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Spotify:

The Post-Piracy Platform

During the 1930s and 40s, playing records on the radio and in jukeboxes was a highly contested practice. Particularly for artists who made their living performing live—playing on the radio and in clubs—the fear was that radio royalties wouldn’t come close to compensating for the cannibalization of live audiences, and sales of sheet music and recordings. Back then, many artists decided to take public stances to protect their livelihoods. Bandleader Fred Waring went as far as stamping his Victor recordings with the phrase “Not licensed for radio broadcast” in the mid-30s, and when he learned a Philadelphia station was playing them anyway, he took it to court.

In 1939, ASCAP pulled all of its material from radio for several months, unable to settle on a higher royalty rate with broadcasters. In response, broadcasters formed the BMI licensing agency, which filled its ranks with the hillbilly and R&B music that ASCAP wouldn’t touch. In the 40s, indie label Decca Records pulled its records from radio in favor of stocking singles in jukeboxes. While performers’ unions claimed that jukeboxes were putting live musicians out of work, many smaller acts that appealed toward the young, minority audiences at soda fountains and bars were reaping the promotional benefits of jukebox play.

Pulling one’s catalog from Spotify—or, at least, vociferously airing grievances about their fairness to artists—has become the 21st century update of those gambits during radio’s first decades. In a piece published on Pitchfork in 2012, musician and writer Damon Krukowski critiqued the landscape for DIY and indie artists in the 21st century, noting that “industrial capitalism on a [small] scale” had given way to a model of “financial speculation” that strives to turn profits for investors on the backs of cheaply streamed content provided by artists. The former Galaxie 500 drummer also opened the books on his streaming royalties, demonstrating how paltry the payouts are for decidedly non-paltry numbers of plays.

At a much higher level of visibility, Thom Yorke pulled the Atoms for Peace catalog from Spotify in mid-2013, taking to Twitter to condemn the platform’s compensation model for up-and-coming artists; he’d later memorably classify Spotify as “the last desperate fart” of the recording industry’s “dying corpse.” A few days later, David Byrne extended Yorke’s Spotify critique to “the internet,” which he claimed "will suck the creative content out of the whole world until nothing is left." In October 2013, Jana Hunter of Baltimore indie act Lower Dens— the exact sort of band that Byrne and Yorke aimed to support with their public stances—took to Tumblr to argue: “Music shouldn’t be free. It shouldn’t even be cheap.”

Spotify’s attempts to balance free access to its vast catalog with fair compensation to artists derives in large part from a particularly Swedish way of thinking about digital music. Stockholm-born Daniel Ek, a precocious, slightly cocky entrepreneur, founded Spotify in 2006 while CEO of µTorrent, one of the world’s most popular BitTorrent clients. In its early form, Spotify became instantly popular in Europe as what communications professor and author Patrick Burkart calls “a rogue index,” offering vast access with no licensing.

“The labels played ball,” Burkart explains, “because the Swedish government was advocating on their behalf, and everybody was trying to find a solution to [BitTorrent platform] the Pirate Bay.” When Swedish police—under significant international pressure—raided the Pirate Bay’s hosting service in 2006, the politically minded Swedish Pirate Party suddenly gained international attention. Burkart, whose new book focuses on Pirate politics, explains that the movement is “informed by the experiences of music fans, independent artists, and tech-savvy Internet activists who collectively reject the unilateral terms of participation in the celestial jukebox.”

As the Spotify concept developed, Ek shaped it as a piracy-killing Napster-with-permission that could turn an estimated half-billion illegal downloaders into paying subscribers. In 2010, former Napster investor Sean Parker invested $15 million in Spotify, then helped broker a crucial partnership with Facebook. Parker’s uniquely American sense of cocky tech-entrepreneur rebelliousness (see: The Social Network) fit well with Ek’s Scandinavian-bred sense of openness, coupled with his salesmanship and skill at coding.

For years now, Sweden has become synonymous with music piracy. The reasons, Burkart tells me, lie in the country’s cultural makeup and its recent legal and political histories with respect to copyright. “Sweden lagged behind other EU countries in terms of implementing directives on copyrights and data retention,” he explains. “Swedes had a little bit longer to experiment on the net and develop alternate delivery systems.”

Sweden is a socialist democracy with a proud history of entrepreneurialism, as well, and Burkart describes a Swedish legal tradition called allemansrätten, a property statute that translates to "every man's right." “It’s most often applied to hiking, boating and skiing across private property,” Burkart says. “As long as you don’t disturb it, you can even camp for a night, collect berries and mushrooms and do non-destructive things in this commons.” To tech-savvy Swedes like Ek, who came of age in the heady times of the late 90s and 00s, entrepreneurialism was filtered through this model of infinite access—the celestial jukebox-as-cultural-commons.

Like many 21st century tech startups, Spotify itself has yet to turn an actual profit—because of its business model, the more Spotify expands in the U.S., the more money it loses.

