September 6, 2012 at 10:50 am

Music Is Still Too Expensive To Be Free, Too Free To Be Expensive

spotify_pandora_payouts labels publishers artists

In this corner, we have recording artists — those beleagured believers clinging dearly to the notion that they can quit their day jobs, just like their tune-slinging forebears did. As many have pointed out, they don’t make much per stream from even today’s most popular streaming services — about $0.003 from iTunes Match and $0.001 from Spotify, according Josh Davidson, whose September 3 tweet sparked this latest round of speculation.

And in this corner, we have music streaming services such as Spotify and Pandora — both of which have been shown this week by The New York Times to lose more money when more people use them. The problem: the more money they make, the (even) more money they owe to artists, record labels, and publishers.

The NYT followed up on that story on Wednesday with research from Enders Analysis showing that the real problem with Spotify is that it’s losing more money giving away free music than it’s making from subscriptions.

According to our recent conversation with the head of Merlin, the world’s largest consortium of indie labels, it’s a little more complicated than that, in one situation at least. According to Merlin chief Charles Caldas, Spotify basically slices up all its revenue (from free and paid users) among the various stakeholders, who then “just have to make a judgement” about whether what they’re getting paid justifies the amount of free music Spotify is giving away. (So basically, Spotify does have to pay Merlin for free streams, in a sense.)

Back to the boxing analogy we started above. Nevermind that the referee and the judges are said to be “on the take” — that is to say that labels and publishers are not always great about passing through all of the revenue they should be to recording artists and songwriters — because there’s nothing new about that accusation.

The fundamental issue here is the same as it was in 2009, when MySpace failed at something slightly similar to what Spotify is now trying to do: Music is too expensive to be free, and too free to be expensive.

By that, I mean that any music service must, always, from here on out, compete with free. Blame it on CDs lacking the encryption that protects DVDs, Napster, the popularity of CD drives right after Napster that let all those MP3s be played on stereos of the time, the labels’ recalcitrance at licensing both download-based and subscription-based music service, some mix of those things, or just the sheer cussedness of fate, but that is the case, from here on out. Everybody just has to deal with it, for better or worse.

On the other hand, free(mium) services such as Spotify and Pandora can’t operate without forking out hefty royalty payments to labels and publishers, who are in turn (are supposed to) pay artists.

Too free to be expensive. Too expensive to be free. The perfect stalemate? Possibly — and labels and publishers might be perfectly happy with that, because they can continue to extract money from Spotify, Pandora, and whatever else the technology sector throws their way, the same way they did with MySpace, Imeem, and any other company that tried to bridge the gap between “competing with free,” as the saying goes, and paying rightsholders for legal music.

There’s only one way out of this mess, obviously: more people paying for music services. According to Spotify’s latest official numbers, four out of its 15 million users (although we question that latter number) currently pay for Spotify, which is a pretty great ratio, but apparently, it’s not enough.

Luckily, there’s good news on that front, to rehash our rebuttal to David Lowery:

  • Spotify’s payouts might be paltry, but they’re growing fast.
  • Labels’ royalty payments lag behind Spotify’s payments to them by as much as a year, and Spotify grew quite a bit in the last year, so many of the numbers we’re all talking about are actually from before Spotify launched in the U.S. (the world’s most lucrative music market).
  • Kids get old and start to have more money than time, which is when they might start paying for stuff they used to have time to track down for free. (This could be the most important factor.)
  • Independent artists and labels are quite important to services like Pandora and Spotify, which are constantly vying for the attention of the most plugged-in music fans, who tend to value stuff from the outskirts of culture.

We have another reason to add to the list:

  • A little birdy says our suspicions about Spotify launching third-party apps on its mobile version aren’t too far off the mark. If that’s the case, Spotify users will have another reason to decide to pay: being able to use the 50 or so (and counting) Spotify apps that are currently only available on the desktop version.
Image courtesy of Flickr/Images_of_Money
  • Anonymous

    spotify is the new boss. same as the old boss.
    Rest assured, the artist is not winning in this race of technology and finance.