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Friday, January 9, 2015

Spotify and Artists (#19b)

(This is Part 2.  You're going to want to read Part 1 if you haven't.) 

You’ve no doubt heard that Taylor Swift reignited the “Spotify doesn’t pay the artists enough” meme when she pulled her music off the service, spoke out against it, and sold a million copies of her new album in a week.  The first question should be, “doesn't pay enough…compared to what?”

To compare Spotify reasonably, we must remember how the music industry was before streaming was mainstream.  The era of $3.49 LPs in the 60's ($20+ in 2015 dollars) and the era of $12 or $15 CDs were great for record labels, but have both come to an end except among collectors and audiophiles.  One can literally count the number of artists who went platinum (sold 1 million+) last year on one hand (Sam Smith, Ariana Grande, Jason Aldean, the Frozen soundtrack, and Taylor Swift).  Total album sales are down from over 700 million in 2001 to less than 150 million in 2014.  iTunes’ rise last decade was a last gasp of the $1 single/$10 album standard, and even then album sales were noticeably declining.  This BillBoard article shows a stark contrast between last year and 1994, when 38 albums had gone platinum by September.  And its not just streaming that took sales from CDs, but illegal file-sharing.  We might forget how huge the problem was last decade: in 2009 NPD group reported that 63% of music acquired by U.S. consumers wasn’t paid for. 
 
So there won't be nearly as much money in selling albums moving forward.  Yet Spotify and its competition have found a solution: offer a user experience so much superior to file-sharing that it's worth paying for music again. And luckily for the artists, Spotify has committed to paying 70% of its revenue back to them (or, more accurately, the labels that control them: hopefully the democratization of content post-internet will change this).  Remember that Spotify’s target is people who were paying little or nothing for music; now artists are sharing the $7 of each subscriber's $10/month.

Is the average artist rolling in Spotify dough?  Definitely not.  70% of revenue averages out to around 3/4s of a penny per stream.  Time.com’s Spotify calculator would suggest the number of artists making millions off of Spotify are in the hundreds (and Taylor was definitely one of them), and an artist would need at least 4 million streams a month to make minimum wage from Spotify alone.

The real winner in $15 CDs.
Spotify is not enough for the millions of aspiring artists to make it.  But what bothers me is the pretense of Taylor Swift representing the average artist.  I’ve spent thousands of hours playing music, but if I released an album, sales would probably be in the dozens, not millions.  If I chose to play music as a career, Youtube and Spotify would be my only options outside of live concerts.  Considering Taylor Swift’s new album has already sold over 3.6 million copies, I trust Taylor has made the right decision for Taylor, but to suggest other artists should boycott Spotify is ridiculous. Spotify just became profitable in the second half of 2014 (Pandora and iTunes Radio have never been profitable), so it's portrayal as a corporate villain is misguided.  The great crime is well-off celebrities and entertainment industry reps lamenting the good old days when consumers paid through the nose for music while refusing to accept that Spotify is the best today’s artists have got.

To the aspiring artist: put your music everywhere.  It is at worst free advertising and at best supplemental income with no marginal cost.  While success from music sales alone is no longer an option for anyone but the Taylors of the world, the digital age will never replace demand for the in-person experiences you provide at each gig and performance.  Now if you’ll excuse me, I’m going to go find out if any of the artists in my playlists are touring.

Spotify, Consumers and Businesses (#19a)

Spotify is poised to take over the majority of music sales someday.  Here’s why.

Know your target.  Spotify does; it chose casual listeners over what I would call “hardcore listeners”.  You know the type: they hang out at record stores, buy concert tickets, merchandise, and equipment for both listening and playing.  They might be the most valuable piece of the market, but to fight for them would bring the combined wrath of the big 3 record labels, Sony, Apple, Beats, and probably the Catholic Church for good measure.  Instead Spotify chose to be music for the rest of us.

This is an important piece of Spotify's winning strategy because the company is what you would call a disruptor.  Almost all disruptive business models involve 1. a new technology or capability to undercut the big players and 2. focusing on the least attractive customers.  By targeting those who rarely buy music, Spotify received minimal retaliation from the record labels, iTunes, and CD sellers while building up sales, users, scale and experience.  Remember that Spotify was completely free on desktop from day 1, a strategy Rhapsody and (legal) Napster never dared.  By the time the incumbents felt threatened, they were behind the streaming wave.

But wait, doesn’t Spotify have plenty of company in the casual music listener space?  Pandora is the original streaming radio and has an impressive library.  An array of playlist apps like Songza and user-submitted music apps like Soundcloud are still free.  Youtube Music Key is only a few months old, but promises to harness the world’s greatest content creation platform for an ads-free, online and offline music experience that, combined with the existing Google Music service, will be tough competition for Spotify.  

Still, the green streaming machine has staked out its position as cheap relative to owning music, but more premium than its peers.  While all streaming services may have a superior product to CDs, Spotify leapfrogged its peers with simplicity, focus, and overall user experience.  The features, such as the ability to see what music your Facebook friends like, add value without muddling the experience. I converted to the cult of Spotify a year ago, and it took a lot to finally overcome my routine of organizing a hard drive full of music and transferring it between devices as space allows.  I was paying nothing and now I'm paying something, but the experience is immeasurably better.  I love the extra benefits of using a service, such as my “Year in Review”, which gave me pretty graphs about what and when I listen, and recommendations with a level of depth and quality Pandora never reached.  
 
While the features are well-executed, the key to Spotify is what’s not there:  it’s a controlled environment without copyright infringement, reposts and unclear labels (looking at you, Soundcloud and Youtube).  There is no needless integration with other services (Google Music) or video and banner ads (Groovesharks, Songza) to ruin the interface.  There are no links to merchandise or to see artists on tour (last.fm), because hardcore listeners are not the target.  Granted, new features do come gradually and will continue to be welcome (I would love to see integration with Facebook chat so that you could tune people into what you’re hearing), but they are done at a pace users can learn and appreciate.   If you’re seeing the parallels to Apple, you’re not the only one.

Spotify’s focused, holistic strategy has yielded a ridiculous conversation rate – 25% of its 50 million listeners pay $10/month for premium, while only 3.5% of Pandora’s 70 million active users pay $5/month for an ad-free product.  This is money in the bank moving forward, as consumers rarely cancel subscriptions they don’t use, let alone ones they tried out for free and use often.

Spotify is threading the needle, balancing a quality product, attractive prices, and also a lack of the image problems that tend to plague tech companies on the rise.  OK, there’s one controversy, surrounding Spotify’s payment of its artists.  Click here for a shorter Part 2, where I examine Spotify’s relationship with the musicians that make up its huge library.

Update 3/2015 - Kendrick Lamar broke the single-day record for streams of his new album, which reignited the debate over Spotify's royalties. Considering Kendrick made $1 million in one day, and streaming revenue officially passsed record sales, I feel good expressing continued faith in Spotify's business model, for both the company and the artists.