UNDERSTANDING SPOTIFY

Screenshot 2014-11-07 10.53.26Young people prize “access over ownership”. This sounds like the kind of thing a digital music strategist like myself would be saying to support streaming services like Spotify. However, that’s not where the quote comes from. This was said by Sheryl Connelly, who is the head of Global Trends and Futuring for the Ford Motor Company. That quote was in reference to cars and was made two years ago in an article in The Atlantic. If the access model is affecting the business model of automobiles, what chance does the music business have to change that tide?

The fear that causes an artist to withhold music from Spotify is based on emotion rather than fact. The access/streaming model is scary largely because consumers are given greater choice. A purchase model requires the consumer to make a decision on which artist to support, thereby distributing money into the hands of fewer artists/labels. The access model gives the consumer such a wide choice that they can listen to a greater variety, thereby distributing money into the hands of a larger number of artists/labels.

Yet when faced with the choices that Spotify provides, most consumers shut down and don’t choose much at all. This phenomenon is called The Paradox Of Choice, and was outlined in the book of the same name by Barry Schwartz. Many Spotify users deal with choice by defaulting into playlists that reflect their style or mood at the time they want to listen. In observing the Spotify charts over the last year, the major deviations in weekly play counts almost always correspond to being added or dropped by a playlist.

Spotify’s growth in 2014, like nearly every other digital company, has mostly been in the mobile space. What makes that interesting is that you can’t listen to a particular song on demand on Spotify’s free mobile service. You are forced to listen to music on a random shuffle instead. Most of that listening, by app design and consumer choice, goes to playlists. By extension, this means the majority of free plays on Spotify are just a different iteration of internet radio.

When you understand that, limiting music to the paid-only version of Spotify becomes an obvious mistake. That’s because much of the revenue generated in the free tier doesn’t come from the consumer’s choice, but rather the choice of the playlist creator. If an artist is not on the playlist, they wouldn’t get much of that free-tier money anyway. Conversely, a song chosen on a playlist creates new revenue that wouldn’t exist otherwise.

Screenshot 2014-11-07 10.54.59Therefore, looking at the “free tier” revenue thru the comparison to sales is incorrect. The much more accurate comparison is internet radio. By that measure, Spotify should be embraced as this tier pays a higher royalty rate than Pandora does. Furthermore, Spotify playlist choices are made editorially by either Spotify’s team or individual users around the world. Pandora’s choices are made by algorithm, which leaves exposure decisions to largely be made by machine. From this perspective, artists of all sizes should be embracing Spotify’s model. Pulling music from Spotify’s free tier is akin to dropping songs from a top radio company that appeals to listeners 25 and under.

By understanding this ecosystem, my label DigSin has been experiencing exponential growth from Spotify, and I know we’re not alone. Our marketing division, DigMark, is also being hired by both majors and indies to help navigate this brand new world. With any disruptive technology, emotional response to fear often creates counterproductive decisions. The usage patterns of both free and paid Spotify users show both ecosystems to be smart opportunities for all artists. I strongly urge the music community to not be blinded by emotion. Instead, understand the data and embrace the digital disruption.

“The only way to win is to learn faster than anyone else.” – Eric Ries

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16 Responses to “UNDERSTANDING SPOTIFY”

  1. aaa November 7, 2014 at 6:21 pm # Reply

    WTF?

  2. Nada November 7, 2014 at 9:45 pm # Reply

    Jay I think you need to do a little more research on this topic. The issue with streaming is that the people that made the deals that matter related to streaming based on the majority market share have already been paid regardless if one song from their catalog or content they have distribution rights to are ever streamed. In fact it’s better if no one streams a song as they get to keep the un-allocated advance at the end of the year. They also have artificially negotiated lower per-stream rates in an effort to slow the per stream attrition of their advances meaning they get to pay their royalty obligations at a lesser rate vs. a rate determined by fair market value. You are right streaming is a great technology but the rates don’t work as they are. Major label greed has totally milked them for huge advances and equity which they are not obligated to share with the public or those that they have rolled up to gain their over inflated market share. You really should do some homework before you make statements and pontificate on this topic. You seem a little naive to the facts and more interested in principles then the actual mechanics of the deals. You are a smart man but the wool has been pulled over your eyes.

