Streamonomics: The Economics of Spotify

By Shania D’Souza | Edited by Drishti Rana

Freddie Mercury once said, ‘”We are in a golden age of music. There will be a time when technology becomes so advanced that we’ll rely on it to make music rather than raw talent…and music will lose its soul.”.  Does this still stand true?  One on hand we see musicians putting out music they truly want to and on the other hand we see them putting out music for the sake of streams. So what does this imply?

Streaming services like Apple, Spotify, Youtube, etc., stream the artists music, but pocket a lot of the sales. Spotify’s 2011 debut in America offered music fans a new way to listen to their favorite artists. Instead of purchasing individual songs or albums, users can stream music from a phone or laptop. The revenue model of Spotify is two fold – ads and subscriptions. Advertisers advertise via sponsored ads for consumers who consume music for free; and subscriptions, via which consumers subscribe to the streaming site in order to listen to music without ads and the option to download songs. But how lucrative is this for the artists concerned? Spotify pays the artists royalties per stream of music.  Unlike physical sales or downloads, which pay artists a fixed price per song or album sold, Spotify pays royalties based on the artist’s “market share”—the number of streams for their songs as a proportion of total songs streamed on the service. What’s more, even that less-than-half a cent is an average, meaning that payout can often be less. Spotify distributes payment pro rata, which basically puts all money generated from streams into a single pool, then divides it up based on the number of streams each artist gets, further cutting into smaller artists’ share. Spotify is also constantly taking artists to court, seeking ways to pay even less in royalties than they already do. But before that let’s get into the core concepts of Economics at play here. 

  1. A market is a place where buyers and sellers come together to buy and sell goods. Similarly, streaming services, with the help of cheap and fast internet, are bringing consumers of content and producers of content together in the digital marketplace. 
  2. Transaction Costs play a huge role in aiding the smooth functioning of markets. Lower the transaction costs, the easier it is for buyers and sellers to come together. Conversely, if you increase transaction costs⁠—e.g. start taxing the internet, cables, communications, or shipping⁠—all of the aforementioned markets will shrink, and fewer people will join up to work together. 
  3. Monopolies and Governments have a major role as well. Markets and free competition are beautiful because they allow individuals and companies to find new ways to satisfy customers. They are horrible to some established businesses because they prevent them from cornering the market and reaping profits. Luckily enough, no one is yet proposing to ban competition in streaming services. 

With all these are at play, we can see how streaming services are profiting off of someone else’s content, revealing exploitative practices. The Pandemic revealed that an artist’s earnings from streams is a joke. 

Spotify currently takes a 30% cut of subscription fees, with the 70% left divided up among the rights holders based on the number of streams. The rights holders, who are the record labels, publishers, and distributors, then pay the artist based on their individual contracts, with similar methods at other streaming sites. In this the winners are the record companies and Spotify. 

Initially, when iTunes was the streaming service, you could buy two to five songs a month, which totals in between $2 and $7 on iTunes. You can continue to purchase off iTunes because one likes the assurance that you will not lose your music if I unsubscribe to a service. But now, as music streaming becomes more competitive, a Spotify subscription becomes more viable as prices are driven down. You save more songs and albums on Spotify, but with  the free version you can only access them with internet service. This has led to an increase in free consumption of music at the cost of revenues for the musicians. Since they aren’t paid directly for every time a song is streamed, their pay out becomes lower. With the increase in exploitative practices and the need for another source of income, artists are stumped as to how they could lead lives without concerts. With the new business model, an artist is estimated to make between $0.006-0.008. That means to earn 1 dollar, they need to have at least 250 streams. Because of the desperate need to be streamed multiple times, artists have had to compromise their musical quality and publish songs which will be crowd pleasers, just so they can earn a fair income. Which is why so many ‘Jazz’, ‘Study’, ‘Chill’ playlists have made it big because the whole playlist is optimized to provide as much variety as possible while still maintaining the same vibe. Plus, the more songs you stuff into a playlist, the more payouts the artists and labels get. The consequence of this is that more and more music producers start to adjust their songs in ways that don‘t serve an artistic goal or the end listener. If trying to bribe the algorithm becomes the new normal, we have a problem. 

Another way of making sure their songs or albums are streamed is by following the ‘Pay for play’ model, wherein record labels pay for their artists’ music to be played in a spotify curated playlist. Right now Spotify’s algorithms are delivering to us our “Best of 2020” playlists, intended to reveal our tastes to ourselves after an entire year of “you might also like” suggestions. And if the new promotional models go through, they will be based less and less on our actual tastes, more and more on who paid, further hemming in our ability to explore and discover. Earlier last year, Spotify announced it would give artists and record labels a boost in promotion if they accepted a lower royalty rate — rates that are already abysmally low. Between fights over compensating artists and the unionization of podcast company workers, it’s clear that even the world of digital streaming has class conflict at its heart.

Music streaming services, like Spotify, may be forced to re-calculate how they pay artists, with the British Government having just launched an investigation into the economics of the streaming industry. They are concerned that “music streaming in the UK brings in more than $1 billion in revenue with 114 billion music streams in the last year, however artists can be paid as little as 13% of the income generated”, according to the British Government’s Digital, Culture, Media and Sport (DCMS) Committee.

Artists like Taylor Swift, Thom Yorke and even Adele, withdrew their music from the streaming service, due to malpractices, Adele delayed the release of her album, but after a year eventually released it. 

Spotify claims it benefits the industry by migrating users away from piracy and less monetized platforms and encouraging them to upgrade to paid accounts. Record labels keep a large amount of Spotify earnings. The current climate has brought to light the extent of unsustainability in the music industry, with Kanye West’s Twitter stunt the latest addition to the #BrokenRecordMovement. With major record labels holding the purse strings, and the streaming giants having a deep financial investment in maintaining the monopoly over where most music is listened to, it is unlikely that change will come about any time soon. But, through frugal innovation, artists are finding new, more sustainable ways to use platforms on their terms.

Haley, H. (2021, April 20). U.K. music icons call for legal reforms to streaming services to help “exploited” artists. CBS News. Retrieved December 26, 2021, from https://www.cbsnews.com/news/music-streaming-fair-pay-demand-uk-artists/

Is Spotify bad for artists? the streaming discussion revisited (2020). Pick Yourself. (2020, November 23). Retrieved December 26, 2021, from https://pickyourself.com/skills-mindset/spotify-streaming-payouts/

Laker, B. (2021, December 10). The economics of music streaming and the role of music streaming platforms. Forbes. Retrieved December 26, 2021, from https://www.forbes.com/sites/benjaminlaker/2020/10/28/heres-how-lockdown-has-shown-that-spotify-has-a-sustainability-problem/?sh=659d784f599b

Ovide, S. (2021, March 22). Streaming saved music. artists hate it. The New York Times. Retrieved December 26, 2021, from https://www.nytimes.com/2021/03/22/technology/streaming-music-economics.html

Silenas, Z. (2019, December 17). What streaming services teach us about economics: Zilvinas Silenas. FEE Freeman Article. Retrieved December 26, 2021, from https://fee.org/articles/what-streaming-services-teach-us-about-economics/ 

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