Last Sunday, Thom Yorke and Nigel Godrich, respectively the lead singer of Radiohead and the band's longtime producer, openly boycotted the world’s fastest growing music streaming platform, Spotify, while also removing three of their projects, Eraser, AMOK, and Ultraista, from the service.
Both Yorke and Godrich later tweeted justifications for their protest, calling for increased “fairness,” which means reimbursement for small labels and new artists. The story added fuel to the larger industry debate on the lasting value created for artists, both established and not, from micropayment royalty models. While I commend both Godrich and Yorke’s noble support for lesser-known musicians, the economics of boycotting Spotify just aren’t there. When’s the last time you bought a record? When’s the last time you paid for digital music?
The real problem lies in the payment deal between the label and the artist, not Spotify’s licensing negotiation. In fact, six days after Yorke and Godrich’s blasts, Great Britain's Musicians Union, which contains over 30,000 members, demanded a 50/50 revenue split between the label and artists.
Spotify, a subscription-based service, cuts deals with record labels and artists directly, rather than a universal objective formula a la Pandora (whose payout is actually the lowest among music streaming and radio services). Spotify pays royalties in relation to an artist’s popularity on the site in a percentage structure. The more popular a song, the more revenues are generated. It’s very simple, and very crowdsourced.
Though larger labels with well known catalogues of music will initially make more money than the smaller unknown bands and their EP albums, Spotify offers the invaluable (and free) service of deep social integration. Music is exposed to a vast, international, and growing population. For bands just starting out, this is crucial. The social network piece of the platform enables users and artists alike to follow and promote others. So if Thom Yorke really wanted to help those struggling bands, then he'd create a playlist and recommend it to his 24,430 fans.
Spotify’s Freemium business model is also highly scalable and profitable, boasting a $200 million total revenue for 2012, up from a $60 million loss the year before and even more dismal numbers in its first two years. As revenues increase, so will payouts to musicians. Profits are generated from advertising and subscription. Spotify users spend twice the amount of money on music through subscriptions, at $120 per year, than the average downloader who spends about $60. Spotify’s conversion rate is 15%, from free users to subscribers. This is remarkably high, and due to the emotional connection upon which Spotify relies: increased value of the service to the user over time. But there’s a catch: to attract and hold the large consumer base, new music is the bait. It’s a cycle stabilized by the increasing accessibility of everything.
This is the Digital Age. All music can and will be pirated or streamed in the cloud. The fate of the music industry will be no different than that of publication and print news, and industry behemoths need to recognize and adapt accordingly. As the value of the track itself decreases, the value of the live performance will increase. And so, socially integrated networks will be the musician’s way of tapping into his or her fan base, and sending tour and impromptu show alerts. Artists will build careers as performers as they are forced to expand tours, engage fans directly, and play smaller, intimate venues more frequently. Revenue will come from ticket sales. Hopefully, this will weed out all the pop-synth crap and rebuild a competitive market for that new talent Yorke and Godrich want to promote.