Spotify Ruffles Feathers, Promises Paradigm Shift

"Spotify? I'm not a fan," says Maynard James Keenan from his home in Cornville, where he balances his winemaking and numerous musical projects. "I haven't made enough from them for a cup of coffee. Rhapsody? Same sad story."

That's the complaint circulating among musicians as industry buzz builds around the burgeoning upstart in the American music-streaming market, Spotify. Part of the latest sensation — cloud computing — streaming has been around for years, with companies like Rhapsody and the revived Napster attempting to popularize the format. But streaming never took hold, losings its luster to services like the more radio-like Pandora.

That was until the Sweden-based Spotify launched in the United States on July 14, 2011. The company's big innovation is its "freemium" model, which allows free unlimited streaming from a desktop or laptop for six months and 10 hours free per month after that. You have to pay a $10 per month fee to access its 18 million song catalog when mobile or offline. (A $5 fee allows continued unlimited desktop access after the six-month trial, though in March, Spotify extended the free trial indefinitely.)

"What Spotify did was create a model that allowed a proper funnel for people who maybe at the time weren't willing to pay for music," says Spotify's Sachin Doshi. "For any business model to be successful, there needed to be a free element to get people onto what we call our Spotify conveyor belt."

Recently, the company unveiled a free radio-style app modeled after Pandora that turns into an on-demand account with premium membership. So far, the company's grown nicely in every country it's entered and converted around 20 percent of its free listeners into premium users. The latest American figures echo that, with more than 10 million active users and 3 million subscribers as of January. Not only that, but piracy has subsided in the countries where it's launched. None of this has stopped a sturdy chorus of detractors here and abroad.

"It's not like radio . . . [where] you're waiting to hear your favorite song. You're putting a playlist together and going, 'Here's all the songs I like' and the artist barely gets paid," says Keenan. "I don't know where people got this idea that it doesn't cost money to make music."

Concerns with reimbursement rates have dogged Spotify since a nebulous Internet meme circulated in 2009 suggesting Lady Gaga received $167 for a million Spotify plays in Europe. Another viral rumor, circulated in America, speculates that Spotify's reimbursement rate per stream to be half that of Rhapsody and fractions of the amount iTunes pays per download. The latter is an apples-and-oranges comparison because downloads are a one-time event while streams represent a continuous line of customers paying admission.

Doshi says comparisons between Rhaposdy and Spotify on a per-stream basis are flawed because streaming is a buffet situation without the finite food. Both companies pay labels and artists comparable shares of their revenues (in a complicated formula), making the number of streams a red herring.

"Distilled down to a per-play rate, what they're measuring is engagement," he says. "On service A — which pays the labels $5 — the average user only streams 250 times a month, [and] the effective per-play rate is two cents. Service B is paying $6 month, and the average user streams 600 times a month. So that service is only paying a penny a play."

Spotify's active user base is exactly what has people excited, because streaming is a scalable business. It's exponentially more profitable the more popular it becomes, and the more profitable it is, more money is paid out. In Sweden, where Spotify has tremendous market penetration, popular artists make most of their digital income from streaming — and it's a significant amount.

"The head of Universal Sweden [the nation's largest label] told me that half of their total revenue is going to come from Spotify," says former Atlantic Records exec and longtime music industry vet Danny Goldberg. "As a result of that, [Universal Sweden's] total revenue is going to be at least 20 percent more than it was last year. That's an extremely encouraging situation, but it may be anomalous to Sweden."

Spotify's success hasn't prevented a number of artists from denying Spotify their music, most notably Coldplay, who withheld their latest, Mylo Xyloto, for four months before quietly making it available in February. Last August, Century Media and its subsidiary labels very publicly pulled all its music off Spotify. Another American indie, Drag City, also doesn't make its music available on streaming sites. Though both declined interviews, the thinking is that streaming cuts into downloads, an idea Spotify disputes.

Doshi notes that none of the countries that Spotify has entered have seen an appreciable impact on download growth, even Sweden (at least until very recently). Saddle Creek Records co-founder Robb Nansel concurs. "It's a little early in the game to know for sure, but it doesn't appear to be cannibalizing iTunes sales," he says.

"I feel like we're in the subsidy stage of streaming model," Nansel says. "The payouts are fractions of pennies for streams, so our overall thought on it is [that] we're kind of hoping Spotify gets this business model off the ground. If it can scale up to the level they're hoping for — 20 million is a number I've heard thrown around a lot — it starts to make sense in terms of payout, and all of a sudden, it's a viable revenue stream. Can it ever get there? We don't know."

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6 comments
Hekate
Hekate

I've used this service going on a year now and it saddens me to see a divide between it and artists. With the ever-evolving ways we access music there needs to be a happy medium for fans and artists. I want artists to make money, but more importantly I want them to make good music, not 1 good song per album which is very common these days. You have artists releasing albums once a year, and quite frankly that's too much. I'm an avid music lover but often spending my money on an album I've not gotten a chance to preview is a risk. Many artists need to produce better material that is worthy of buying a whole album.  I got tired of buyers remorse after buying CDs, and welcomed iTunes, and now Spotify. I go on Spotify to discover artists, and albums I've overlooked in the past. If it's good, I go on and buy it at Amazon or iTunes, I can't tell you how much stuff I've bought since using Spotify, it's to the point were I need to budget my music spending LOL. Sometimes I listen to albums I own just because I'm on my laptop and want a light program that doesn't eat of my computer's battery life up like iTunes. People like Maynard shouldn't worry about Spotify, his fans are going to go on an buy his albums. It's the Goytes and the Lana Del Rays that should be more concerned. 

mcdisease
mcdisease

Tool isn't even available on Spotify. A Perfect Circle is available. He should probably call Virgin Records and find out where his coffee money went. 

Nicholas Gonzalez
Nicholas Gonzalez

Love it. Musicians need to stop crying and use this technology to their advantage, cause its not going anywhere.

amy0
amy0

Maybe Maynard needs to quit being such a tool and create music people actually want to hear (and wine people actually want to drink).  Has been non-factor says what?

pennyformythoughts
pennyformythoughts

 @amy0 $0.0117.  That's what an artist gets paid when their song is streamed through spotify.  Relevance of Maynard aside, that's a joke.

 
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