Spotify: is it a Trojan Horse?

Just over a year since it launched, the internet music streaming service Spotify claims to have signed up nearly six million users. The service is available for free in a number of European countries – but is only available on a subscription basis in Ireland. Before 2009 is out, Spotify, which is based in Sweden, is planning to take on the biggest music market in the world when it hits the US. Yes, it’s legal and yes, royalties are paid, making it – on first glance at least – a better option for the music industry that the rampant illegal filesharing and downloading that has been the bane of the business over the past five years in particular.

But increasingly questions are being asked, with one in particular standing out: does Spotify really give artists a fair deal?
Spotify offers two services, one free, the other paid for. Free users stream content from artists or genres they like but there are commercial breaks of about 15 seconds each at random intervals, disrupting the music flow. Premium users, meanwhile, pay €9.99 to have their content streamed ad-free. So in theory Spotify is making money on two fronts – from advertisers and from subscriptions. We’ll come to the details of this business model in a minute but, first up, what return do artists get?
By all accounts, a stream on Spotify is currently almost worthless. Because the service is so new, because royalties are back dated and because the company is very secretive about its finances, it’s difficult to say exactly what figure Spotify is paying out to artists. But there’s plenty of anecdotal evidence out there to suggest it’s very small indeed.
In August, Swedish singer Magnus Uggla withdrew his material from the service, claiming that in six months on Spotify he’d earned “what a mediocre busker could earn in a day.” Of his label, Sony, he said: “After suing the shit out of Pirate Bay, they’re acting just like them by not paying the artists.”
And here we come to what may be, from the artist’s perspective, a major problem with Spotify: the major record labels own an 18% share. As a result they do not have the same incentive to pursue the best possible deal from Spotify for the use of recorded music as artists. Perversely the lower the royalty rates, the more likely Spotify is to turn a profit, the quicker they will receive dividends – on which no royalties will be payable to artists. It is a classic conflict of interest, with the cynical taking the view that record companies win either way.
Uggla’s take on this scenario is both highly contentious and very colourful: “I would rather be raped by Pirate Bay than fucked up the ass by (Sony boss) Hasse Breitholtz and Sony Music, and will remove all of my songs from Spotify pending an honest service.”

THE ARGUMENTS FOR AND AGAINST
At The Music Show in Dublin recently, a number of industry experts took part in a panel discussion on illegal filesharing. There was a consensus that artists and record companies should be paid for the use of their music, with strong support being expressed by some of the speakers for the ‘three strikes and you’re out’ option which has been agreed between IRMA and Eircom in Ireland and is also being introduced via legislation in various European territories.
Jim Killock, executive director of the Open Rights Group, which campaigns in favour of ‘digitial rights and civil liberties’ was a dissenting voice. He argued that “clamp downs” help no-one. Rather, he suggested, licensing and competition laws need to be fundamentally changed to open up the music market, and to ensure that artists can make money from internet services – including Spotify. “You can’t take people off the internet – the internet is an integral part of our lives,” he argued. “The answer is to stop the anti-competitive practices, the dodgy deals that are going on between record industries and the few online businesses we actually see. Take Spotify: 20% of Spotify is now owned by a handful of record companies. That is market abuse and that is happening because people in the record industry are able to say, ‘These are exclusive rights, you can’t have them unless you take our deal,’ and that means people get stitched up. And that is why you don’t see a flourishing online market.”
While there is little evidence of record companies rigging the market to date, the fact that the majors have a shareholding in Spotify may change that perception.
For his part, John Kennedy, president of the International Federation of the Phonographic Industry, the organisation which represents record companies internationally, defended Spotify. But the former president of Universal Music argued convincingly that Spotify won’t be able to sustain itself as long as it’s competing with services that pirate music to make it available ‘free’ to the public.
“I am a big Spotify fan,” he said. “We’ve had to live with the idea that, if only the music industry had licensed Napster, we’d all have been all OK. I wouldn’t have even had to come here today if Spotify had solved all our problems. Unfortunately Spotify is competing with free, and it’s got very difficult business models to sustain – people don’t move from the advertising model to the premium model and I fear that you won’t get that migration as long as ‘free’ is still an option. The future is subscription, but you’ve got to get to that stage where, when you turn on the tap, nothing comes out for free.”
Shane O’Neill, the Vice President of Liberty Global, who run the cable and broadband service UPC, as well as dozens of TV stations around Europe was even more sceptical, dismissing the ad-supported model as ‘a busted flush’.
“I’ll give you on statistic,” he added. “92% of advertising on the internet goes to six companies. I think you all know who they are, Google, MSN, etc. You then have 275million websites trying to survive on the remaining 8%, so it’s not going to work. I think what the music industry has to concentrate on is subscription business models or paid download. That would be the way I would be trying to drive the business.” He has a point. Those big six aside, internet advertising is the goose that no-one can get to lay the golden egg. There probably is money in it, somewhere – but, to date, very few online publishers have been able to turn anything resembling a reasonable profit out of selling advertisements. That’s why, from next summer, Rupert Murdoch will be charging subscription fees for access to the various websites run by News International. Every other web publisher will be watching closely to see if Murdoch’s new model can work.
As for Spotify, the Swedish press recently reported that made a loss of $4.4 million in 2008 – no surprise really for a start-up requiring a heavy investment in infrastructure. The company is not short of funding – investors include Hong Kong-based businessman Li Ka-shing (the 16th richest man in the world, according to Forbes) and British venture capital firm Wellington Partners and is currently ‘valued’ at about $250 million. But investors won’t pump money into a service indefinitely if it can’t demonstrate the potential to stand
on its own two feet and turn a profit.
Like many other internet enterprises, it’s a ‘freemium’ service – the vast majority of users aren’t paying but the company depends on the few who do to turn a profit. Speaking in London earlier this month, Spotify founder and CEO Daniel Ek said: “Any freemium service should be very satisfied with around a 10% conversion rate [from free user to premium]. Spotify aims to be on the higher end of that, higher than most other freemium services.” That’s merely an aspiration. At present, in the UK, just 17,000 out of an estimated 2.7 million users have signed up for the premium service.
Spotify pays royalties to record companies based on the number of streams from their catalogues. A huge influx of free users means a similar increase in streams which have to be paid for – but the sporadic advertising revenue is unlikely to cover even that cost. In August, The Guardian reported that Spotify’s advertising revenue was just £82,000.
John Kennedy and other industry experts believe that if Spotify is going to survive it will have to go to an exclusively paid-for model. But as long as there’s reams of free content out there, how can a subscription website compete?
Meanwhile, artists are becoming increasingly disaffected with the return they get from Spotify. Magnus Uggla isn’t the only one to have taken his music down – Bob Dylan removed all his studio albums from the service last month. Other major-label major acts that have opted not to have their music streamed on Spotify include Red Hot Chili Peppers, AC/DC, The Beatles and Metallica.
Current estimates are that artists earn about one cent per stream, at best, from Spotify. Or to put it in stark perspective, you’d need 100,000 streams to earn just a grand. For most musicians, in other words, it’s just another MySpace or YouTube – it may or may not help to build a fanbase but there is no way that it can remotely hope to replace the royalties earned from record sales. At present then, no-one bar the shareholders, stands to make any real money out of Spotify.