    • Jay Frank November 8, 2014 at 8:27 am # Reply

      While I appreciate your perspective, I respectfully disagree. I have worked many digital deals directly with major labels over the years and am aware of the pros and cons involved with them. It’s not to say things are perfect, but they are far better than artists are lead to believe. My point in this piece is that you have to look at the type of music play as well. Much of the revenue I’ve been receiving from Spotify (and it’s sizable) has derived from playlisting, which is exposure and revenue that wouldn’t exist otherwise. It’s not replacing sales because it’s airplay to people who were unaware prior to that listen.

      As far as research, I’ve been studying the ecosystem of Spotify both from a monetary and exposure perspective for several years and am paid by major and independent music companies to advise them on strategies related to it. There are few people who have studied this system more than I have, so I’m pretty confident that I’ve done enough research and stand behind my analysis here.

      • Nada November 8, 2014 at 12:10 pm # Reply

        The biggest difference is that you are not coming from a position of a strong and lucrative physical sales that transitioned into a digital piecemeal download business to now a fractional streaming business. The other issue is that the majors you are consulting also are looking at streaming as a way to revitalize a catalog of dead music in so far as existing music retail channels are concerned. I agree that steaming is the new radio and webcasting and programmed or interactive streaming is key to exposure to potential music buyers. The issue is that on demand streaming satisfies demand. There is not reason for someone to buy music when they can get it for free on-demand when ever and where ever they would like it. On-demand should pay a premium price for that satisfaction of demand and it doesn’t. The point I was trying to make is that it very well could but the deals that have been struck for the large catalogs are in fact front loaded and have artificially lowered the per-stream flow through to much of the trickle down royalty base recipients. If you look at the various premium services you will see that they all pay substantially higher per stream rates then Spotify and that is factual based on actual royalty statements. As for volume and gross dollars that like saying we lose a little on each sale but we make it up in volume which if that is your perspective it’s flawed. The right answer is to get the per stream playing field leveled at the highest rate possible and right now that is the subscription segment of the on-demand streaming providers. On Demand streaming is a great tool to legitimize piracy. Its also a great tool for acts that don’t have access to commercial channels of exposure but that’s usually because their music doesn’t appeal to a larger audience and on demand streaming is able to target those niche pockets of listeners via playlists. That said so is programmed streaming and it to can be actively effected as to song placement within a stream cycle. The difference is that when you have a product that is already IN demand and there is a large audience of willing buyers, free on-demand streaming is and will cannibalize their willingness over time to continue to be a willing buyer and it will and does change them into a digital native that does not see value in ownership. I am an avid buyer of music based on my generational upbringing. Streaming is changing my mindset of ownership and just because you can do something technologically doesn’t make it the right thing to do. The music industry needs to actually set its course so that it can support the artistic community. Technology does not have that same goal nor does it take accountability for effects. It could be a much better partner in this space and make decisions on free on-demand with premium having more access to a broader content pool at a premium royalty. That is the argument here and hopefully something that could be worked towards in the future.

        • Jay Frank November 8, 2014 at 2:02 pm # Reply

          Clearly I’m not about to change your mind. Any artist has the right to do what they feel is best. However, the logic of losing volume and making it up in gross sales is exactly how this industry was built. By your logic, in 1998 labels should have pulled their music from Walmart and gone all in with indie record stores. Instead, they doubled down on Walmart and aided indie stores to great success. All of these arguments have been used throughout recorded music history dating back to radio killing music sales. Yet we continue to stand and make revenue. I appreciate your contradiction, but I and my acts and clients are personally pleased with our position on the matter.

  3. TJR November 10, 2014 at 5:14 pm # Reply

    This is obviously in response to not only Taylor Swift breaking the Platinum drought of 2014, but also other major artists who have pulled their albums from Spotify as well and ended up having some of the top selling albums of 2014.

    There is no “one size fits all” business model for music artists. What works for one may not work for another. But clearly if you are a Major artists like Coldplay or Adele. It makes sense that releasing your album to Spotify the same week that you release if for sale is going to cannabalize your sales.

    This is why Major movie studios don’t release their big films on Netflix instant the same week they release it in theaters.

    Netflix does not expect Movie studios to give them all their movies at the same time they are released to theaters….Why should Spotify expect the same of major artists?

    PS:

    It doesn’t make sense for me to do this though because at this time. I am on a very different level than Coldplay or Taylor Swift. I have all my music on Spotify and have even included a handy Spotify playlist embedded on my website. But that doesn’t mean it wont make sense for me at a future date.

    Also: Withholding your album from Spotify doesn’t have to mean forever either.

