10 Spotify myths debunked

Posted on 08/12/12

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10 Spotify myths debunked

A few days ago we reported about the new features that Spotify will soon have; features that have to increase music discovery. The reporting on itself pushed some artists and labels to brand us as being on the Spotify payroll for speaking so positively about the service. Well, we wouldn't mind being on their payroll, but we sadly have to inform you that we aren't (yet). The reactions however showcase how badly informed many artists and labels still are when it comes to this way of music consumption.

In this article we will try to demystify some of the misconceptions that are travelling around in the music industry despite that you'd think they would be better informed (but hey, they aren't). You'll see that we include a lot of data based on what happens in Sweden. The reason is simple, the swedish market has matured a lot when it comes to streaming (or digital income all around). Plus, it also gives us the opportunity to highlight what the music market will be in the near future in the rest of Europe, the US (and Russia).

Note that even if this article is focused on Spotify that you might easily replace the name by Deezer, Rdio, Rhapsody and related.

Read after the jump to find 10 myths about Spotify debunked.

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Myth 1: Being on Spotify harms your revenue

Does it? In the first half of 2012 Spotify helped Swedish music sales rise 30.1%. Streaming music now accounts for 89% of digital music sales in Sweden so the GLF (the local arm of the music industry body IFPI) announces. And digital music alone accounts for 63.5% of all music sales in Sweden. Outside Sweden, we already notice that streaming can be good for 25% of total digital revenue, a number that is increasing constantly. Note that we still haven't reached the levels from before 2001 as far as revenue is concerned, but it is picking up again after years of steady decline as you can see.

Side-Line also contacted hundreds of scene labels to ask them to share their data with us in order to be able to give you a clear view on things. 31 labels were so friendly to pass us their data (thanks for your trust!). From this data we see not only that Spotify has become the leader of streaming, it also shows us that digital income for these labels has actually increased with the arrival of Spotify on the market, and not decreased. And that brings us to the next myth...

Myth 2: Streaming is cannibalising downloads

Yes and no. Let's go back to Sweden to check reality. Streaming is indeed cannibalising downloads in Sweden, but the growth of the former is outweighing the fall of the latter. That is also exactly the same what many of our 31 labels noticed. They lost some terrain as far as downloads was concerned, but the streaming revenue compensated that largelyresulting in an overll increase in digital revenue.

In relation to this, when compared to iTunes, the average listener spends $60 dollars a year, whereas Spotify Premium users spend $120 per year (see also myth 3).

Myth 3: Spotify's income is peanuts

All 31 labels that participated into our survey announced that Spotify now is their 3rd (and in several cases even 2nd) biggest source of digital income after iTunes and Amazon MP3. As said before, Spotify and the other streaming services now account for 25% of the total digital income. In the case of our 31 labels, that was good for 446.400,00 US$ for the last 12 months. Yes, four hundred forty-six thousand and four hundred US dollars. And this is just for scene bands/labels. Believing some media these 31 labels would need hundreds of Lady gaga's on board to generate this streaming revenue. They don't. It's scene band generated streaming revenue. And they generated at least 89.280.00 streams altogether. That's indeed over 89 million streams. Over 89 million tracks played via a streaming service.

The misconception lays in the fact that a lot of media, artists and labels keep on focusing on the revenue per stream. But let's put things in context. When you buy a download for instance, you'll pay 0,99 US$ in most of the cases. With Spotify you get between 0,003 to 0,005 US$ per stream (that is before cost deductions from aggregators). Which means that you need to stream that track at least 330 times to generate that income. Well, surprise surprise. After using Spotify for just one year I noticed that the tracks I would have bought otherwise have been streamed over 350 times already... in other words, that track paid itself back more via streaming than via a download. On top, I actually also bought some of these tracks from iTunes. Double price for bands and labels.

This example showcases exactly what the strength is of this model, namely that a good song will make more from streaming services in the long run than it would via one download.

Next to that, let's make a simple math. Spotify has 20 million users (5 million paying subscribers) and generates at the moment around 1/5 of the revenue iTunes generates. iTunes however has 400 million users. That is 20 times more than Spotify. we won't go that far to say that Spotify could generate 4 times more than iTunes if all these users would switch to streaming, but hey... the maths don't lie. This comparison also puts some of the criticism in perspective, namely that some artists and labels go ballistic over a service that has 20 times less users than iTunes but from which they expect the same revenue already. That's impossible. And intellectually dishonest.

And to end the myth, several mediatised stories were taken totally out of context. Especially the Lady Gaga story where she claimed getting peanuts was completely incorrect. In fact, the amount she claimed only related to royalties due from her collecting society. The sum excluded the much bigger royalties paid to Lady Gaga's record company. Of course, Spotify cannot be blamed when an artists signs a not so good digital revenue share deal with his/her label.

Myth 4: Streaming won't and can't replace CDs

This is a non-discussion. Spotify was not created to replace CDs. It's initial intend was - after being confronted with the illegal download market in Sweden - to reconnect with the public that no longer bought music but instead downloaded it illegally. That initial intent has proven to work and actually still works (look at our debunked myth 2). To support this, know that in 2011 the Media Vision Group found that the percentage of music fans pirating in Sweden dropped from 47% to 23%. A Norstat study at the same time showed that piracy in Denmark and Norway halved once music listeners started streaming. It wouldn't surprise us that the rest of Europe will soon be able to present the same figures.

So, it was never about replacing the CD in the first place anyhow. Actually, you will also always have people who keep on preferring vinyl over CD and CDs were clearly made to replace vinyls by creating a new medium. Streaming in the Spotify philosophy was not a replacement for current legal formats. It wanted to get a huge market back on the legal rails.

