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Thom Yorke/ Spotify Royalty Rate Rant

spotify royalty rateA while back when the music industry was still reeling from effects of widespread piracy and the ipod was in its infancy, I made a prediction that consumers would soon be demanding access to extensive libraries of music anywhere at any time.

First, the ipod allowed massive collection of music to be carried in a wallet sized device, but users were limited to libraries they actively built (legally or not) and placed on the ipod’s limited hard drive

Next, itunes enabled users to purchase new music anywhere with an internet connection, which allowed users to expand their library on the go for $0.99 per song. Pandora enabled users to listen to semi-customized internet radio station for free, but it wasn’t until the Swedes developed Spotify that users could literally listen to almost any song by any artist anywhere with 3g connectivity. Spotify offers a free ad-based service, but for $9.99 permonth users can use Spotify on mobile devices and even listen to songs without an internet connection. My prediction was realized, and from a consumer’s view, it’s a dream come true.

Unfortunately, those on the other side of the table, the artist and songwriters, aren’t happy–and with good reason. As soon as Spotify debuted, it just seemed too good to be true. How can nearly every song be available to me without ads for unlimited play for only $9.99/month? The answer, of course, is to keep operation costs low by paying artists and songwriters as little as possible.

Here are a few examples: In a New York Times piece from January 28, 2013, independent cellist Zoe Keating published her Spotify earning: 131,000 plays for a total of $547.47 or $0.42/play.  In a similar article on NPR independent artist Erin McKowen discovered she was only getting $0.004 per play.

While neither per play is is generous, the discrepancy between the two per rate royalties is due Spotiy’s variable royalty payout model. It’s much more complicated  than I present here, but here’s the idea of how it can work. Per-stream rates on the free platform are up to 90% less than those streamed on the paid subscription platform. And, unlike Pandora, Spotify’s royalty rates aren’t statutory, meaning that each publisher record company, and independent artist may have different agreements.  And don’t forget that record company and publishing agreements with artist and songwriters will designate that an even smaller chunk of the check paid to them by Spotify will actually make it to the artist/songwriters pockets. So the low rates are really a multifactorial issue and not purely a result of Spotify’s greed.

The royalty issue, while not new, has been thrown back into the spotlight when Thom Yorke announced Monday that the new LP for his side project Atoms For Peace, won’t be available on Spotify. The album’s producer Nigel Godrich argued that under Spotify’s current model, “small labels and new artists can’t even keep their lights on.”

While Spotify’s growth and popularity are predicated on the (mostly true) illusion that the service carries everything, Atoms for Peace’s absence probably won’t put a dent in Spotify’s business model. But will it raise enough awareness to cause other larger acts follow? And if so, what result? Will Spotify change their penny pinching ways? Can they?

In rebuttal to Yorke’s announcement and criticism, Spotify argued that by the end of the year they will have paid out $1 billion to rights holders since the company’s start in 2006. Whoa, sounds like a lot of money, and it is, but what’s not mentioned is how many artists are on Spotify, how many total plays the service has recorded, and how much profit Spotify has netted over that same time. So besides shock value, their response doesn’t add much to the conversation.

So what if every artist follows Thom? Of course Spotify won’t be popular with a tiny catalog, and when taken to its extreme, the service will shut down. Artists would like to see Spotify say “ahhhh you guys are right, lets renegotiate,” but that’s just not going to happen unless Spotify can grab more revenue. And that’s where a the third party that often get left out of the conversation becomes relevant: the consumer. While I don’t know Spotify’s exact financial situation, I’d venture to say that under its current model, merely increasing money paid to artists/songwriters isn’t a viable longterm option. They will need to increase revenue which will test how much consumers are really willing to pay for music.

So what if Spotify were to cease its free ad-based program? Would consumers flee to other sites or would they convert their account to Spotify premium? Right now Spotify has been able to convert around 17% of their free users to paid subscribers, but it’s unclear how that would change if a free option didn’t exist. My guess is that new paid subscribers would drop since the free-to-paid conversion is based largely on users first becoming hooked on the free version and craving more.  With no free option it will be harder to convince potential new consumers to even try the service.

Spotify could also raise their price for current and new paid subscribers, but would face the same threat of losing subscribers.  And even though I use Spotify every day, if my monthly rate jumped to $15-20/month, I have to admit that I’d definitely look for a better deal. Now why nearly the entire country, including myself is willing pay $80+ month for non-customizable cable service but not $15 for completely customizable music is beyond me, but right now, that’s the way it is. So while it’s easy to demonize Spotify, we have to remember that they are operating within the market that us as consumers have created.

The royalty issue is complicated one and my rantings have only just begun to scratch the surface of the argument. I still see streaming services like Spotify as the future of music consumption, but if consumers are unwilling to pay for music, nothing is likely to change.



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