Spotify's Financial Viability and Pernicious Fallacies (Op-Ed)

David Macias is the President of Thirty Tigers, a label services, management and distribution company that represents the master rights for Flogging Molly, Matisyahu, Trampled By Turtles, Jason Isbell and others.

Spotify is once again on everyone’s radar, thanks to the recent decision by Thom Yorke and Nigel Godrich to pull their works from Spotify, with Mr. Yorke saying on his Twitter account, “Make no mistake new artists you discover on Spotify will not get paid.” These objections follow in the wake of similar objections by other artists, most notably Damon Krukowski in his widely disseminated and discussed article on Pitchfork entitled “Making Cents.”

For the record, Spotify pays rights holders 70% of the income that is generated from subscriptions and advertisements on a pro rata basis based on the percentage of streams each song receives. This is the same percentage iTunes pays.

It is estimated that Spotify currently has slightly more than 1.5 million subscribers in the US (having only passed 1 million in December 2012) or market penetration of .5% of the US population. If you’re looking for Spotify to deliver sustaining revenues here in the US, you should remember how incredibly tiny their market share is here. Spotify is currently responsible for just 2.5% of Thirty Tigers’ revenues.

To more properly gauge the effect of streaming on the overall market, one must look at a market where Spotify has garnered sufficient market share. Might I suggest Sweden, where Spotify has a market penetration of 15% of the total population and generates 70% of all prerecorded music business revenues (according to the GLF, the Swedish recording industry trade organization)?

The result in overall revenues in the Swedish market? Up. Up by 14% from 2011 to 2012, and up another 12% so far in 2013. In fact, up every year since 2008. If streaming services were detrimental for music business revenues, then you’d be hard pressed to explain away Sweden.

One of the more pernicious fallacies is the comparison between what one makes from a download and a stream without due consideration of the repeatable transactional nature of streams and the revenue derived from significantly more transactions. Let’s look at Macklemore and Ryan Lewis, an act that one could safely say is relatively new.

Eyeballing their page on Spotify, it appears that they have registered over 300 million streams. If you divide that number by 10 to approximate the number of times an album would have been listened to, that would be 30 million. They would never sell 30 million, or even close to it, even if you included TEA (track equivalent album) sales. That is because a download is a one-time transaction, and a stream renews the transactional relationship with every listen. At an estimated rate of $.005 per stream, that comes out to an estimated gross of $1.5 million. Given that they own their work, they are almost assuredly keeping the vast majority of it. Not a bad take from one account that has such small market share.

A little closer to the ground is Thirty Tigers artist John Fullbright, who is also new, but has not had quite the amount of airplay that Macklemore and Ryan Lewis have had. He has over 400,000 streams, which have generated $2,307, the vast majority of which he retains. If that seems like a small amount, I’ll remind you that Spotify represents 2.5% of our total revenues. Multiply that number by 28 (70% divided by 2.5%) to get a sense of what the total effect would be for Mr. Fullbright if the US had the same market share as Sweden. That would yield $65,000 in gross revenues, not exactly chicken feed for an artist that has scanned just shy of 20K units.

The naysayers have never provided any sound economic rationale as to why they think that streaming is an unfair model, other than narrow anecdotal evidence from their own statements with no recognition of the miniscule market share that Spotify represents in the US, the vastly improved state of the Swedish music business, or the radically different consumption patterns of downloads and streams. Some of the “supporters” of streaming will concede that money cannot be made, but streaming provides exposure opportunities that an artist should embrace regardless of the financial ramifications.

I concede nothing of the sort. When one examines the facts, streaming is a viable financial model that pays rights holders fairly and can and will grow the overall business. Simples.

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