Whether you love it or you hate it as much as Thom Yorke does, Spotify is now a massive player in the music industry, with around 40 million active users. The Swedish-born service has grown swiftly since its creation in 2008 and has effectively made streaming a commonplace technology with its expansive library and free option. However, there’s been plenty of controversy swirling around the service’s payment plans and business model, along with plenty of people defending it as a beneficial service for the industry. Here are six things to keep in mind about Spotify, on both sides:
1. Spotify Does Not Take A Cut From Merch Sales
In an attempt to better its relationship with artists, Spotify partnered with direct-to-consumer sales service Topspin, allowing musicians to sell merchandise on their Spotify artist page. Artists can link merch sales to any direct-to-consumer sale site, the only requirement being an ArtistLink account. The merch ad appears below the top five songs on each artist’s page, but it’s worth noting that only three items can be available for sale at one time.
2. Average Payment Per Stream is Less Than a Penny
Spotify reports that the average pay for each stream of a song is between .006 and .0084 of a cent. While the low rate does stem from the fact that it’s a single listen and not a download, streams take much longer to match the revenue generated from an album sale. Spotify’s business plan of taking listeners who would otherwise pirate music and getting to them to generate some money on the service is effective, with Swedish piracy rates reportedly going down after a few years of Spotify, but compared to traditional music sale formats, getting .006 of a penny is not much of an improvement.
3. Paid Subscribers’ Streams Give a Bigger Payout
Of course, keep in mind that “bigger” is a relative term here. While Spotify does not like to think of revenue in terms of streams, they did admit that factored into a royalty payment is whether or not the listener is a subscriber to Spotify Premium or a free user, as well as the country the listener is in. That average rate of pay between .006 and .0084 of a cent includes payments between both free and paid tiers, but streams from subscribers lean towards the higher end, despite the artist’s lack of control over this aspect. Still, no matter how small the payout is, there’s another figure to keep in mind.
4. 70% of Spotify Revenue Goes Into Royalty Payments
Regardless of payment per stream, Spotify says that roughly 70% of the money it earns goes back into royalty payments to rights holders. The other 30% is for operating costs, expansion and profit. This figure includes advertising revenue from the free tier and subscription costs from the paid tier. That’s a pretty large chunk of change. However, this also does not account for the massive private investments Spotify has received in the past, which greatly aid that 30% in keeping the company going.
5. Their Business Model Depends on Expansion
With that 70/30 revenue figure in mind, Spotify has often cited that their solution is to continuously expand. Opening the service in new countries brings in new advertisers, new paid subscribers and more streams. However, that last part can be problematic, because more people streaming means more royalty payments. This constant cycle could make it difficult to break out of reliance on private investment and makes it difficult to keep the service profitable, bringing us to our last, unfortunate point.
6. Spotify Has Been Consistently Losing Money
Although its revenue has been growing rapidly and in strides since 2008, its losses have also grown alongside with it, and in worrying numbers. From 2011 to 2012, Spotify’s losses went from $60 million to $77 million, and this was despite the massive increase in revenue raised by 2011’s U.S. launch, according to The Verge. This is because the more listeners Spotify gains, the more royalty payments it has to roll out as well. So although the company is focused on constant growth in new countries, new listenership also means higher royalty payments.
This isn’t just an issue with Spotify, however. This is an issue with all music streaming services on the market. Pandora and Rdio have found similar losses throughout their business runs, and it appears that most of these streaming sites keep running thanks to large outside investments.
So even with marginal royalty payments, Spotify and its fellow music streaming sites are experiencing losses. The solution is far from clear; some have tried to get lower royalty payments for streaming services, which of course would come at a cost to artists.
With Spotify’s popularity rapidly growing, for better or for worse, and Apple’s recent entrance into the fray by acquisition of Beats Electronics, including their Beats Music service, streaming looks to continue to expand as a major medium. However, there are pros and cons to almost every aspect of the business, and it’s worth keeping them in mind, especially with rumors circulating of a public offering Spotify stock.