotify is truly a daily part of my life. The only music I have on my phone is through the Spotify app. My Spotify playlist on my laptop is organized into 4 categories of music and I have actually accumulated a number of followers to my playlists over the years. The convenience factor of Spotify is unmatched. You hear a song you like, you look it up on Spotify and immediately add it to your playlist– and like Kendall said, the $5 a month student discount for unlimited streaming seems like something that cannot be passed up. It is unfortunate that Spotify is paying so much and receiving so little– Pete and James make great points as well. Hopefully Spotify will find a way to sort out the royalties so that their services don’t end.

  6. Nice post. Music industry people either have (or need to) recognize that there is really no way to make money off of recorded music these days. Now its meant to promote the artist so you’ll pay to see them live. In the old days, bands toured in order to promote record sales. Now, they cut “records” to promote live shows. Which is why the concerts are so darn expensive these days. So, spotify helps promote at the very least, not make money.

  7. Hi Olivia, great post! I have always wondered how exactly Spotify made money so your post is super informative. I have always been a huge fan of Spotify and think their platform for music sharing is one of the best and super easy to use. Interesting to think that while many perceive the company to be super successful, there still are some underlying problems with their costs and royalty payouts. I would think that the competition factor does not play much of a role here, as every music platform seems to have their own unique way of operating and generating revenue. I also agree with Kendall and Allie, that the $5 a month student discount is a huge selling point for Spotify and definitely something that students should take advantage of. In the future I would hope to see Spotify become the main choice for users – hopefully it can figure out how to balance artist demands and the royalty issue.

  8. Nice post! This is really interesting, considering I am currently listening to Spotify as I read this. However, as much as I use Spotify, I had no idea it was doing so poorly (relatively speaking). I love Spotify, mostly because I think its a great tool to share music. But it makes sense as you talked about in your post, that the company is having issues with their costs and royalty payouts. I am interested to see the future of Spotify!

Is Spotify the Best Option for Distributing Music?

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.

Payments-per-1m

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.

Relative-fig-est (1)

This is all based on the formula that Spotify uses to measure how much an artist receives from them:

Spotify-Royalty-Formula

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.

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