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Swedish startup Spotify has taken Europe by storm. The ad-supported music streaming service, which also offers an ad-free and mobile-enabled paid offering, has more than 6m registered users across Europe, with more than 2.5m in the UK. Expansion into the US is planned for 2010.

Spotify's popularity has attracted investment from major record labels and recent reports suggest that Spotify may be Sweden's biggest contribution to the music business since Abba.

But is Spotify's success all rosy?

Swedish recording artist Magnus Uggla made waves when he claimed he earned in six months through Spotify "what a mediocre busker could earn in a day". And a recent report in Norway indicated that indie record label Junior Racing had earned approximately $3 after music from its artists had been streamed more than 55,000 times on Spotify.

Now comes a new report that Lady Gaga was recently paid approximately $167 in Spotify-generated royalties by the Swedish Performing Rights Society. This despite the fact that hit song "Poker Face" was played more than one million times on the music service over a five month period.

Faced with the news, one Swedish recording artist commented "It is totally sick. We musicians have no rights, you may not charge [for music] anymore."

The report has sparked new debate and discussion about Spotify, and about digital music business models in general. When it comes to monetizing music online, some blame the record labels. Some "free culture". And others even blame those greedy recording artists themselves. Me? I'm not sure who to blame because I think the ongoing changes in the music industry can be difficult to dissect and analyze. There are a lot of factors at work, and a lot of players with varied interests.

There's no doubt that something feels 'off' when an artist's songs are played more than a million times and she receives less than $200 in royalties. But obviously this is only part of the picture. It's almost certain that at least some of the people who listened to Gaga on Spotify discovered her music through Spotify. And went on to purchase an album. Or went on to attend a concert. Etc. etc. etc.

The well-known "last click" bias is worth mentioning here. Your display ad campaign may have delivered paltry CTRs but if you're only looking at the last click, you may not be accurately analyzing the value of the display campaign. And so it goes that looking at royalties from services like Spotify may not accurately portray how these services influence sales.

That said, if accurate, the report does raise a lot of questions about the viability of some of the more popular digital music business models. For an artist like Lady Gaga, this discussion is purely academic. When you're a multi-Platinum recording artist and one of the hottest acts in all of music, you're making money. Big money. But for emerging artists, those toiling and waiting for a breakthrough, and independent record labels, every little bit counts. At some point, "Stop complaining about free promotion!" rings hollow if all that 'free' promotion doesn't pay the bills. In other words, you can only give away so much product before your inability to sell it leaves you wondering whether or not you have a product worth creating in the first place.

And therein lies the inconvenient truth: not all promotion leads to profit. For the average artist, if Spotify is the future of music but a million-plus plays on services like Spotify can't even pay for a bottle of First Growth French wine, one has to wonder if we won't eventually see digital music business models reinforce the exact trend they were supposed to reverse: the importance of a smaller number of artists to overall industry revenue.

Photo credit: AFlickion via Flickr.

Patricio Robles

Published 23 November, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2355 more posts from this author

Comments (19)

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Sarah Goodwin, Owner at Freckle Red Internet Consultancy

This statistic is a non-event. If they really want to talk about how much money they're making, they need to look at how many individual users were involved in those million plays.Admitedly at that cost the price per listener is still going to be much lower than the cost of a single on amazon, but there is a lot more to the earnings calculation than just payments per downloads.

over 6 years ago

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James Goode

How much would Lady Gaga earn from one radio play, with one million listeners? Because that's what we're talking about here: Spotify isn't about buying your music, it's about listening to it, just like radio.

And how much exactly does Lady Gaga's record label receive for her one million plays on Spotify? Alot more than the artist, I suspect...

over 6 years ago

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Sune

This is so stupid and uninformed. The Big Four own a controlling interest in Spotify. They paid peanuts for this. That was the only way they'd release their materials to Spotify. They're bastards and *they* have set the royalty fees - no other. Do you really think Spotify can legally set the royalty fees they want? You're not too smart, are you?

And as for Magnus Uggla, you uninformed eejit: Uggla's never had a traditional recording contract. He's too smart for that. He's always had *distribution agreements* with CBS Sweden. He reckoned he was pals with those people. If you read what he wrote you'd realise he was angry not with Spotify but with his contact at CBS who he felt had fooled him. Uggla can be really belligerent and fooling him really makes him pissed off.

Do the research next time and stop publishing so much rubbish.

over 6 years ago

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Sune

Lady Gaga has made *over* USD 20,000,000 *this year alone* touring. She's hurting really bad.

This is just more record company FUD and propaganda. Read the London Times. Read their study. It's the record companies losing out - finally. The recording artists can't transport it to the bank fast enough.

You're such a tool. Don't be a tool.

over 6 years ago

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Jonathon

@Sune - i can't see anything too 'uninformed' about the article - i think everyone reading this realises the record companies would take the lion's share of the fee, but the fundamental point still stands - if one of the year's biggest recording artist can make $167, is's probably fair to say they haven't cracked a sustainable business model for the music industry? as daniel ek himself says in the *ahem* "London Times" ... (note the irony coming from someone accusing others of being uninformed ...)

over 6 years ago

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Chris Mair

| But obviously this is only part of the picture. It's almost certain that at least some of   the people who listened to Gaga on Spotify discovered her music through Spotify. And went on to purchase an album. Or went on to attend a concert. Etc. etc. etc.

