The Losing Proposition of Streaming Music
Spotify is set to renew its licensing deals with major record labels in the coming weeks, with an eye to reducing artist payments even further.
Greg Sandoval for The Verge writes that Spotify plans to ask labels for the rights to extend its free tier to mobile devices and make substantial cuts to the royalty fees it pays artists. It’s an expected, perhaps even necessary, move as it tries to build a business with a model that has yet to reach profitability, but it marks the latest in a worrying trend of music subscription services—a model that’s undoubtedly here to stay—going to great lengths to pay artists as little as possible.
The fight to reduce costs got its most public airing last year when the Internet Radio Fairness Act (IRFA), a bill that sought to reduce the royalties streaming services had to pay that was very publicly supported by Pandora and Spotify, was in front of Congress. The bill failed to get much congressional support—some congressmen suggested the “Unfairness Act” as a more appropriate name—and is now in “hibernation”. Writing about IRFA last year, Sandoval bet that “all the parties, Web radio, traditional radio, and the music industry will sit down and cut a deal without government involvement,” which turns out to have been quite prescient.
Spotify currently spends 70 percent of its revenue on licensing and only 10 percent on operational costs, per Sandoval, which just about “zeroes out Spotify’s profits.” Pandora has a similar cost structure and its central argument while debating IRFA was that it couldn’t prop up a business under those conditions—a line of argument that, needless to say, did not garner much support from Congress or the public. When Stereogum wrote about IRFA last November it said “rather than try to corral customers into the paying model, [Pandora] are trying to fix the system in their favor (in favor of free) through the IRFA,” a description that applies to Spotify just as much as it does to Pandora.
It’s anyone’s guess how the talks will go. Major labels have been historically opposed to lowering royalty rates, a position they made clear during the IRFA talks, but Sandoval says Spotify is in a good negotiating position. Labels like streaming music services because they provide a reliable income and users like it because it’s free. Spotify has a remarkably high conversion rate to paid plans of 20 percent, but it’s not enough: As has been widely reported and confirmed by artists, Spotify’s royalty payments are pitifully low and far from enough to make a living on. The situation appeared to be slowly improving, but it seems Spotify wants to reverse that trend.
No matter the outcome, artists are on the losing end: Spotify wins, and if their talks result in a favorable outcome, paves the way for Pandora et al to follow suit; the labels, who get shares in Spotify in return for their licensing agreements, win; users, who get access to a giant catalog of music whether they pay or not, win; and artists get to watch rich CEOs fight to reduce their income even further.