TECHNOLOGY SPECTATOR: Spotify's missing profits

Technology Spectator

Spotify's Australian launch will make the Australian music streaming market even more crowded than it has quickly become this year. Paris-based Deezer launched in Australia in April, and MOG's is set to bring its streaming music service to Telstra's subscribers via an exclusive deal in a couple of weeks. Add to this that offerings are already available from Rdio, Rara, Sony Music Unlimited, Microsoft Zune and JB HiFi and it's clear that consumers are now spoilt for choice when it comes to unlimited all-you-can-eat music to computers and mobile devices for a fixed monthly fee of between $8 and $15.

But do you know how much of that money an artist gets when you listen to their album on one of these new digital music subscription services? If you answered no, that's fine. In fact, it's the same answer given by the streaming companies that take your money each month in return for all that legal music. Although they might not know how much ends up in the hands of those making the music, they do know they are generating about $150 each year for the music industry from each paying subscriber. For their part, they just pay the record labels and digital distributors to get the rights to offer you all that music and it's then up to the labels and distributors to pay artists. As David Hyman of MOG said last year, however, the share that ends up with artists is a "black hole” that they have no idea about.

How much it costs them to get that music from labels and distributors is something that they certainly do know. As is the size of the significant upfront lump-sum payments they handed to the major labels to get access to the catalogues in the first place – none of which has reportedly been passed to artists by record labels. These payments are protected by strict non-disclosure agreements so exact details are not publicly known, although in Spotify's case the upfront fees paid to record labels in the US market were reportedly more than $100 million.

Add to this that the major labels also own substantial equity in many of the streaming providers – if not outright ownership via joint ventures – and there is further reason for artists to be suspicious. Sony, Warner, Universal and EMI own between 15 per cent and 20 per cent of Spotify, now believed to be valued at around $US4 billion.

Even so, major labels and recording industry associations are optimistic about these new streaming services, seeing them as a big part of the answer to the problem of online piracy. A common theme is that if a listener currently spends less than $150 per year on music – either legal or illegally – and switches to a streaming service they will generate more value for the music industry. Indeed, some high-level numbers show that if one third of Australians took a streaming service at current rates it could drive wholesale music sales from last year's $383 million – back towards the record $600 million-plus levels of 2000 to 2004. Clearly that would make labels happy – and also make them feel like they are winning their war on piracy. But what about the artists, the ones the industry has been so vocally telling the pirating public for so long they've been fighting for?

Right now, labels and streaming providers aren't willing to divulge exactly how much subscription revenue flows between them or eventually to artists. But given these services have now been in the US long enough to start trickling through to royalty statements, artists are starting to get an idea.

Unfortunately, it doesn't look good: according to my statements, in December last year Spotify generated US$0.00393 per stream. Yes, that's around one third of a cent per stream – the equivalent of a few cents per album. The same royalty statement shows that iTunes downloads generated $US0.70 per song sold while a single play on US college radio generated just under five cents. For someone that would have previously bought a new album via iTunes, at current rates they'd need to listen to a new album 180 times in full via Spotify to generate the same amount of money for the artist.

The way things stand, streaming models massively dilute listener spend – even if their total spend is greater than it was back in the download world. For example, even if you only used to buy five new digital albums a year on iTunes – around half of what you'd spend on an annual Spotify subscription – that spend would have flowed towards those five artists. But with a streaming service like Spotify, everything you listen to counts and that new album probably only equates to a very small percentage of your total plays over a month. Clearly, the major labels' huge back catalogues are very powerful in this new streaming paradigm where the share of overall listens dictates eventual payment flows.

Sure, it's fine if you listen to that new album more than 180 times – maybe it's just survival of the fittest and if the album is good enough it will get there over time. (Although taking a look at the play counts in your iTunes music library will shed some light on how many albums get to 180 plays.) Alternatively, there will need to be lots of reformed music pirates – who'd have never bought the album anyway – streaming alongside you to make up for the lost sale. Most artists would prefer the money now in one lump, not in very small chunks over many years. It's not surprising that Coldplay, Adele, The Black Keys and Tom Waits have all withheld recent releases from Spotify and other streaming services.

Those who see streaming as music's legal future argue that it's still early days for the new services and artists' returns will get better when the user and revenue base grows significantly. But Spotify's home market of Sweden – where streaming has been available since 2008 – doesn't appear to support this argument. Even though streaming services accounted for around 42 per cent of all record label revenues there last year, generating almost five times the revenue of downloads and almost the same as CDs, artist royalty rates are still uninspiring. According to my statements it would still take around 90 streams at the current rate of €0.0078 to generate the equivalent of an iTunes download for an artist in this well-developed streaming market.

For many artists, keeping their loyal paying downloaders amidst today's sea of pirates might look better than this kind of streaming future. Even if Australian consumers now have multiple options for cheap and legal access to unlimited music, whether artists benefit from this increased spending is yet to be proven. And if piracy was the new radio (as Neil Young said earlier this year), maybe Spotify is the new piracy. That would make Spotify's chief executive, Daniel Ek – recently named to The Sunday Times' Music Rich List top ten – the biggest new pirate of them all, with a bounty worth almost $1 billion at current valuation levels.

Given the debate over artist royalties has been raging overseas for some time, it's only a matter of time before Australian artists start questioning their share of the streaming pie now the big international streaming players like Spotify and Deezer are entering the Australian market. Maybe Ed Husic could ask a question or two of the streaming providers and record labels on artists' behalf at the same time he's asking them why streaming prices are 20 per cent to 50 per cent higher in Australia than in the US, Canada and Europe?

Andrew Harris is a member of San Francisco/New York/Melbourne band Beaten by Them. He is also an independent telecoms and technology consultant and writes for publications including The Economist.