Spotify is no desperate fart, just ask the music fat cats

Thom Yorke: not a fan of streaming services. angela n

Spotify is currently the world’s largest music streaming service with 24 million active users. Founder and CEO Daniel Ek has stated that the company will pay out roughly $500 million to rights owners in 2013. Nevertheless Radiohead’s lead singer Thom Yorke has argued “new artists get paid fuck all with this model” and, more recently dismissed Spotify as “the last desperate fart of a dying corpse”.

Yorke is right to say that from an artist’s perspective, payouts from Spotify are modest. Earlier this year, the cross-over cellist Zoë Keating published a spreadsheet detailing the royalties she received from streaming services for her two solo albums One Cello x 16 and One Cello x 16: Natoma. This revealed that she earned just US$808.01 from Spotify, even though her music had been streamed 201,412 times.

Spotify use made up 89.2% of all Keating’s streaming income, which shows how hard it is to earn a living from royalty payments in this model. On average Keating received US$0.004 for each song streamed on Spotify. With rates like that, a musician would need 5.1m streams to earn US$20,380 - the minimum wage of a waiter or waitress in the U.S.

Evidently, music streaming is not currently a viable income source for artists. So who is profiting? It’s not the streaming services themselves. Despite boosting its revenue by 128% to US$573.1 million in 2012, Spotify reported a net loss of US$77.4 million and asked investors for fresh capital to help it grow.

Like all streaming services, Spotify has a cost structure problem. According to PrivCo, a US-based financial intelligence service, Spotify’s cost of sales – mainly licensing fees – made up 98% percent of its revenue in 2011 (cost of sales fell to 83.5% in 2012).

If we deduct 3% for credit card payment fees, this means Spotify had to pay US$234.8m out of a total revenue of US$244.5m to rights holders in 2011. Take out other costs for personnel, marketing and sales as well as for overheads, and there isn’t much left. It is therefore crucial for Spotify to convert as many active users as it can into paying subscribers to counter-balance the high content acquisition costs. Spotify’s conversion rate was 32% in 2012, but this has to be improved in the near future if it wants to make meaningful profits.

Despite these figures, the larger record labels and publishers seem to believe in music streaming as a business model. And the numbers imply that for them at least, it works. The Beggars Group chairman, Martin Mills, recently said 22% of the label group’s digital revenues came from streaming and that most of its artists made more from streaming than they did from downloads in 2012. According to a New York Times article Spotify pays labels between 0.5 and 0.7 cents per stream (or US$ 5,000 to US$ 7,000 per million plays) for music featured in its subscription service and 90% less for its Freemium model. Therefore, record companies and music publishers with large, high-demand back catalogues benefit from music streaming.

However the business model favoured by the labels is not just based on royalties from licensing their music catalogues but also on guarantees and upfront payments made by the streaming platforms. The amounts paid are undisclosed but in larger markets such as France, Germany, UK and the US it is believed that payments in the tens of millions are usual. None of this money needs to be shared with the artists.

What’s more, the major labels appear to also have a stake in streaming services. It has been reported that the three biggest record companies in the world own 18% of Spotify. If it is true that Spotify is currently valued at US$ 4bn, the stake of Universal Music Group/EMI, Sony Music Entertainment and Warner Music Group would be worth US$ 720m in the case of an initial public offering.

Spotify seems to be a gold mine - but only for major record labels and some of the larger independent outfits. Small indie labels and artists – except a few superstars - aren’t getting a look in and, in fact, neither is the company itself. The other winner is of course the consumer. If you take money out of the equation, the social profit of having such a large catalogue of music available is immeasurable.