Spotify the industry's new scapegoat

Spotify: The Music Industry’s New Scapegoat

By Kari Keller

Karissa Keller Spotify the music industry's new scapegoat

Kari Keller is an MBA Music Management major graduating in May 2015. She completed her BS in business administration: marketing & music business from Albright College in Reading, PA in 2013. Kari is currently interning at Live Nation NYC and also spent this past summer as a student associate in the bookings/marketing department at Madison Square Garden.

Spotify the industry's new scapegoat

Technology and its constant improvements and changes have helped our society operate smarter, faster, and more effectively in some ways. However, it has also posed major challenges to certain industries. In the music industry, outdated laws and a lack of flexibility by the label gatekeepers have severely impacted revenue streams despite technology’s progress. Music streaming services, Spotify specifically, have opened up a new alternative to traditional means of collecting income such as album sales via CDs or digital downloads. Unfortunately, due to the strict royalty rates imposed by dated copyright laws and the lack of financial support granted to artists from their tight-fisted labels, Spotify has now become a target for angry artists demanding their fair share.

Daniel Ek: Spotify Creator, Piracy Fighter, and Successful EntrepreneurSpotify is a Swedish music streaming service launched in 2008 by Daniel Ek. Ek’s goal was to create a technology that would help give customers a better alternative to piracy (Swanson 208). The service entered the U.S. market in 2011 and has continued to grow in popularity. Spotify is based on a freemium model which allows “Users [to] have the option of registering for a free account, supported by visual and radio-style advertising, or for one of two paid subscription models, which are ad-free and offer a range of additional features, such as higher bit rate streams and offline access to music” (Swanson 208). While many users, including myself, seem to like Spotify for its huge vault of songs and cost effective options, many artists complain that the service isn’t fair.

Smaller acts signed to independent labels, or acts that rely heavily on album sales as opposed to touring, seem to be more concerned with the royalty structure and what they believe to be “fair” returns. Larger acts that are still receiving most of their income from touring, or are receiving higher royalties as a result of major label deals, are more interested in how they can leverage this service to make it work for them. (Swanson 214)

So why aren’t returns fair and what does this really mean? A few reasons seem to be the problem in my opinion, although Spotify isn’t really one of them. We’ll delve into this as we continue.

The music industry, despite obvious evidence that times and technology have continued to change, has seemed to struggle to accept that albums and album sales are no longer the bread and butter of the business.

“In 2009, only 2.1 percent of the albums released sold even 5,000 copies. Typically, a record company cannot recoup investments until an artist’s record goes gold, meaning it has sold 500,000 copies. In the case of 97.9 percent of artists, they won’t see a penny from album sales, as all royalties go towards recouping the label’s initial investment.” (Swanson 211). This means that artists have to pay back their recording costs, producing costs, touring costs in most cases, and whatever else the label deems fair charge for their time and efforts.

Consider, however that this data was taken in 2009 and here we are now going into the year 2015. How many albums do we think are selling 500,000+ now? Taylor Swift was the first artist to break one million albums in all of 2014.  She is backed by not only a major label with deep pockets but has also managed to cultivate a huge fan base around the world. Taylor is lucky; she is just one out of the millions of artists struggling to make it in a hard and unforgiving business. With album sales dropping at such a high rate, many artists hope that Spotify will replace their dwindling revenue stream. However, the way that royalties work and the unfairness of many label contracts don’t seem to allow this to happen.

The most recent major law that has effectively had an impact on digital copyright was the Digital Millennium Copyright Act which was put in place in 1998 (SoundExchange). This was almost seventeen years ago! What’s worse is that this law didn’t even change the rates at which royalties are calculated. It simply “…expanded the statutory license to include non-subscription, non-interactive digital audio transmissions.” (SoundExchange).  While it’s great that this ensured sound recording rights holders (labels and recording artists) would get paid for digital streams, it didn’t really help the overall revenue structure. With the rate that technology is changing these laws are clearly outdated and don’t reflect the environment that the industry is operating in currently. What artists don’t seem to be realizing is that they are pointing the finger at the wrong person. Yes Spotify could potentially do more to support artists and their rights which will be discussed later in this piece. However, the real culprit isn’t this streaming service. It’s these outdated laws and the record labels.

