United States: Spotify Center Stage In Digital Music Debate

Last Updated: March 2 2015
Article by Andrew K. Gonsalves

Can a popular digital streaming service hold up under the glare of the spotlight?

When megastar Taylor Swift released her latest album, 1989, at the end of October, she also took that opportunity to announce that she was removing her entire song catalog from Spotify, a popular digital music streaming service.

Swift justified her stance by stating that artists should be paid for their art, implying that digital streaming services like Spotify do not fairly compensate the songwriters and musicians who are making the music. Swift's record label, Big Machine Records, acknowledged that the move was simply a good business decision.

After seeing Swift's new album sell a staggering and industry leading 1.29 million copies in its first week alone, it is hard to argue against the move. But the bigger question is whether Swift's abandonment of Spotify will have a greater impact on the place that digital streaming has in the music industry.

A Brief History of Digital Music Distribution

In 1999, two teenage, amateur software developers launched the Internet peer-to-peer audio file sharing service known as Napster. Within less than a year, Napster had 20 million users who were sharing MP3 files of their music to one another for free. By all accounts, Napster ushered in the age of digital music distribution.

However, within a span of two years after its launch and with about 80 million registered users, Napster was essentially shut down due to an onslaught of legal challenges by the music industry. At that time, the heavy metal band Metallica was the face of the opposition leading the charge against this new form of distributing music over the Internet.

At about the same time that Napster was forced to shut down, Apple launched its own digital music download service, iTunes. However, unlike Napster, the 2001 release of iTunes was done with the approval and proper licensing of rights from the major record labels. About a decade after its launch, iTunes overtook Wal-Mart as the top music retailer in the United States.

Digital distribution of music has come a long way since the 1999 launch of the Napster. Along with iTunes, other digital distribution services have taken there place in delivering music to both paying and non-paying customers. Some of the more widely known services or online music stores include YouTube, Pandora, Amazon, Google Play, Rhapsody, and, of course, Spotify. What seems to set Spotify apart for increased scrutiny is its mode of distribution and the lack of financial payback to the artists.

Modes of Distribution: Digital Downloads v. Streaming

There are two main forms of digital music distribution: digital downloads and streaming. Digital downloading involves the actual downloading of an audio file (e.g., MP3 file) to a customer's device, such as a computer, a mobile phone, a digital music player (e.g., iPod), or a tablet (e.g., iPad, Microsoft's Surface). By and large, the customer pays for the download and therefore owns the downloaded audio file, which is a copy of the song.

The customer is then free to listen to the audio file at anytime and on any compatible digital playback device. iTunes and Amazon are two of the primary examples of online services that sell digital downloads of music, often at about $0.99 or $1.99 per song, or at about $9.99 or $11.99 per album.

Unlike songs purchased from iTunes, some digital downloads are not permanent, in that access to a downloaded audio file can be terminated. This type of non-permanent download is known in the industry as a "tethered" download, and is typical for subscription-based services (e.g., Rhapsody), where downloads can be eliminated from a customer's device if the subscription fee is not being paid.

Streaming is the other dominant form of digital music distribution. There are two basic streaming models. The first model is the non-interactive type of streaming that is provided by Internet radio services such as Pandora. These services will allow the user the option of free streaming or subscription-based streaming. Free streaming will usually require the customer to periodically view or listen to ads in between music streaming. A subscription allows the user to enjoy the music without ads for a monthly subscription fee. This non-interactive type of streaming does not allow the user to pick a particular song to play, although it does allow for one to select a desired genre of music.

The second type of streaming model is known as streaming on demand. This type of streaming allows the user to pick any song from a service's library of songs, and to listen to that song whenever desired. These on demand streaming services typically require the user to pay a subscription, usually a monthly subscription. However, different subscription plans are available, with free subscriptions including ads and paid subscriptions being ad-free. Spotify is one of the most popular interactive, on-demand streaming services.

Why is Spotify Being Singled Out for Criticism?

While Taylor Swift is the most recent and arguably the biggest named star to speak out against Spotify, the digital streaming service was met with its fair share of detractors from the time of its launch. Big time artists such as Coldplay, Led Zeppelin, the Beatles, and the Black Keys have never allowed their song catalogs to be included in the Spotify library. And other artists, like country superstar Jason Aldean, are following Swift's lead and refusing to include their new releases on Spotify.

