This was in the Wall Street Journal a couple of days ago:
http://www.wsj.com/articles/how-the-cash-flows-in-spotify-streams-1433376207
How the Cash Flows in Spotify Streams
Songs on the free version pay a lot less in royalties, and that’s just one of the quirks
By Ethan Smith
Updated June 3, 2015 9:57 p.m. ET
On Spotify, not all songs are created equal; sometimes not even the same song is created equal—at
least when it comes to how its creators are compensated.
According to an analysis of data supplied by Spotify AB to music publishers, it takes five to seven
plays of a song on the streaming service’s free “tier”— which makes its money from ads—to generate
the same amount of royalties as a single play on Spotify Premium, which charges users $10 a month.
Last December, a single play on Spotify Premium was worth an average of about 0.68 of a cent in
royalties, according to the analysis, conducted by Audiam, a company that helps music publishers
collect digital royalties. In the same month, a single play on Spotify Free was worth an average of
about 0.14 of a cent, about one-fifth the value on the subscription. (Royalties generally are due to
record companies and music publishers; how they are shared with performers and songwriters depends
on their contracts.)
Some in the music industry want Spotify to set stricter limits on the free tier, either by reserving
certain music for paying subscribers, or by making people start paying after a certain number of
months on the free service.
Spotify argues that the open-ended free service is a way to convert listeners to subscribers.
Spotify Free listeners have access to the same 30 million songs as Spotify Premium, albeit with ads
interspersed and some other limits, such as albums playing in a shuffled order.
The share of Spotify users paying for the Premium service fell last year, to 25% of its 60 million
active users. A year earlier, the company told music companies, paying subscribers represented 28%
of its users. The company says that ratio moves both up and down from month to month.
Even though free users outnumber paying subscribers by about three to one, the free tier generated
only 9% of Spotify’s $1 billion-plus revenue last year; the rest came from subscription fees,
according to a financial disclosure Spotify filed last month in Luxembourg.
The two tiers generate roughly the same amount of total listening in any given month, according to
data shared with publishers. (Subscribers—who presumably want to get their money’s worth—tend to
listen to a lot more music than free users.) In March, that amounted to over 4 billion streams each
on Spotify Free and Spotify Premium in the U.S. alone, where online music companies have to share
certain usage and royalty data with music publishers.
The previously undisclosed numbers help explain why some artists are unhappy with Spotify’s free
tier. Most famously, Taylor Swift removed her music from all of Spotify last year when the company
wouldn’t let her take it off the free tier. She kept her music on services such as Rdio, which doesn’t
offer a free on-demand option.
“Ad-funded is not a sustainable business model” for on-demand music, Lucian Grainge, CEO of Vivendi
SA’s Universal Music Group, said in a Journal interview last fall.
Tellingly, Apple Inc. ’s new music-streaming service won’t offer the kind of free, all-you-can-eat
option that Spotify does.
Spotify, under the terms of its deals with music companies, calculates its royalties by creating
separate pots of money for the subscription and free tiers, then divvying each pot up among the
billions of songs its users listen to in that month. Because subscriptions generate so much more
revenue than the free service, the subscription pot is much bigger.
The value of a free listen during the past 15 months has risen from 13% to 21% of the value of a
paid listen, according to Audiam’s analysis.
That increase has happened partly because the value of each paid stream has declined as usage has
increased—a sort of volume discount that is built into the way Spotify pays out royalties.
Between January and December of 2014, the number of paying Spotify subscribers in the U.S. increased
75%, to about 4.7 million, while the total number of songs they listened to rose an even greater
85%, to 3.44 billion. The average subscriber listened to 695 songs in January and 734 songs in
December—meaning each user’s subscription fee effectively paid for more songs.
Thus, a 6% uptick in listens per paying user contributed to a 16% drop in the value of any given
listen, to about 0.68 of a cent last December, from 0.81 of a cent last January.
Audiam Chief Executive Jeff Price has an analogy to explain the phenomenon. “It’s as if you’re
spreading peanut butter on bread, but the piece of bread keeps getting bigger,” he says. “The peanut
butter gets thinner and thinner.”
Spotify says that subscribers who listen more are more inclined to keep subscribing, and that any
reduction in a per-stream value is irrelevant, because the overall pot of money available for
royalties is growing. And the company says it pays royalties based on a percentage of listening, not
by calculating the value of individual streams.
“The more people listen, the less their theoretical per-stream rate is,” Spotify’s head of
communications, Jonathan Prince, says. “But the more people listen, the more likely they are to keep
paying, which is what all of us, Spotify, rights holders and artists, should want.”
—The Upshot is a business column by Journal bureau chiefs. Mr. Smith is the Los Angeles chief.
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