Taylor Swift vs. Spotify
In November, 2014 Taylor Swift and her label, Big Machine, removed all of her tracks from Spotify.

“Digital services like Spotify generally don’t do business with musicians directly. Instead, they go through labels or distributors, which are then responsible for paying royalties based upon pre-negotiated rates.” (Swanson 218). What are these pre-negotiated rates? Labels make deals with Spotify on a case-by-case basis the majority of the time and luckily for them they are not forced to disclose the specifics of these deals to the public (Swanson 209). “If the rates were really so bad, [however,] the rights holders – the major record companies – would be complaining. The fact that they’re continuing to sign up means they must be making good money” (Dredge). Unfortunately just because a label may be making good money, doesn’t mean that the artist is making good money. The artists make whatever their contract says which usually means that the label will take the premium chunk.

Spotify the music industry's new scapegoatAccording to a 2010 study, the average Spotify stream results in a whole whopping $0.0016 for the label and $0.00029 for the artist. That means if an artist wanted to make the minimum U.S. monthly wage during this time period of $1,160, their song would have to be streamed over 4 million times per month (Crane). The fact that these rates are so small is absolutely absurd in my opinion. How many artists are actually able to achieve these high numbers? Well considering our previous look at album sales the results are probably very bleak.  So how do things really break down with streaming then?

“A Spotify premium subscription costs $10 month. Of the $10, “$6 goes to the owner of the recordings, $1 goes to the owner of the publishing copyright, and Spotify keeps $3. This is the same proportion by which revenues are shared in the iTunes model” (Swanson 221-222). Spotify isn’t doing anything different than its predecessors. Labels negotiate with the service and then pay the artists from there. It’s a business of penniess. Since the rights holders are usually the labels, is it any wonder that they are taking as much as they can get out of this deal?

“Although it is an unconventional way of thinking and requires a ‘perceptual shift in the transactional relationship,’ the economics of Spotify conform exactly to the economics that have always existed in the music business” (Swanson 222). The artists are the little man just as they always have been. The label and their contract determines how much money actually gets passed on to the musician (Dredge). When you consider that each stream only yields a percentage of a cent, of course the label is going to take as much as they can get.

Genevieve Schatz, lead vocalist of an indie rock group, says that Spotify is “…a business, just another business.” (Swanson 213) Yes, Genevieve, you are correct in that Spotify is a business but what alternative would you propose it to be? Wake up call! If Spotify isn’t a business and doesn’t make any money, it can’t pay out royalties which means you get paid zero. Artists like Genevieve are completely off the mark when they categorize Spotify as just another big business.

Fun fact: Spotify has lost an estimated $200 million since it was founded (Brustein).

Why? “Spotify pays out 70% of its revenues to music rights holders, and has said that it expects those payments to exceed $500m in 2013” (Dredge)! If Spotify really had the mindset of a big business or cutthroat personality, would it allow itself to lose so much money? Further still, would its stakeholders allow it to lose so much money? It seems to me that if the company’s shareholders truly didn’t believe in the idea and the potential of Spotify, then they wouldn’t invest in it and wouldn’t be willing to put up with the lack of profits. Yet here we have artists saying that the company isn’t paying out enough when over half its revenues are going to royalty payments. Spotify isn’t to blame here. The labels that take the majority chunk of these royalty payments and the fact that said payments are so skimpy you can barely make a living off them due to the ridiculously low rates are.

The music industry is no longer an industry of records and albums. Revenue has to come from all different avenues such as touring, streaming, merchandise, licensing, and endorsements. “In the 1980s and 90s, before the proliferation of the internet, the music industry was actually over-inflated. Musicians could make a living just by selling sound recordings and touring” (Swanson 211). Unfortunately, this is just no longer the case. With digital royalty rates the way they are and labels taking the majority cut, streaming is not profitable enough to replace album sales fully as a revenue source. It’s time for artists (and labels) to come to terms with this fact and ensure that the business can still be a profitable one as technology continues to change.