Several years after Napster’s inability to strike deals with the major labels, Spotify needed the participation of the multinational corporations who control around 80% of the world’s recorded music in order to launch its ostensibly piracy-killing platform. The solution was one that went directly against the commons idea: offer the majors equity in the company, an agreement that means that somewhere between 18 and 20 percent of Spotify is owned by the three remaining major labels. (The exact number isn’t known because the deals were struck under binding non disclosure agreements.) For many artist advocates, this is one of many troubling aspects of the service.

“The major labels are able to build a new business on the backs of artists without telling them very much at all about how their compensation actually works,” Casey Rae, an attorney and label-owner, tells me. Rae is the interim executive director of the Washington D.C. nonprofit Future of Music Coalition, founded in 2000, which is devoted to musicians' rights. Rae and many others within the FMC aren’t inherently predisposed to hate platforms like Spotify, but they worry about the sustainability of the streaming model, for artists as well as other independent platforms. “There are only three major labels left, so it's not even really like Spotify can have a competitor enter the marketplace,” Rae explains, "because any competitor would have to be extraordinarily well-capitalized in order to even get to the negotiating table.”

Even though Spotify’s effects on revenue were an unknown, it was too compelling an opportunity to pass up for most indie labels. “Early on, Spotify was this weird foreign threat,” remembers Chris Swanson, co-owner of the Secretly Label Group, which includes Secretly Canadian, Jagjaguwar, Dead Oceans, and the Numero Group. “It was this cloud in the distance that we were all reading about, seeing how it was impacting overseas markets in some positive and negative ways.”

The payout numbers Swanson and other label owners were being offered were significantly lower than the 70 cents-per-mp3 that iTunes paid. Nonetheless, the Secretly Group signed up, and were able to negotiate decent terms. “We just didn't want to be missing from a platform,” Swanson says. With a few years of hindsight, he surmises that holding music off of Spotify “is almost like it's not on the grid, which maybe forces people to go buy records, but it actually means people are talking about the music less.” But Spotify’s ties to peer-to-peer—a huge catalog, an on-demand interface, and a free, ad-supported version—means it threatens profits more than any other platform.

Still, like many 21st century tech startups, Spotify itself has yet to turn an actual profit itself—its value is based on investors’ speculation of its future success as a business model. This leads to what appears like a paradox, or at the very least, terrible PR. On one hand, Daniel Ek is a very rich man. On the other, Spotify’s yearly revenues are exceeded by its fixed costs—marketing, payroll, and especially licensing fees and royalty payments, which themselves account for 70% of revenue. (Spotify claims to have paid $1 billion in royalties to artists as of the end of 2013.) Because of its business model, the more Spotify expands in the U.S., the more money it loses.

In December 2013, Spotify took a small step toward transparency by releasing an information-laden website detailing many aspects of its operation, including its royalty payments to artists. One of the more interesting revelations was that during July of last year, a “niche indie album” collected $3,300 from plays on the platform, and a “breakthrough indie album” pulled in $76,000. I reached out to several labels trying to discern the origin of such categorizations. Unsurprisingly, no one had ever heard of them. Spotify’s “niche indie” classification, as it turns out, is about as useful in a descriptive sense as “classic hits” are for radio listeners. Its purpose for Spotify, perhaps obviously, is pure public relations. “Niche indie” artists are what Spotify wants them to be.

Talking about these Spotify classifications and numbers, Jeremy DeVine, owner of NYC-based indie label Temporary Residence Ltd. (Explosions in the Sky, Eluvium), says, “We get paid almost exactly $3,300 a month right now from all on-demand streaming services. For the entire label—215 titles—we make between $3,300 and $3,500 a month.” As for the “niche indie band” categorization? “That’s a band who can sell as many of one record in a month as an entire independent label that does fairly well sells for their entire catalog in the same timeframe,” DeVine estimates, citing Beach House and Vampire Weekend as possible examples.

Over the past few years, DeVine has devised his own experiments at Temporary Residence to understand Spotify’s threats more directly. “We don’t release records to on-demand streaming platforms on release dates anymore,” he explains. Such a delay—which other labels have adopted—echoes the past decade’s label strategies devoted to avoiding mp3 leaks ahead of release dates. Keeping new records out of certain channels around the time of release—treating Spotify as the new MediaFire, in a sense—is widely viewed as the best way to translate release-day promotion and hype into actual sales.

DeVine had a different, somewhat grander experiment in mind a couple years ago. When he noticed that his label’s digital and physical revenues were declining after offering them on Spotify, he devised a plan: pull the entire Temporary Residence catalog off on-demand services for one calendar year and then compare those revenues to other years. But DeVine decided to drop this experiment altogether after sending an email to the acts on his roster. “There were a handful of artists who understood and liked the idea of it,” DeVine remembers, “but they just didn’t want to be attached to a statement. There would suddenly be articles like, ‘Explosions in the Sky Pulls From Spotify’ or ‘Pinback Pulls From Rdio'. It’s not their fight.” DeVine agrees with Yorke’s principled stand, but notes that many smaller artists fear that their music would stop speaking for them, in lieu of the politics of their label.