Music News

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."

Others note that in negotiations on reimbursement rates, the major labels took a stake in Spotify. This has led some to question the contracts — since the numbers are private and the money is reimbursed through the labels (who have had a notorious reputation for "cheating" artists).

"I'm sympathetic to the fact that there's a longstanding distrust between artists and the labels on these things . . . but I think the economics are fair, and they're going to see that the second we scale to the levels we expect to," Doshi says. "Apple battled this among the artist community when it first launched. You saw a lot of people holding their records off of iTunes. As they scaled and made clear there was a real revenue source there, artists started to buy in."

Considering the way things have gone during the past decade, can you blame artists for being skeptical? As Cracker's David Lowery charged in his reply to NPR intern Emily White's now-famous blog post about her generation's general unwillingness to pay for music, artists feel their work's been devalued by fans who don't want to pay for it. The problem with Lowery's gripe is the horse already has fled the barn and is racing to a "wish you were here" place.

"Whether artists like it or not, selling records is not going to be the revenue stream that it once was," says Chuckie Duff, founder of local record label Common Wall Media. "Personally, I love [Spotify]. I never thought I would be into a streaming service, because I prefer to own music . . . but, really, it's just been a great way to listen to stuff that I might not normally listen to. And [eventually] I will buy it — most of the time."

At this point, it's too early to hate Spotify, because there's no telling how its streaming service will play out in a digital marketplace that changes so quickly. (MySpace, anybody?) There's still a long road ahead. Former Atlantic exec Goldberg says that in the first six months of this year, 60 percent of all albums sold were still purchased in physical media.

"There's a big gap in behavior between early and late adapters. So these things happen in waves. But, clearly, it's the harbinger of the future on some level," he says. "There have certainly been harder times. Up until the 20th century, there weren't any records at all — there was only the [concert] business. Music has been around a lot longer than recordings have been, but if you work with and love music and musicians, then you have to figure out how they can make a living."

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Chris Parker
Contact: Chris Parker