A conversation about Spotify’s business model started five days ago with tweets by Nigel Godrich and Thom Yorke. The fact that the conversation, amplified by social media and covered by more traditional media, continues to this day is remarkable and speaks to the weight of the subject matter.
Streaming is becoming a significant part of the business. It’s only natural for a debate to exist about the fundamental aspects of the business model. When notable artists voice their concerns and pull their titles from a service like Spotify, people take note.
One unavoidable truth underscores this debate; streams aren’t worth much. Whether it originates from Spotify, YouTube, SoundCloud or another platform, very little monetary value is attached to any single stream. That is not to say intellectual property of all kinds does not have some intrinsic value, but the truth is people generally don’t pay for streaming media (other than with their attention by viewing advertisements). Streaming media is ubiquitous and, in most cases, absolutely free. Only streams that originate from a value-added service like Spotify or Netflix — they provide many features in addition to huge catalogs of content — actually cost money.
Exacerbating this value problem is the fact that streaming is a value meritocracy. That is to say, all streams are worth the same amount. A stream on a 99-track compilation that costs 99 cents at Amazon.com generates the same royalty as a stream on a deluxe digital album that costs $15.99 at iTunes. (I’m setting aside small variations in royalties that result from differences in licensing contracts.) A catalog track is worth as much as a hit song. Popularity is the only variable in this equation. A popular song will earn more streaming royalties than a less popular song.
I see two takeaways from this debate:
1. Artists need to sell things. The economics of streaming demand that artists sell things to their fans. Sell them downloads, CD, concert tickets, merchandise and bundles with some or all of these items. This will result in more revenue being recognized sooner rather than small amounts of streaming royalties being generated over a long period of time. Sell them experiences such as webcasts of intimate performances. Sell access to the artist during production of a new album. If ten years from now streaming services have seriously eaten into purchases, artists will still need to sell things.
2. Digital services should provide more value to artists. Subscription services may not be able to pay artists higher royalties (although an argument can be made that new releases deserve higher royalties than catalog tracks). Higher royalties would be passed on to consumers in the form of higher prices, and prices are high enough right now. One option is to provide a “superfan” tier of service that generates more royalties for artists. In effect, a higher tier of service would allow subscribers to place themselves into different categories according to willingness to spend (download buyers do this when they opt for a regular or deluxe version of a digital album). Other options would return non-monetary value to artists: allow users to sign up for the artist’s mailing list, provide detailed analytics and data, and better facilitate sales of tickets and merchandise. In either case, services need artists to be happy with their platforms.
This week’s conversation about Spotify has been helpful. Artists have voiced their concerns about the business model. Spotify has defended its business. Other stakeholders have joined the discussion. Shifts to new business models result in growing pains. The only way for models to properly evolve is for this type of conversation to take place.