Music Artist revenue streams
One survey of 200 artists in the UK based upon revenue streams. Survey conducted by RightChord Music.

So what can we do? The way I see it there are definitely a few changes which need to be made to get things started. First and foremost, I stand with Swanson in that “…the payment structure needs to be reconsidered and higher royalty rates ultimately need to be negotiated in support of the artists. This may be as simple as artists revisiting deals with their labels. It may be as massive as Spotify re-evaluating the way that it distributes royalties.” (223).

Never heard Spotify?  Click Play on the playlist below.

The labels are clearly taking advantage of the talent here. Until these outdated laws change, services like Spotify will never have to pay more than pennies for each play of a song. Also, labels will never have to pay more than a small chunk of change to their artists because of said royalty rates and potentially unfair contracts. Artists have hardly ever had power in this business even though they are the ones that are creating its lifeblood.

Doesn’t that seem wrong and strange? Higher royalty rates would likely mean even more loss for Spotify at first yes, but as the business adjusts and works in favor of the artist hopefully the label would pay more to Spotify in exchange for promotion or other value. Also, if royalty rates are higher, wouldn’t Spotify theoretically make more per stream as well therefore they may actually be able to gain revenue after the initial setbacks? It will take a huge altering of the way the industry thinks, but ultimately I believe that if we were all to start putting the artist first we could all find a way to make it successful for everyone.

Your Nashville & Memphis, Tennessee Spotify Playlist
A typical Spotify playlist.

Spotify too can help in this “artist-first” attitude by changing some of its practices to aid in this as well. For example, Spotify could allow artists or labels to view or even purchase data about the demographics of their listeners. Of course ideally fans would have to grant permission for this data to be collected. If it were, however, artists and labels could better understand where they should be touring, what outlets they should be using to market their music, and what other interests their audiences may have based on their ages, genders, locations, etc. “Unless artists feel like Spotify is their advocate, there will continue to be pushback and a loss of support from artists and fans.” (Swanson 222). It’s up to Spotify as well to work with artists and the labels in order to make the industry a friendlier and more lucrative environment for all players involved.

Times and technology will continue to change and it’s evident that the music industry needs to do more to adapt to these circumstances. If we want to continue fostering artists that can create marketable music while still making a living, we have to work more on their terms. These outdated laws that only yield a percentage of a cent and allow rates to be individually negotiated need to be updated in order to increase fairness and revenue for all involved. Artists and labels need to re-evaluate their contracts in order to ensure that the label isn’t taking an unfair majority of the cut. This isn’t going to be easy. It will take a new way of thinking and a total transformation of the way the industry has traditionally operated. However, with a new generation of music business with an artist-focused mindset, we may be able to create a system that can be profitable for everyone.

 Works Cited:

Brustein, Joshua. “Spotify Hits 10 Million Paid Users. Now Can It Make Money?” Bloomberg Business Week: Technology. Bloomberg, 21 May 2014. Web. 27 Nov. 2014.

Crane, Matt. “Here’s How Musicians Make Money in One Graph.” AP: Alternative Press. Alternative Press, 27 Oct. 2014. Web. 27 Oct. 2014.

Dredge, Stuart. “Billy Bragg: Labels Not Spotify Deserve Streaming Music Payouts Scrutiny.” The Guardian. Guardian News and Media Limited, 7 Nov. 2013. Web. 26 Oct. 2014.

“Laws and Regulations.” SoundExchange. SoundExchange, 2014. Web. 25 Nov. 2014.

Swanson, Kate. “A Case Study on Spotify: Exploring Perceptions of the Music Streaming Service.” The MEIEA Journal 13.1 (2013): 207-30. ABI/INFORM. Web. 20 Oct. 2014.

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