  4. Maciek Pysz November 11, 2014 at 6:59 pm # Reply

    I am an artist and I really think I am loosing by being on Spotify…let’s really think about this for a minute, even £10 is little for an album…in fact it should be more! £10 a month for hundreds of albums? No! Why don’t we all go the other way, rather than thinking it should be free, how about we make each album, for example a minimum of £30 or £50 and imagine there are no places to download it for free…people would be buying it, as they are buying clothes, etc. As soon as they will find a way of easily 3D printing their clothes from the internet they will stop. I don’t think it’s really different with music than any other product, it just happened that somehow people are able to get this product for free and it’s socially acceptable…but I don’t have to agree with it. People are complaining music is expensive and spending £10 for two pints of beer, come on! Don’t you think music is worth it and £10 or more it’s still a fraction to pay of what were the time and expenses that went into making of the album. If people are happy to pay, say £50 for a ticket to see one gig, why not for an album they could have for life? It can be personal choice if it’s free, this is fine, if the band feels to give it away for free, more power to them but people need to have a choice if they want to make their music free, it’s shouldn’t be socially forced on them…ECM pulled out their catalogue from Spotify for a reason, so did other artists, it doesn’t work! Well done Taylor Swift!

    • Jay Frank November 12, 2014 at 12:37 pm # Reply

      An artist can certainly do as they wish. While I’d love a world where a $50 album could be sold, that’s mostly not the case. It’s a classic business problem of supply and demand. As more artists have the ability to reach people, the overall competition rises and value decreases. From what I’ve seen in 20+ years in the music business, Spotify absolutely works if you have good music and want to work with it.

      • Marilyn Carino December 20, 2014 at 4:27 pm # Reply

        Jay, just because it’s “just not the case” that we live in a world where a $50 album is not the norm, doesn’t mean that compensation for artists’ work can’t be made relatively equitable in new business models. The only reason it isn’t anywhere near equitable now is because all the rates were determined in corporate back rooms while all of us were sleeping. No content providers were consulted when Spotify was determining streaming royalty rates. They pay next to nothing BECAUSE THEY CAN AND NOBODY SAID ANYTHING ABOUT IT UNTIL NOW. Thanks to Taylor Swift for kicking open a door other musicians have been banging on for a while now!

        Spotify “works” in that they are the biggest and best-known forum for music streaming. They earn money selling subscriptions based on the fact that they HAVE tremendous supply. That volume, that variety of supply is what sells people on Spotify! So there is a DEMAND for a bigger supply in this case. And it works, but only for music consumers and for Spotify. Artists do NOT make money lending their content to Spotify, and since the vast majority of artists on Spotify aren’t on major labels that may have the type of deals that Ed Sheeran has to have extra and/or advantageous promotion, just being on Spotify is no guarantee of anything in the realm of increased sales or even increased awareness of an artist.

        It is a spurious argument to equate the two as an inherent component in the value of Spotify to artists. There is no equation. Anyone can win at the blackjack tables in Vegas. Does that mean that blackjack is a feasible source of income for people?

        Why doesn’t Spotify agree to transparency when it comes to how they determine their streaming rates? We keep hearing promises that rates will increase as subscriptions increase, but how will anyone know when that mythical critical mass point is reached? Or are we to just trust Spotify that they will shower us with coins when they feel the time is right and they can spare it? In what universe does a company that achieved success paying the lowest wages suddenly raise those wages as it becomes more successful? By that logic WalMart and McDonalds would be paying six-figure salaries.

        Jay, it is you who is behind the curve. Spotify is NOT an acceptable model for content creators. You can call me a Luddite all you like, I’m not. I just think that a billion-dollar company needs to be forced to pay fairly for the content that earned it its billions. Nada’s arguments are spot on. “Better than nothing” is just not good enough.

        • Jay Frank December 22, 2014 at 1:29 pm # Reply

          The rates Spotify pays is more transparent than you think. It’s about 70% of revenue pro-rated to listens. As such, the rate can fluctuate based on how much activity occurs in a month as well as the country it was streamed in. It was determined with content providers, who are the big labels and indie distributors.

          Does any of this guarantee people will make money from Spotify? Of course not. That’s never been the case in the music business. All platforms offer is a chance, and it’s up to the artist to make that a lucrative one. Some artists will succeed and others won’t. 96% of all releases on iTunes can’t sell 100 copies, yet Spotify is the bad guy if an artist generates less than $100 in royalties?

          As a content owner, it’s your right to sell your music wherever you do or don’t like. It’s hard to put me “behind the curve” when I am currently generating more revenue for our artists at a lower marketing cost than any other point in this business BECAUSE of Spotify.

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