By Michael Driscoll
How much is one play of a song really worth?
Ever since streaming service Spotify AB put a number on
that--around seven-tenths of a penny--the music industry has
debated whether the figure is fair.
A look at royalties in the digital age shows that, while
Spotify's compensation falls short when compared with income from
compact-disc spins, the company outperforms when it comes to
passing along revenue more broadly. Perhaps more importantly, an
inspection of the numbers highlights how streaming's impact on
piracy could eventually steer more cash to everyone.
"The reality is, whether you like it or not, people are moving
from buying to streaming," says Martin Goldschmidt, co-founder of
Cooking Vinyl, a British label that is home to Billy Bragg, the
Prodigy, Amanda Palmer and other acts. "It doesn't matter whether I
like it or I want them to. It's the real world."
Spotify is among a host of companies--including Pandora Media
Inc. and Apple Inc.'s Beats Music--that stream music to listeners
via the Internet. Spotify offers subscribers access to a vast
catalog of music, playable on demand, for a monthly fee, currently
$9.99. (It also has a free, ad-supported version.)
At first blush, Spotify's piddling payouts per play might seem
discouraging to those aspiring to a record deal--more so when one
considers that labels and publishers often take a sizable cut of
what Spotify passes along. While royalty arrangements vary widely
from label to label and artist to artist, in a typical deal, the
amount making it back to the musician might only be about 0.15 cent
for each song streamed, say people familiar with how royalties
break down.
Compare that with more-conventional compensation: A compact-disc
retailing for $15 and featuring 10 original songs might return
about $1.50 to the writer and performer, or 15 cents a song. But a
CD is played more than once, of course. Played twice, the artist
has gotten 7.5 cents per song listen. Played 15 times, one cent. In
this model, the CD would need to be played 100 times before the
payout per play, per song, would equal what the artist receives
from a Spotify stream. Even for a favorite tune, 100 spins seems a
high bar.
But a song-to-song comparison may be the wrong way to go about
it in the age of streaming, when users are buying a single listen
at a given moment rather than the track itself. Traditional
purchasers of a song file or physical recording were paying a
premium for that ownership and the ability to cue up a track
anywhere at any time--on infinite repeat if desired. Spotify isn't
competing on those terms.
Instead, Spotify offers isolated access, and its system of
charging for that access looks more favorable when viewed from a
revenue standpoint. The streaming company says it keeps about 30%
of the cash it brings in. That is comparable to the percentage
Apple Inc. keeps from cash generated by downloads from its iTunes
Store, the people familiar with royalties say. The typical retailer
might keep about 40% of the revenue collected on a $15 CD, these
people say, making Spotify's system appear generous by
comparison.
Critics of Spotify's compensation have homed in on the
0.6-to-0.84 cent the streaming service said is a reasonable
estimate of what it pays per play. (The company actually has a
formula that relies on ever-changing variables for getting at that
figure.) But Spotify has released another number worth noting: $2
billion. That's the amount the company late last year said it had
sent to rights holders globally since its inception in 2008.
Cooking Vinyl's Mr. Goldschmidt says those focusing on the tiny
payments artists receive are missing the bigger picture: "The more
interesting thing is the fact that I'm earning more money."
And there's a not-insignificant bonus: Streaming services that
offer easy, paid access to music have proven an effective way to
draw in listeners who might otherwise choose illegal downloads, Mr.
Goldschmidt said. He calls Spotify "the best thing the industry has
ever done to fight piracy."
"Music is consumed now more than it ever has been on the planet,
but most people don't pay for it" or pay "very, very little," he
says. "What Spotify is doing is getting people to pay for it."
Willard Ahdritz, who founded Kobalt Music Group Ltd. in 2000 to
help artists manage digital royalties, pointed to recent reports
highlighting a decline in piracy in parts of Europe where streaming
has flourished as an example of what could be in store elsewhere.
"Spotify has killed the illegal market in Scandinavia, and the
market is growing from it," he says. "There's a lot of cash coming
out."
Streaming revenue in the U.S. was $1.9 billion in 2014,
according to the Recording Industry Association of America. That
was nearly triple 2011's figure. Industry revenue broadly was flat
over that period, suggesting dollars once spent elsewhere were
directed toward streaming.
The question now is: Can Spotify and other streaming firms build
off those levels in a meaningful way?
Sachin Doshi, Spotify's vice president of content and
distribution, said he thinks the company has found a formula for
growth that "will help bring the industry to its peak and
beyond."
It has a way to go: U.S. recording-industry revenue topped out
at $14.6 billion in 1999. In 2014, it was $7 billion. Complaints
about Spotify's payouts might just as well be directed at that
dropoff. It's hard to pay musicians with money that isn't
there.
"A lot of artists think the world owes them a living," says Mr.
Goldschmidt. "And it doesn't."
Write to Michael Driscoll at michael.driscoll@wsj.com
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