The Spotify Conundrum

Taylor Hoysradt, Copy Editor

The music industry is at a crossroads regarding its identity and direction. With the digital age almost in full effect, many artists, labels and listeners can’t help but wonder if a fully digital music industry is truly the right way to go. Consumers now have the luxury of being able to legally stream practically any song from all of their devices, which is great for them. But it’s a different story for the artists who create the material.

Since its launch in 2009, Spotify has become one of the top music streaming services in the world. What makes Spotify more appealing in comparison to services like Pandora is the freedom that listeners have when using it. Instead of listening to preference-based radio stations, Spotify gives you the ability to stream any song from its massive library for free. There is also a premium subscription offered for $10 a month. Premium users can create playlists to listen to while offline on any device and don’t have to deal with any advertisements during their listening experience.

Despite the convenience that Spotify offers, its business model will not hold up in the long run and it is not the solution for the woes of the music industry. For starters, Spotify makes money from only two sources: the advertising-based free service and monthly premium subscriptions. It is hard to imagine that there will ever be more premium users than free users, especially in today’s “what have you done for me lately” culture. What makes this really debilitating for Spotify is that even as its number of premium users grows, the company doesn’t increase its profit margin. Spotify uses the revenue from premium subscriptions to pay royalties, so if the number of premium users doubles, royalty payouts increase. On the surface that sounds great, but it is a vicious cycle, as Spotify will not grow as a company.

While Spotify claims its users generate more revenue than the average listener, artists are continually backhanded by the company’s royalty system. Originally viewed as a “pay per stream” service, Spotify actually uses a more complex formula to determine payouts. In order to determine royalties, Spotify’s monthly revenue is multiplied by the artist’s number of streams, divided by total Spotify streams, which is then multiplied by 70 percent. That then goes to publishers and finally is multiplied by the artist’s royalty rate. What this means is that Spotify pays out royalties based on a “market share” system. Basically, artists that make up more of Spotify’s streams or its “market” in a particular month will receive the most compensation. The artists that truly benefit from this system are those who release a track or album that becomes the hot trend and generates millions of streams in a short period of time. Otherwise, artists who rely on touring and merchandise sales from a dedicated fan base don’t have much to gain from Spotify.

Earlier this year, artists began posting pictures of their royalty checks on Facebook and Twitter in an effort to show the flaws of Internet streaming services. Well-established bands including Darkest Hour and Trivium posted pictures of checks amounting to $.01 and $1.31, respectively. If artists are going to receive such minuscule amounts of money for their work, it is not even worth putting on Spotify unless the artist is trying to develop its fan base.

Spotify does have its flaws but the company has certainly done a good job of getting listeners interested in legally supporting artists as opposed to pirating music. The music industry needs to follow this example by stirring up more appeal for legally purchasing music while at the same time turning a profit and compensating artists fairly. Saying that is easy, but applying it will take quite some time. What cannot be lost in all of this is that the music industry can be brought back to life if we as consumers revert back to buying the physical copy of an artists work. Paying $10 for an album can be tough, but it goes a long way for the artist, label and the industry as a whole.

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