An Update on Spotify

One of the most intriguing recent features of Spotify is its platform of music discovery apps.⁸ Some of these apps function as curators for Spotify’s vast selection of songs. Apps created by Pitchfork, Rolling Stone, Billboard and The Guardian list charts and review the latest releases. Other apps track artists from a user’s library and provide a list of concerts near the user’s town. There are also apps designed to make playlists according to moods.  Potential dating partners can be suggested for people of similar tastes.

This November, the company also announced that it would launch a browser-based music player in a beta version.⁹ Up until now, the only way to use Spotify was to download and install the application on a computer or mobile device. In offices and on public computers, where downloading apps is not possible, people could not use the service. This new development puts Spotify on the same level as Pandora, Rhapsody and Rdio, which already offer both apps and web-based browsing.

Finally, Spotify plans to expand into Latin America and Eastern Europe.¹⁰ It recently raised about $100 million from Goldman-Sachs and Coca-Cola. The company has been valued at three billion dollars and it expects $900 million in revenue for 2012.  Spotify however, is still not profitable. According to its founder, Daniel Ek, the company would be happier to have higher growth multiples before considering an initial public offering. In truth, market conditions have never been ideal after Facebook’s storied IPO.

Challenges

One of the most talked-about issues concerning Spotify is how much it is paying artists. According to the company’s webpage, it has direct agreements with record labels, publishers, digital distributers, aggregators and collection societies.¹¹  Royalties are generated every time a song streams. However, it is difficult to come by the data. Agreements are subject to strict confidentiality requirements and there is no standardized royalty rate or official data. This generates unease. Some artists have gone as far as making their royalty statements public trough blogs and social media in an effort to educate their peers. Lady Gaga’s case became emblematic when, in 2010, The Guardian published a story claiming that her hit “Poker Face” earned $167 for one million Spotify plays in 2009. Each stream was worth 0.02 cents.

Pitchfork recently published anarticle by songwriter Damon Krukowski that presents the uncertainties and complexity of royalty calculations.¹² Krukowski writes that “it seems this rate is adjusted for each stream, according to an algorithm (not shared by Spotify, at least not with us) that factors in variables such as frequency of play, the outlet that channeled the play to Spotify, the type of subscription held by the user, and so on”. Krukowski’s own math from his paycheck returns 0.5 cents per stream– which would be substantially more than Lady Gaga and confirm the volatility of royalty returns to artists.

It is important to note the difference between a stream and a digital download or physical album sale.¹³ A Spotify user does not own the songs, but has access to listen to them whenever he or she wants. While the individual payment for a stream is lower than a download, the cumulative payment triggered by a consumer repeatedly listening to an album or track may be higher over a longer period. That is why the topic of artist collections from the service will loom so large in the future.

Some artists and indie labels have said that they would rather suffer piracy than have their music on Spotify. Many have withdrawn their songs from the service. Taylor Swift’s Red album is still unavailable.¹⁴  Her label, Big Machine Records, argues that the model does not make sense for a small record company with limited releases, but it may work for a major label that has a roster of hundreds of artists and records.

In an effort to portray itself as an artist-friendly company, Spotify has been trying to leverage its international reach to step into the A&R world and promote unknown artists.

In particular, it has experimented with a band named Cazzete.¹⁵  Spotify is actively sponsoring the band by building an attractive and interactive app that looks like a cassette player and also by featuring them in the “What’s New?” section.  The band says that album sales are secondary for them, and all the promotion will eventually be reflected in better album sales; they’re ‘accessibility and exposure’. It is unlikely more established artists will agree. Moreover, sites like Pitchfork have built a reputation for selecting good new music over many years, and do not have a financial stake in the proceeds—all of which removes the appearance of impropriety that Spotify may create.