Spotify Has Paid Out $40 Billion to the Music Industry – So Why Is No One Happy?

Basically no one is happy. Here’s why. Spotify’s dirty little secret is that artists are unlikely to get paid big, and they have a business model that makes it virtually impossible for Spotify to turn a profit. The company achieved its first profit in the fourth quarter of 2018. It’s been 12 full years since its launch and has only had a handful of profitable quarters since. It seems that the more you earn, the more you lose.

Losses in Q4 2022 were higher than losses a year ago.

Fundamentally, Spotify’s pure economics don’t work. Its variable cost structure is a burden, and its gross margin (cost of goods sold, or the amount of money you get from every dollar after deducting the cost of your music) is simply too thin. The streamer pays his 70% of each dollar to rights holders (record labels, publishers, distributors, performing rights organizations, collection societies). And those variable costs that don’t even factor in Spotify’s operating costs (employees, marketing, infrastructure, overhead) show no signs of abating.

In fact, it can, of course, get worse over time due to industry pressures. Rights holders only earn about $0.005 per stream. That means 1 million streams will pay around $5,000 at the high end.

All this means that Spotify and other streamers put very little food on the table, except for a few mega-artists. That makes Spotify a pariah in the industry.

But is it really fair? The streamer entered the music scene with a basic pricing structure and monetization constraints. Then came two cataclysms that fundamentally changed the economics of the music industry. The first was his original Napster (and other bootleg sites of its ilk at the time), which facilitated outright theft. Napster and its users basically stole him twice. That is, stealing money directly out of the artist’s pocket and reducing the perceived value of music to zero.

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 was a $0.99 song 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 good amount of money, levied the now infamous “Apple tax” (30% of every dollar spent on content), and still defines content rules for games (and this continues today). subject to epic lawsuit from Epic Games).

The iPod was made possible by Apple’s “tax”, which combined with turning 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 has moved billions of dollars away from artists and creators and into Apple’s pockets. And with that one-two punch, Napster and Apple laid the foundation for the economics of today’s streaming industry.

In that sense, Spotify launched at a price arguably needed to compete with Apple’s core. At $9.99 per month, that’s about the same as buying an album on iTunes. Unlike Netflix, which has increased prices over time, Spotify has struggled to change its original price. This was also to cover Apple’s 30% charge. Then Apple launched Apple Music for $10 a month. Spotify’s pricing in the US is the same as when it launched in the country in 2011.

The only winner here seems to be the consumer. We can now enjoy a whole world of over 100 billion songs anytime, anywhere, on any device, for a little more than a cup of Starbucks coffee. This is an incredible bargain and an undeniable value proposition. That amount pales in comparison to the joy music brings us, and the blood, sweat, tears, and creativity (not to mention the livelihood) of the artists behind it all.

That said, a significant number of consumers are still reluctant to pay anything. Technology has forever changed the perception of the value of music. And technology’s newest disruptive force, generative artificial intelligence, is likely to do the same: AI can spew out an endless stream of new songs without stopping to sleep, eat, or tour. You don’t need to pay musicians to write movie scores when AI can look at past scores and recreate new ones infinitely.

What can artists do in the face of these harsh realities? First, musicians, like 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 only pay $100 each year to support their favorite artists, that’s $100,000 worth of him. I wouldn’t say it’s easy, but this is the reality of Creative Her community. As I’ve written several times in TheWrap, Web3 and the value of the token gates it enables hold a tantalizing promise here.

Let’s go back to what many still consider the villain of this story: Spotify. Certainly, in the face of that difficult reality, we may try to raise prices. Apple almost certainly has the means to lower such new pricing and outlast Spotify’s independent economics. there is. (MP3 is still flooded with pirate sites.)

The more obvious answer is that Spotify will eventually have to sell itself. Try it, streamers have yet to monetize anything significantly other than the music itself. YouTube cannot compete with (by far the world’s largest music service), Apple and Amazon. 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.

For more information, visit Peter’s company Creative Media (creativemedia.biz) and follow him on Twitter. @pcathy.