True. But how many potential purchasers decide against buying because they can get it for free any day of the week?

over 6 years ago

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Andrew Griffiths

I agree, and made a similar point on my blog, that whilst interesting, these figures are ultimately not of importance to Lady Gaga as an artist. For her I would argue that Spotify is simply part of the marketing mix which will drive people to spend their money on her elsewhere. 

As @James Goode pointed out, Spotify is playing a similar role to the radio and in reality Gaga is probably making more from Spotify than she does from many equivalent radio station royalties. It does of course raise questions about the future of Spotify and particularly how smaller artists can utilise its power without being taken advantage of. However, lets remember that as a money making business it is still in its infancy so much like with Twitter, maybe we should watch this space.

over 6 years ago

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theMusicskeptic

A lot of interesting views on this topic. I do however find it very hard to believe that anyone using Spotify "discovered lady gaga" on there. Sure they you search you play and you share but Lady Gaga probably had one of the largest promotional budgets of the past year and was literally everywhere when "Just Dance" broke. People who I know that aren't even remotely into electro-pop music know of Lady Gaga and her various hit songs. If these numbers are correct I think this is once again a case of the value of music as a commodity being reduced.


Having said this, from an indie artist perspective many of these sites that have come to be in this digital age aren't really of that much value. If one considers that as an indie artists your songs are going to be in the mix with artists that have been already established and most music consumers are going to these sites in search of them. Take for instances iTunes, I buy only indie music and don't care much for major label releases yet I have never once seen iTunes suggest to me an indie or unknown artist when I am there shopping for new tunes. They always say others have bought this major label release and that major label release.

What I am basically saying is that in the real world artists or bands do not get discovered on any of these services. It is always up to the artist to point out to their fans that they are available on these services. Then these services take a percentage of their earnings, plus the upfront cost and percentage take of what ever aggregator they used to get on them in the first place (as non of these services will deal directly with small artists) and in the end the artists return is very small.

So what exactly is the point? Bands might just want to stay clear of all these so called services, make their music available on their own sites and find ways to play shows once they have built a modest following and call it a night. Why become the 1 Million and 1 song on Spotify giving them all this content they can exploit just to get $0.000167 per stream?

There is a lot of talk about the music industry changing and sure on the surface it seems that way but it is still very much the same. Every enitity has found a way to exploit artists for content make as much money as possible doing it and share very little if any with the recording artist that provided them that content. From record labels, to distributors, to aggregators, to promoters, to these new digital music business ventures they all have the same business model.

over 6 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

theMusicskeptic,

Thanks for the thoughtful comment. Agree with a lot of what you say.

That said, I think the idea that record labels 'exploit' their artists is a bit overdone these days. This isn't to say that many artists give up a lot, but as middlemen labels provide a lot of things that artists themselves would never be able to afford or manage, including promotion and distribution.

Complaining that the middleman made more money than you is easy to do but usually ignores the fact that you wouldn't have earned anything without the middleman in the first place. And, frankly, we can't ignore the fact that many of those who complain about the record labels complain after they've mismanaged (and lost) their own wealth.

over 6 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

Patricio, when middleman takes the lion's share of the profit, based on deceptive contract, that's near theft. While it stays within the letter of the law, even a five year old child would be able to recognise that it is wrong.

Where have you put your ethics?

Some of us are working on making a better world, not celebrating and propagating the injustices of the present one.

over 6 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Alec,

Let's be clear: record labels are not the most lovable entities in the world.

But there's a problem with your argument. In most developed nations, contract law considers the concept of "unconscionability". Wikipedia has a simple enough definition:

Unconscionability (also known as Unconscientious dealings) is a term used in contract law to describe a defense against the enforcement of a contract based on the presence of terms unfair to one party. Typically, such a contract is held to be unenforceable because the consideration offered is lacking or is so obviously inadequate that to enforce the contract would be unfair to the party seeking to escape the contract.

In and of itself, inadequate consideration is likely not enough to make a contract unenforceable. However, a court of law will consider evidence that one party to the contract took advantage of its superior bargaining power to insert provisions that make the agreement overwhelmingly favor the interests of that party. Usually for a court to find a contract unconscionable the party claiming unconscionability will have to prove both that there was a problem with the substance of the contract and the process through which that contract was formed. The substantive problem will usually be the consideration, but could also be the terms, interest payments, or other obligations the court finds unfair. Procedural issues that a court could consider include a party's lack of choice, superior bargaining position or knowledge, and other circumstances surrounding the bargaining process.

In most countries, contracts must also be negotiated in "good faith", and contracts can be found unenforceable if there was fraud or misrepresentation, the contract was made under duress, or one party was incapable of entering into a contract. The idea that a record label deal is "based on deceptive contract" but also "stays within the letter of the law" is therefore contradictory. Had there been deception, the contract would be unenforceable. Period.

