IT’S NOT SPOTIFY’S FAULT, PT. 2

The debate on Spotify has continued in recent weeks as mainstream press has been covering the fact that big artists like Adele and Coldplay are holding back their releases since they believe it cuts into sales. For their part, a Spotify spokeswoman says there’s “not a shred of evidence that holding back downloads cannibalizes downloads”. There’s probably not enough evidence yet to support either argument convincingly, but it’s not the real issue. To find that, we need to step back for a second to look at the business from 30,000 feet.

I’m a big fan of the book The Curse Of The Mogul. Authors Jonathan A. Knee, Bruce C. Greenwald and Ava Seave discuss the historical facts of disruption on many businesses and how it relates to the modern entertainment business. One important idea is that when the walls of distribution come down, with access comes devaluation. In recent weeks, I’ve come to fully embrace this as the root cause behind artists’ displeasure at perceived royalty rates.

The first clue came in a recent Businessweek article where three anonymous music executives said the average person spends $60 a year on iTunes. Since Spotify and other subscription services charge $10 a month, this means the revenue per consumer should double. Sounds like great news for the music business. While I know that the “average” won’t literally double, let’s just go with it for the sake of this example, and keep in mind that what I’ll outline is therefore a “best case” scenario.

If the average person is spending $60 a year on iTunes, it stands to reason that they are spending it on a minimum of 4 artists (4 albums x $15 price tag for deluxe albums) and a maximum of 87 artists (87 singles x $.69 discount price). Realistically, most people will be smack in the middle having bought a couple of regular $9.99 albums and a few singles at the $1.29 premium. If narrowed down to a month, on average the most someone would spend money on is 7 artists.

But how do we know how many artists get heard on Spotify? Well, we can make an educated guess by looking at the Facebook streams of playlists. This is admittedly unscientific, but will highlight the issue nevertheless. I examined what 10 random Facebook friends of mine listened to on a variety of subscription services. They ran the gamut from one person who listened to only one album to someone who listened to over 400 songs, which included albums, singles and playlists. What I found is that the average person listened to 3 songs per artist.

Data on how much people are listening to subscription services on a monthly basis is not available enough to get an exact reliable statistic. However, looking both anecdotally online and from my own personal knowledge, the average person is likely listening to 10-15 hours a month. Using this statistic, we can deduce that people are listening to somewhere between 40 artists (120 songs (5 minute song average x 10 hours) divided by 3 songs per artist) and 100 artists (300 songs (3 minute song average x 15 hours) divided by 3 songs per artist) per month.

In an iTunes world, the average person consumes music by, at most, 7 artists a month. In a Spotify world, the average person consumes music by, at least 40 artists a month. So in the best case scenario, even though the dollar pool has increased by 2x, the number of artists the payouts are distributed to has increased by nearly 6x. Given that this is the best case scenario, the figure is almost certainly higher than that. In a dollars and cent perspective, while the average artist grossed as little as 69 cents per person in iTunes revenue, the average artist probably grosses no more than 25 cents in subscription revenue.

The reality is that the very thing that gives indie artists access to subscription distribution is what is keeping the royalty rate low for everyone. The pool to increase payouts per artists not only doesn’t exist, it CAN’T exist without raising the price of subscription to a price-prohibitive rate of $50/month or higher. The only other potential solution would be to create a service that excluded access to many artists to allow existing artists to obtain a larger chunk of the royalty pie. This would give services a gatekeeper role not unlike current physical music retailers. Many artists would certainly complain because they were kept out, but the ones that did get in would be happier with a more reasonable rate.

As a new independent label owner, I actually welcome all the artists and labels keeping themselves off Spotify. It actually allows for an opportunity for us that are on these services to command a larger slice of the royalty pie. However, don’t think of Spotify as being cheapskates. The truth is that as an unknown artist, if you want access to the big game, you must understand that until you’re popular that it comes at a (lower) price.

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One Response to “IT’S NOT SPOTIFY’S FAULT, PT. 2”

  1. wade January 27, 2012 at 4:14 pm # Reply

    This makes sense that subscription services like Spotify are going to have a higher artist-per-month range then an iTunes or other similar purchase site. Subscription services are great for Artist discovery because you don’t have to commit to the purchase of a song, you can explore.. this is what I have always been interested in with subscription types. And with these subscription models over time you are going to cut way down on piracy because the cloud model via subscription services is going to give you access to libraries that pirates would normally have to go out and build. Now they are legally part of your favorite artists lists.

    The reality is that because of the availability and access to so many artists via internet technologies, music is moving closer to the definition of a commodity item.. Inexpensive creation of the product and mass distribution models available to all. Think of other art forms like graphic artists (painters). What does it cost to create a piece of art, canvas and a few tubes of paint. And as with most art, the quality is subjective. So what makes Adele (who I think is great) differentiate herself from another artist that is pretty good when exposure via Internet methods is equal? Multiply that by thousands and thousands of examples. Good luck major labels trying to keep up with that.

    Also, the fact these artists are withholding releases from the download market is no different than the movie industry staging their releases from Theater to On-Demand to DVD to Cable.. etc. Releasing to the more profitable model first is very common unless you don’t have to clout to do a theater release (ala straight to DVD movies). Only difference is a CD now costs thousands to create versus movies are millions. Cost of creation is still a barrier to entry for the film industry, not so with music.

    So get out your canvas and paint music industry, competition and distribution of revenues is going to drive this business into the hands of the many not the few.

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