In a recent interview, Sean Parker, a board member, said he believed Spotify would eventually attract enough subscribers to help return the music industry to its former glory — that is, to the days before Parker’s first major enterprise, Napster, came along.
“I believe that Spotify is the company that will make it succeed,” said Parker, who is also a former president of Facebook. “It’s the right model if you want to build the pot of money back up to where it was in the late ‘90s, when the industry was at its peak. This is the only model that’s going to get you there.”
As the largest music market, the United States has been a critical proving ground for streaming companies, but competition is also quickly spreading globally. Deezer, a French on-demand service, has announced plans to be in more than 100 countries. And localized streaming services have also sprouted up: Anghami, for example, serves listeners in the Middle East, and the Indian music market has Dhingana and Saavn.
a good deal?
For the biggest pop stars, hit streams can provide substantial revenue. Last week, a Google executive said in a company earnings call that Psy’s viral video sensation “Gangnam Style” had generated US$8 million from YouTube, where it had been watched 1.2 billion times, yielding a royalty of about 0.6 cents per viewing.
Many musicians whose work does not reach the top of the charts, however, are not as sanguine.
Complicating the issue, each type of service pays different rates. Pandora’s are set by law. Spotify declined to comment on its rates, but according to a number of music executives who have negotiated with the company, it generally pays 0.5 to 0.7 cents per stream (or US$5,000 to US$8,000 per million plays) for its paid tier, and as much as 90 percent less for its free tier.
The companies behind streaming are ballooning quickly. Pandora, with 67 million regular users, is publicly traded, with a market capitalization of nearly US$2 billion, and Spotify’s investors have reportedly valued the company at US$3 billion. Yet so far they have contributed relatively little to the American recording industry’s US$7 billion bottom line.
In its last four reported quarters, Pandora paid US$202 million in “content acquisition costs,” including licensing fees, and Spotify recently announced that it has paid US$500 million in royalties since its inception. Downloads, by comparison, had US$2.6 billion in sales in 2011, according to the Recording Industry Association of America.
For those whose income depends on royalties, the biggest concern has been whether streaming cannibalizes CD and download sales by offering a cheap or free alternative.
Cliff Burnstein, whose company, Q Prime, manages Metallica and other major acts, said that even if streaming hurts sales, all is not lost as long as the number of paying subscribers continues to climb rapidly.
“There is a point at which there could be 100 percent cannibalization, and we would make more money through subscriptions services,” Burnstein said. “We calculate that point at approximately 20 million worldwide subscribers.”
Metallica recently announced an exclusive deal with Spotify.
If those subscriber ranks grow, royalty rates will also climb, recapitulating a process seen whenever new technologies have been introduced, said Donald S Passman, a top music lawyer and the author of the book All You Need to Know About the Music Business.