Spotify Has Paid Out $40 Billion To The Music Industry, So Why Is No One Happy?

Spotify recently touted that it has paid nearly $40 billion to music rights holders since its launch in 2006. But few in the industry were impressed. The artist certainly wasn’t. In its latest earnings report, the music-streaming leader said Q4 2022 revenue reached his €3.17 billion (about $3.4 billion) and paying subscribers reached his 205 million. celebrated. work. But few people on Wall Street have been impressed. Certainly investors are not. Spotify’s stock price is about one-third (1/3) what it was just two years ago.

Basically no one is happy. Here’s why. Spotify’s dirty little secret is that they’re stuck with their pricing and business model. As such, making payments to important artists is unlikely and making them profitable is virtually impossible. The company hit its first profit in the fourth quarter of 2018, a full 12 years after its launch. It seems that the more you earn, the more you actually lose. That happened again in the latest self-proclaimed ‘strong’ Q4 2022, with losses outpacing losses from a year ago.

Fundamentally, Spotify’s pure economics don’t work. Its variable cost structure is a burden and its gross margin (money per dollar after deducting the cost of selling the goods – music here) is simply too thin. Streamers pay 70% of each dollar to rights holders (record labels, publishers, distributors, performing rights organizations, collection associations). And these variable costs, which don’t even take into account Spotify’s operating costs (employees, marketing, overhead), show no signs of abating. In fact, it can, of course, get worse over time due to industry pressures. After all, artist rights owners only make about $0.005 per stream. That means 1 million streams will pay you around $5,000 at the high end. Artists and composers themselves only collect a small share of that number from rights holders.

All this means that Spotify and other streamers put very little food on the table, except for a few mega-artists. But in some ways, Spotify shouldn’t be considered a pariah. The streamer entered the music scene with a basic pricing structure and monetization constraints. Then two cataclysmic events completely disrupted and fundamentally changed the economics of the music industry.First, of course, was the original Napster (and other pirate sites “old times” of its ilk) facilitated outright theft. Napster and its users have effectively stolen her twice. Stealing money directly out of the artist’s pocket and zero perception of the value of music.

Falling second were Steve Jobs and Apple. Unsurprisingly, with the music industry panicked by Napster’s insidious peer-to-peer theft, Jobs promised to be its savior. His solution, of course, was his $0.99 download. do you remember them? Apple basically took the singles off the album and gave consumers, at least those who agreed to pay, exactly what they wanted. Usually it was his 1 hit song from his 12 albums. Of course, Apple made a sizable profit and “invented” his one-third (1/3) share of the game’s content, which still defines his rules. at the heart of Epic Games’ epic lawsuit against Apple).

The iPod was made possible by Apple’s 30% “tax” which, combined with that, turned the company into the $2.3 trillion behemoth we see today. The New York Times recently called Apple’s fees “a key driver of growth.” Jobs’ sleight of hand effectively moved billions of dollars away from artists and creators and into Apple’s pockets.And with that one-for-two punch of his, Napster and Apple laid the foundation for the economics of today’s streaming industry., despite the fact that Jobs never believed streaming was for nothing. He couldn’t conceive that consumers would give up “ownership” of a song by downloading and what he called “renting” a song by streaming.

In that sense, Spotify probably launched at the price range needed to compete with Apple’s core: $9.99 per month. Fast forward to today, after faster broadband and processing power unlocked the power and potential of streaming. On the music side we have Spotify and on the video side we have Netflix. Netflix doesn’t share Spotify’s variable cost structure, but faces similar structural challenges. Arguably, both major players want to change the underlying economics, and Spotify has attempted to do so at some point. In 2014, Apple increased the monthly fee from $10 to $13 to cover his 30% charge. But Apple later released Apple Music for a dismal and predatory $10, and Spotify pulled out. It’s probably not all that shocking that Spotify’s pricing in the US is the same as when it launched in July 2011.

The only winner here seems to be the consumer. We can now enjoy over 100 billion songs from around the world, anytime, anywhere, on any device. For $9.99/month, you get all this functionality ad-free. Think about it. Unlimited listening to over 100 billion songs for less than a cup of Starbucks coffee. This is an incredible bargain and an undeniable value proposition. That amount pales in comparison to the joy we feel, and the blood, sweat, tears, and creativity (not to mention the livelihood) of the artists behind it all.

Still, quite a few consumers are frustrated with paying anything. Technology in the form of Napster and the Internet and Apple’s iPod and Apple Music finally changed the perception of the value of music forever. And the latest disruptive force in generative artificial intelligence (AI) technology could do the same. After the initial investment in infrastructure has been made, the AI ​​can spit out an endless stream of new songs without sleeping, eating or paying for anything. You don’t need to pay musicians to write movie scores when AI can look at past scores and recreate new ones endlessly.

What can artists do in the face of these harsh realities? First, musicians, and all creators, need to learn, understand, and internalize these new threats and realities. Second, they must admit that these forces cannot stay here and simply claim their existence (which is the way the RIAA preferred when it first faced piracy). bottom). Third, artists must learn to make the most of new technologies to power new possibilities, rather than fighting new technologies and altered economic realities. Yes, technology is indeed a threat. But technology can also empower and open new doors of possibilities.

Streaming, at least in theory, allows musicians to build global audiences and communities to foster ongoing engagement. Yes, the streamers themselves only add pennies to their earnings. But artists now have new tools they can deploy to reach and monetize their fans. This is the famous “1,000 True Fans Theory”, which explains the earning power of fandoms, even in small numbers. If these superfans were only paying $100 a year to support their favorite artist, that would make him $100,000. I wouldn’t say it’s easy, but this is the reality of the creative community. As TheWrap has written several times, Web3 and NFTs have some tempting promises here.

Let’s go back to what many still consider the villain of this story: Spotify. Faced with that difficult reality, we are confident that we will eventually be able to raise our monthly fees. may return to theft).

The more obvious answer is that Spotify will eventually have to sell. To try it out, streamers are still not significantly monetizing anything other than the music itself. And the pure business model in the content world (including Netflix on the video side) is to compete with Big Tech competitors Google/YouTube (by far the world’s largest music service), Apple, and Amazon. You can not. All these giants use content as marketing. YouTube is increasing Google’s ad revenue, Apple is increasing sales of his iPhones and Macs, and Amazon is increasing commerce.

The Spotify acquisition is the only one that will please investors. But still, of course, the artist is not. Perhaps the industry needs to take Apple more seriously.

peter xassie Media, entertainment and technology professionals, business advisors, Harvard Law-educated lawyers and journalists. Today, he is the founder and chairman of Creative Media. Creative Media is a firm that specializes in media, entertainment, music and technology business advisory and legal services.