At first glance, such animosity does not seem fair, particularly given that Spotify has secured the rights to its song library from the four major record labels, namely, Sony, Universal, EMI, and Warner. In order to partner with these labels, it has been reported that Spotify paid something in the neighborhood of $500 million to these record companies, and also gave them nearly 20% equity in the company.

While it remains a topic of debate, Spotify's cozy partnership with the major labels may be one of the driving forces behind the backlash it is receiving from the artists. As stated earlier, Spotify seems to be receiving greater scrutiny due to its mode of distribution and the apparent meager financial payback to the artists. Because Spotify uses the streaming model of digital distribution, the songs are not actually being sold, which allows for a lack of transperancy in the streaming statistics and royalties flowing back to the artists.

Without going into the maze of how copyrights and licenses are administered and governed in the music industry, digital streaming via Spotify (as opposed to digital downloads or actual physical sales such as compact discs) tends to disfavor the artists, particularly those not covered by the large record labels. This is borne out by candid reports from artists on their royalty payments.

Follow the Royalty Checks, or Lack Thereof

Spotify has found an ally in at least one high profile artist, Bono of the mega rock band U2. Bono points out that Spotify pays out 70% of its revenues to record labels. However, while Spotify claims to have paid out $2 billion to labels and publishers since it European launch in 2008, the royalties that the artists are receiving from Spotify have been low to non-existent according to reports by many musicians and songwriters.

Zoe Keating, a cellist and recording artist, has been a prominent voice in the debate on digital music distribution, providing royalty numbers from her Spotify streams. In 2013, Keating reported having 403,035 plays of her songs on Spotify, which earned her a mere $1,764. Another artist, Galaxie 500, reported that one of its songs, "Tugboat," was played on Spotify 5,960 times, but the three songwriters only collectively received $1.05, which amounted to 35 cents for each songwriter. Some artists signed to independent record lablels have reported receiving only $0.0005 per stream of a song.

Even best selling artists like Taylor Swift lament the relatively low royalties received from digital streaming services like Spotify, as compared to physical sales of CDs. For example, in the most recent tussle with Spotify, the CEO of Swift's record label stated that less than $500,000 was received from Spotify in Swift-related royalties.

Spotify countered by stating that it paid out $2 million on Swift's music over the same period. While Swift's numbers are high compared to other artists, the disparity between what Spotify is reporting to have paid out is starkly higher than what Swift's label is reporting to have received.

The Future of Spotify and Digital Streaming

There is no disputing that the physical sales of albums (e.g., CDs, vinyl records) have been declining for at least the last decade, while digital downloads and streaming of songs has grown exponentially over that same period. While this would seem like a positive in favor of digital streaming, artists have reported a significant decline in pay from streaming services. This seems to be true for both prominent and unknown artists.

Further, there appears to be a gathering chorus of outcry from artists against Spotify. Whether that leads to a change in favor of more compensation to the artists from streaming services remains to be seen. It also is still up in the air as to whether Spotify and other similar streaming services have a viable long term business model. For example, the numbers do not look good: Spotify reportedly lost $56 million in 2011, and Pandora had a net loss of more than $20 million in the first quarter of 2012.

Conclusion

Unlike Napster, Spotify has thus far managed to steer clear of any serious legal challenges from the heavy hitters of the music industry, namely, the major record labels. However, since Spotify's United States launch in 2011, there has been a growing chorus of criticism from the artists who create the music being streamed by Spotify, mostly because of the meager royalties the songwriters and musicians receive from the service.

So, the question is whether digital music streaming services like Spotify can withstand the highly public criticism of elite artists like Taylor Swift and the increasing numbers of lesser known artists who are following Swift's lead.

The music industry and how royalties are paid out is complex. It does not appear that copyright legislation to cure the ills of digital music streaming is the near term. Therefore, it could be a matter of time before Spotify either pivots to a more viable model or crashes under its own weight. Perhaps there will be room for a new, more transperant and fair model for digital music distribution on the horizon.

This article was originally published in The Daily Record on November 18, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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