For those who still think that streaming wants to replace CDs. Keep in mind that you probably missed the digital download train. Because if there is one format that is replacing the CD it's the MP3 and all other related download formats. Not streaming (see myth 2).

Related to this, streaming services will start to unlock Russia as well. A label like ArtOfFact, Alfa Matrix and many others have now already entered the streaming market in Russia. A market that this far was considered dead and buried. Streaming might (and will) revive it as far as revenue is concerned. Yes, the price per stream in Russia will be lower than in the US or Europe, but the purchase power in Russia is also a lot lower than in the US or Europe.

Myth 5: An individual streamed track is worth as much as an invidiual download

Let's put it differently. Suppose you rent a DVD. And you pay 5 US$ for it. The next few weeks the DVD is rented 10 times more. That is 50 US$. The DVD itself is sold for 15 US$ in the shops. Following the reasoning of the Spotify critics this would mean that the DVD publisher lost out on 10 sales. Every reasonable citizen will admit that he/she often rents movies that he/she would never have bought anyhow. Even the film industry understood it.

Back to Spotify. If you compare a streaming with a download, you actually say that a track is only listened to once. Everyone knows that this is incorrect. Tracks are played over and over again, streamed or downloaded. The only difference is that once you paid for a track that the revenue stops there. With a stream the revenue continues because you keep on renting the track. The only black spot it is how many times a track is being played. A small data query (see myth 3) showed people will stream their most loved tracks over and over again, creating a (much) bigger income source.

Myth 6: People still prefer CDs

Well, considering the success of streaming and download services and the ongoing decline of the CD market, it's clear that people don't prefer CDs at all. The number of CDs being sold keeps on falling year after year and it doesn't look like that this will change at all. Sure, limited editions will keep on finding their way to people, but such 'die-hard fans' only represent a very small portion of the possible market. On the other hand, streaming services are indeed monetizing the public that before only found its way to piracy which only made the piracy website owners rich and none else.

A side-note: people prefer CDs when they are sold at very low (unprofitable) prices. This is not a longterm revenue model. Anyone contradicting this needs an urgent economics speed course.

Myth 7: Radio pays out more than Spotify

A while ago the music collection societies had an analysis made concerning the amount of money paid per listen (on Spotify, on the radio, ...). The results showed that Spotify paid a lot more than radios. With radio, there is a per listen rate, but it's spread among all the listeners. When measured on a per listen basis, the amount you will earn from Spotify is significantly higher than Radio. To give you an idea, while a play on Spotify generates between 0,003 US$ and 0,005 US$, a play on the radio generates only from $0.000186 to $0.000372 in the U.S. and from $0.0004 to $0.0007 in the UK, per listener that is.

Need we say more?

Myth 8: Spotify keeps a lot of money

Well, iTunes keeps 30% and so does Spotify. If you sell a CD you'll see that there is an even wider gap between PPD (Published price to dealer) and the final price in the shops. A PPD might be half of the final price in the shops. 30% in this perspective is not much, and the debates about Apple's iTunes and Spotify ripping you off are just plain unfounded. Of course, if you signed a dodgy deal with some label, then you might end up with 0 to 1% of this revenue. You wouldn't be the first nor the last artist having signed such deal. But that is your fault as an artist for not having thought through things enough.

Myth 9: Spotify users never return to buying downloads, CDs or vinyl

When classical music record label X5 launched an app within Spotify and saw streams of one album increase 412% in a month, they also noticed that the album's iTunes sales shot up 50%. According to X5's CEO Johan Lagerlof lots of people use the Spotify free service as a discovery tool and then go to iTunes for buying their music. It's more than reasonable to think that some people even go to buy CDs and vinyl due to discovering music on Spotify. Fact is that people seem to be more picky what they buy. Streaming is easy, but paying means you need an extra positive bond with that artist. Treating your fans as thieves like many bands and labels do isn't exactly encouraging that.

Myth 10: Spotify has the monopoly on streaming

With only 20 million users, one has to explain to us how they can have a monopoly. iTunes has 400 million users and will most probably enter the streaming market sooner or later (they are actually already in it via the iCloud streaming feature). Amazon's customers account number is probably around the 120 million (they had 100 million accounts back in 2009). Which means that these players have a way bigger monopoly potential.

The only monopoly that we see is that since several mainstream labels have an equity stake in the company, that they can give Spotify a preferential treatment. However, it would be grotesk to think that Apple or Amazon would have less negotiating power than Spotify's team. Especially Apple has been a saviour for many labels as far as revenue is concerned and it remains to be seen what Apple's iTunes might be exploring music wise in the not so far future.

All ok then?

Although we truly believe in Spotify as a profitable business for labels and artists, we do have concerns about how Spotify splits up its revenue between major labels and indies. Don't forget, the majors have an equity stake. We are not sure that indie labels and major labels are treated equally by Spotify. However, this does not mean that the current revenue share by Spotify is not correct.

We also urgently ask labels and bands to stop trying to impose an old model onto consumers. A lot of labels respect the choices of their clients and offer their material in various formats, physical, download and streaming. Leave the people a choice. It will benefit you in the end.

This is just an advise. You are not obliged to agree with it. But please, keep the discussion intellectually honest instead of comparing apples and oranges, or even calling us names and accusing us of bribery. And if you think we convinced you, let us know.

Feel free to comment.

PS 1: For those complaining about the ads in Spotify. Use the premium account. Nice deal no for not even 10 US$ a month?

PS 2: Enjoy our playlist on Spotify:

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