Both Hypebot and Digital Music News have been reporting recently on concerns from indie musicians regarding Spotify’s streaming royalty payouts and a handful of indie labels pulling their catalog from Spotify’s database of available music. I’m also hearing a growing chorus of concerns from musicians I talk to regarding Spotify’s business model and royalty structure
Concerns from music creators about the streaming royalties Spotify currently pays are valid for sure, but I believe the indie music community should be rooting for Spotify to succeed and quickly reach the critical mass of consumers needed to sustain their business.
Since the rise of Napster over a decade ago many (probably hundreds) of companies and entrepreneurs have launched digital music services of one kind or another. With the exception of iTunes and perhaps one or two other smaller players, none of these digital music services were able to gain the critical mass of paying customers needed to sustain their business. During this same period of time the overall revenue for the recorded music industry has been in a steep and steady decline.
The recorded music industry today is in desperate need of innovation and reinvention.
Spotify may not currently pay a royalty rate indie artists can make a living on or be transparent about the business arrangements with the major labels but the company just might have what it takes to help revive revenue growth in the recorded music industry. And that’s important to everyone who cares about music.
Below are five things indie musicians should consider before passing judgement on Spotify:
#1. Growing Consumer Preference for Streaming Media
While many in the music industry have finally come to accept paid MP3 downloads, a growing number of consumers have already moved past the paid download model and prefer streaming media. Sadly, there is a whole generation of consumers that are not used to paying for recorded music at all. Those who want to own music can simply choose to pirate any and every song they desire.
Streaming typically provides much easier access to music then downloads. The first place my middle school age kids and their friends go to check out a new band they’ve heard about is not iTunes but YouTube. And these kids strongly prefer a smartphone, iTouch or iPad as their primary way to access the web and media.
Spotify’s ability to seamlessly stream their catalog of music plus an individual’s MP3 collection to smartphones comes very close to giving music fans what they’ve always wanted, unlimited and instant access to the world’s music.
Give consumers what they want and they will gladly pay for it.
An indie musician’s number one challenge, without a doubt, is the opportunity to be heard by potential fans. Spotify makes it easy for users to discover new music and check out the latest music recommendations from friends or bloggers. Spotify users have virtually no obstacles to checking out bands they’ve heard about or have even a minor interest in hearing. Removing obstacles to music discovery is a good thing for indie musicians. Having your music heard is the first step towards building a new fan relationship.
Although the details are still emerging, Spotify’s new partnership with Facebook initially seems to represent an unprecedented opportunity for indie musicians to be heard. The ability of 700 Million Facebook users to easily share their favorite songs, albums, bands and playlists with their Facebook friends could potentially turn out to be a much more powerful publicity tool than any influential magazine, radio station, disc jockey or TV show in the history of the recorded music industry.
Admittedly, the Spotify monetization story for indie artists is the weakest part of my argument today. Royalties on a per stream basis for indie artists are anemic at best. However, if Spotify successfully gains mass consumer adoption the royalty payouts can potentially become meaningful for many artists.
Additionally, If Spotify can successfully ramp up their user base I fully expect to see them add additional user features such as personalized tour alerts and the ability to buy concert tickets and /or band merchandise. Should these types of end user features be added in the future they can certainly help generate incremental revenue for indie artists.
#4 Monthly Reoccurring Revenue Models Rock (in the long run)
I firmly believe a reoccurring monthly revenue model like Spofity’s has the potential to generate a superior customer lifetime value metric for the recorded music industry than the current pay per unit pricing model approach. Consumers that pay $10 / month, every month for unlimited access to music will ultimately end up paying more of their disposable income for music than today’s average music consumer that purchases recorded music on a per unit basis.
Keep in mind there are currently 70 Million smartphones users in the United States. If Spotify gains a double-digit adoption rate among smartphone users their monthly reoccurring revenue model can generate substantial and long-term music industry revenues and creator royalties.
#5 The Majors Labels Do Not “Own” Spotify
I hear the “ownership” concern a lot from musicians. It’s important to know that the major labels only have a minority ownership position in Spotify. There are several published reports citing a combined 18% ownership stake for the major labels. This equity position was no doubt one of the requirements for Spotify’s access to the major label music catalogs.
From a corporate governance perspective control of a company typically requires a minimum 51% ownership of all outstanding shares. Even if the major labels have board level representation they have no authority over the company’s day-to-day operations.
Additionally, most start-up and high growth technology companies like Spotify do not pay dividends to their shareholders even when they eventually become profitable. Like their other investors, until Spotify goes public or is acquired it is unlikely the major labels will be generating any significant cash flow from the company (outside of their per stream royalties).
A Few Steps in the Right Direction
The folks at Spotify certainly have a lot of work cut out for them before a majority of indie artists will support their streaming music business model and royalty structure. It’s important to recognize though that the recorded music industry must innovate in significant ways or face the continued downward slide to oblivion.
A decade after the rise of Napster, Spotify could potentially be the innovation that helps the recorded music industry begin to grow and thrive once again. I hope the indie music community will be supportive and give them that chance.