Which brings up an obvious question: if what you believe to be true (that these are "deceptive" contracts), why aren't courts throwing out record label contracts left and right? The answer: because these are legal contracts that are not unconscionable, fraudulent, made under duress, etc.

Putting aside the fact that these contracts are not "deceptive" or fraudulent, a musician doesn't have to sign with a record label. Nothing stops musicians from doing things on their own, and more musicians don't have record label deals than those who do. Unfortunately, trying to "break through" when you're working a day job and playing night gigs is very difficult, just as it can be difficult to build an internet startup without some form of financing.

The advantages of a record label deal - the financial backing of a large entity, distribution networks, promotional capabilities, relationships, significant personal advances, front money for recording/music videos - are why so many musicians who get the opportunity to sign with a label do.

Back to the internet startup analogy: do you believe that venture capital is "wrong" too? The deal isn't all that dissimilar. In exchange for financing, most VCs get preferred shares with liquidation preferences (they get their money out first), in many cases they control the board of directors, and by the time a company goes public, the founding team usually owns no more than 20-30% of the company's stock. Sometimes it's far less (I've seen under 10%). Are VCs somehow engaging in "deception" too?

As much as I don't like VCs and would never want to deal with them, if you believe that, you also have to accept that companies like Google wouldn't exist. After all, many notable and successful internet companies took VC at some point.

Which brings up a final rhetorical question: what isn't unethical to you? Is Mr. Record Label Exec supposed to invest $1m in Broke New Artist and give him 75% of the profit? Is Mr. Venture Capital supposed to invest $5m in Broke Internet Startup and take no more than 10%? Should two adult parties, both with the ability to obtain legal counsel, be prevented from freely negotiating legitimate contracts under which a middleman is handsomely rewarded for providing something the other party lacked which was required for success?

over 6 years ago

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Andrew Liddell, Ecommerce Business MGR at Personal

Very interesting subject! 

I for one discover music in more ways than one: but most of the time i Shazam from the Radio, Search in Spotify and create playlist. The whole point of Spotify for me is that i have access to 'all' music in my pocket without having to worry about costs and data storage/organisation + my iphone is the most popular 'Generic MP3 Player' at parties on the Music Dock as it has everything everyone wants to hear. (To me thats worth £10 pm) 

What is getting my back up is disappearing songs from my playlists! The feelings produced when something is taken away are far grater than when someone receives it and for this reason im seriously questing my monthly subscription. 

over 6 years ago

David Iwanow

David Iwanow, SEO Product Manager at Marktplaats.nl

Im guessing that this model is not built on CPM and agree that such channels are more useful for promotional methods that getting rich quick.

But it does show that how digital revenue measured on a single metric such as royalties is not always effective.  Using digital media to they should be measuring other metrics such as how total online plays relate to the following

  • online sales via iTunes/Amazon
  • views of artist clips on YouTube/Vimeo
  • news mentions and blog articles
  • number of fans on Facebook/Myspace/Twitter
Its easy to track that there was a 5% increase in those who heard your tracks online might translate to a 10% increase in followers... While the service may not be making you rich, I see the concept of just tracking how much $ you made on Spotify is a very backward and simplistic view of its true value. It would be like just measuring how much money you collected as a busker but ignore the fact that a radio dj was walking past heard your music and asked for your demo to play on air... So while you may have got $10 from busking would you attribute the demo being played on air to this activity? Just in case you are thinking that busking in the street will lead to on air success, i would bet my money on Spotify, or Last.FM being a better way to be discovered or get more fans... Being a busker is just not scalable as your can't be everywhere 24/7 but platforms like Spotify are!

over 6 years ago

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Bad Romance

Lady Gaga is the greatest singer ever. People think shes a man but she's not. LEAVE GAGA ALONE! :-)

over 6 years ago

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Lady Gaga Concerts

Yeah right! I dont care what people thinks about her or what she has. She still rocks!

over 6 years ago

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Dirk

I think Spotify should be ashamed.  I certainly hope Grooveshark, my favorite for streeming music, behaves better.  Icloud my Grooveshark!

over 6 years ago

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Truth One

Artists would flourish and the world would be a better place without the RIAA.

Long live The Pirate Bay!

almost 6 years ago

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Miguel

I must say it is quite a surprise for me the low revenues for such a known artist. Many people may be wondering about this business model. Me too.

But while speaking of it, what business model exists nowadays? In my perspective, I'm sorry, but I hardly believe that people buy many albums considering the easy access you have via "torrents" and similar methods. Only pubs, discos and such buy them (if so...). EVERYTHING is available in illegal sources, and when there is a legal source, people simply look at the revenues. I believe the current business model is based on tours (concerts, festivals, ...) and how do you get people to join? Acquaintance of the music, of course.

Concepts like Spotify not only help the "big" artists to bring their "other" (not played in radios) music to the listeners, but also help the "small" artists to break into market. For people interested in music, watching concerts regularly (like me), finding out a new band/artist that enchants you is many times the trigger to go look for the next concert in your city. There are the revenues. Isn't it fair for everyone?

almost 6 years ago

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jebanje

nice :)
thanks for article

over 5 years ago

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