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Does Spotify Make Cents for Creators?

December 14, 2011

There has been a lot written about Spotify in recent days. As of now Spotify operates in Europe and the US only, but there are very similar services in the works here in Canada, and the discussion below may well apply to them as well.

Some of the attention Spotify has received lately is because a growing number of independent record labels have stopped allowing Spotify to stream the music of their artists. The central complaint has been that the revenue stream from Spotify is so miniscule that it provides virtually no compensation for music creators and indie labels, while undermining sales of physical product such as CDs, which pay considerably more.

Spotify has responded by announcing that it has paid the music industry roughly $150 million over the 3 years it has been in business.

That may seem like a lot, but for those of us who write and perform music there is both much more to the story, and unfortunately, far less.

Let’s begin with the $150 million figure. Since that revenue was paid out over 3 years it averages $50 million a year. Keep in mind that although Spotify has only operated in Europe for most of that time, the music it streams originated with creators from all over the world, and so that $50 million must be split between creators and right holders in the US, Canada, France, Australia, the UK, Ireland, and many more countries around the world.

Now let’s compare revenue from other sources to get some perspective.

In Canada, our excellent performing rights society, SOCAN, collects about $250 million a year from radio, TV and other sources. BMI, ASCAP and SESAC, the US performing rights societies, collect an amount between $1 and $2 billion a year. Worldwide performance revenues are billions more. This all sounds like a great deal of money. But when it is divided among all the creators and right holders in the world it amounts to modest payouts to the vast majority. SOCAN’s average royalty payment to songwriters is in the area of $500 annually.

So the $50 million a year from Spotify when divided among the world’s creators and right holders amounts to payments that are far below other uses such as performing royalties, and in fact are microscopic for creators and right holders.

Some argue that this kind of comparison is unfair to Spotify because it is still relatively new and in time it will reach many millions more subscribers and pay a reasonable amount to those who write and perform the music.

Maybe. But after 3 years, Spotify has only 1.6 million paying subscribers in Europe, or less than one half of one percent of the population. That does not bode well for Spotify eventually reaching the size of audience that it would need to fairly compensate creators.

So the situation comes down to this: Music creators are being asked to subsidize a model that pays them very little now, and may never pay a reasonable royalty for the use of their work.

As we have seen with a number of independent record labels, some are just saying no.

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3 Comments leave one →
  1. December 15, 2011 2:15 pm

    This is arguably a very complex issue. While you raise some interesting facts, I don’t view Spotify as being another “performance” revenue stream like SOCAN or ASCAP, so I’m not sure comparing it to these organizations makes sense.

    The artists or labels mentioned are withholding because the Spotify model competes with sales royalties (mechanical royalties or actual product revenue if they own their masters). The reality is, we’re at another crossroads in our industry where the consumption patterns of music listeners are changing from an ownership model to a subscription model, and so far the subscription model cannot compete with the ownership model in terms of revenue. This is very similar to what happened (and is still occurring) with physical sales and digital music (legal or illegal). Digital drove down the price point of recorded music because access to the product became much easier and more widespread.

    While I think creators should be compensated fairly for their work, at some point we have to accept that we’re no longer in control of setting that price point, and in all likelihood, it will never be what it once was. Once you start competing with a price point of free, you need to adjust your business model in order to adapt and survive.

    So where does that leave us? Well, I think it depends on what type of a creator you are. Most professional songwriters still see the majority of their revenue from performance royalty organizations like SOCAN or ASCAP and from licensing fees from placements. Mechanical sales royalties have become less and less prevalent, and unless you’re writing for hit acts that are still moving lots of units, I’ve talked to many songwriters that never end up seeing them. Is that right? No. But it is happening more and more. To the average writer then, Spotify shouldn’t seem like a huge threat.

    If you’re a touring act, signed or independent, the picture may look slightly different. Independent acts that own their masters can still see a decent chunk of their salary coming from recorded music sales (physical or digital) assuming they’re moving units, and therefore there is a threat to any model that could detract from people obtaining your product through a subscription service for a royalty much less than if they purchased it. The same could be said for signed artists, although I would suspect that affects the label more than it does the artist as many signed artists never see their royalties because they are recouped against recording and marketing costs. The exception may be artists like Adele that are moving huge numbers of units, in which case it may be beneficial for both her and her label to refrain from subscription services that currently pay much less.

    With all of that said, I think artists, especially new or developing acts, need to look at what the subscription model can do for them as part of the greater picture. It’s fine for The Black Keys or Adele to hold back from these models; they have a fan base large enough to support them. Most artists are not in the same situation, and there are benefits to giving people the ability to access to your music easily. Your recorded music revenue stream may suffer, but if your work is great, you may reach a wider audience which you can capitalize off of in other ways (touring, merchandising etc.)

    I do believe that in time, subscription services will become the norm, and hopefully they can attract a large enough volume of users to support the artist community fairly. In the mean time, I think withholding from adopting them is dependent on what stage you’re at in your career and what role recorded music sales have within YOUR business model (which may be different than other acts), keeping in mind that your model should be constantly changing and adapting to the market as it changes.

    • December 15, 2011 4:18 pm

      Thanks for your comments Mitchell. Spotify is considered a performance, certainly in Canadian law since it is “a communication to the public by means of telecommunication” which is a key component of the definition of a performance. My problem with the “promotional” aspect which we face all the time, especially for developing artists, is that if every use of music is promotional, then how do creators make a living? Finally Spotify is not a charity. Those who manage and own Spotify have already received substantial advances and revenues. A more equitable distribution of revenues so creators benefit as well seems entirely reasonable to us at the SAC.

      • December 16, 2011 12:08 pm

        Thanks for responding! This is definitely an interesting topic. To continue the debate, even if by law it’s considered a performance stream, I don’t believe Spotify is competing with or detracting from the money paid out by PROs like SOCAN or ASCAP. It’s a new method for consumers to access music for personal use (which to me is different than a public performance on radio/tv/live), so law aside, from a creators perspective, it seems like Spotify is competing with mechanical/artist royalties and product revenue as far as money is concerned. Furthermore like you said, Spotify functions as a for-profit company. Are there other PROs that function as for-profit? I’m not aware of one, so should we as creators really be looking at Spotify as another PRO?

        If we are supposed to, I wonder if anyone has really analyzed the numbers closely to see how it compares to the royalties collected by other PROs. I haven’t, so my perspective is only speculation. As an example though, I’ve seen SOCAN statements of television/radio royalties, and a single play often results in only a few cents to a few dollars depending on the station/placement. So if we’re considering Spotify another type of PRO, given that a single play on a radio/TV station that might reach a thousand plus listeners in some markets only generates a few cents to a few dollars, why should a single play to a single listener be valued at much more than a cent or a fraction of one? That wouldn’t make sense.

        Given those factors, it would seem then that the real issue with Spotify is that by the law’s definition it functions like a for-profit PRO, but it’s really a new model for music consumption, and that model doesn’t compensate creators the way physical or digital sales do in terms of royalties. Why doesn’t it? Well, it could be a variety of reasons, including that there aren’t enough subscribers yet to fully compensate the rights holders or that Spotify retains too much of its revenue for operations, product development, and its investors. Ultimately though, I suspect a key issue at play is that our desires and expectations as creators may be inflated because we’re used to the revenue model of a sale, not a stream, and that’s an unfortunate reality we may have to face if the industry continues to evolve and shift towards a subscriber model. With that said, I think it’s extremely important for the creator community to have a voice in defining what the value of a stream is, but I think it’s equally important to first acknowledge that it’s not (and won’t be) the same as a sale, and therefore an adjustment of expectations is necessary.

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