Spotify & 1 Cent Per Stream Royalties: Tastes Great, But Less Filling (In Artist Pockets)?
Steve Jobs created the music industry's basic economics, and Congress’ new proposed bill can't fix that (and may actually hurt, not help, artists)
Spotify just reported that it paid out $9 billion in artist royalties in 2023 – an impressive number to be sure, but one that still fails to please artists due to long-standing sub $.01 per stream royalty rates that many believe devalues music.
But it was Steve Jobs two decades ago who essentially framed music streaming’s fundamental economics when he set Apple’s album download pricing at $9.99 to give consumers a legitimate alternative to Napster’s outright P2P theft. Spotify and other DSPs later launched with that same price point to move consumers away from downloads to streaming. Meanwhile, shell-shocked musicians tried to make sense of it all and find ways to fuel their art and livelihoods with confounding new per stream royalty rates that were a fraction of one penny.
In an attempt to rewrite that history, and significantly raise streaming rates paid by Spotify and other DSPs, U.S. Representative Rashida Tlaib recently introduced a bill – dubbed the Living Wage for Musicians Act - that essentially doubles those rates from the current $.003-$.005 per stream to $.01/stream.
The bill’s goal is to give more musicians a chance to earn a livelihood in our streaming-first world that plays by economic lines arbitrarily drawn two decades ago. Its timing is particularly salient now, because musicians are getting hit by the second tech-tonic shoe to drop – generative AI. Generative AI-produced tracks increasingly flood music streamers, overwhelming IRL artist tracks that otherwise would trigger plays and royalties.
But as laudable as the proposed bill’s goal is (and it is), its new $.01/stream royalty rate would be financed in a way that would hurt pure-play streamers like Spotify and Deezer significantly more than Apple Music and Amazon Music — streamers from multi-faceted Big Tech behemoths that boast multiple revenue streams. That reality would, in turn, likely hurt musicians themselves.
Here's why
The bill’s proposed incremental royalty payments to artists would be financed in two ways: (1) by automatically increasing music subscription pricing by 50% (up to a certain maximum dollar amount) and directing those incremental amounts into an overall artist fund; and (2) by requiring DSPs to inject 10% of their non-subscription revenues (mostly advertising) into that same artist fund. Together, these new payments function as a consumer subsidy for the benefit of artists.
It’s easy to defend the push for this kind of artist subsidy, given the undeniable value consumers get for unlimited access to 100 million songs for less than two soy lattes at Starbucks. Remember, current streaming royalties have changed little in the past 15 years, and there’s no “magic” to these current low streaming payouts. Those royalty rates were arbitrarily set two decades ago after Steve Jobs fundamentally altered the basic music industry landscape when he unleashed iTunes’ $.99 song and $9.99 album downloads into the world.
To compete and incentivize consumers to adopt new streaming behavior, Spotify and others settled on Jobs’ $9.99 “magic number” for monthly subscriptions. Only recently – beginning last year – has that pricing crept up. Spotify raised its monthly premium subscription by $1 to its current $10.99 - still a shockingly low value.
When introducing her bill, Representative Tlaib justified it by saying, “Streaming has become an increasingly popular choice for people to enjoy music, but unfortunately while streaming services and record labels continue to make tons of money off of these platforms, the artists who make this music are not seeing shared prosperity.” But here's the issue. No matter how much artists and consumers may consider it to be the enemy, Spotify is essentially never profitable despite its massive global reach.
The streaming giant has achieved profitability only a handful of times in any quarter since it launched in 2008. The more it makes, the more it seems to lose (there are lots of reasons why, as I’ve previously written). That means that Representative Tlaib’s proposed “10% shaving” of non-subscription ad revenue will only make matters worse for Spotify and profitability more elusive and distant.
But It Gets Even Worse for Spotify
But it gets even worse for Spotify and the other pure-play music DSPs. They would be harmed significantly more than their resilient Big Tech streaming competitors by the inevitable large numbers of defections by subscribers who refuse to pay the new 50% “tax” (even when those defectors understand that those incremental dollars would go directly into the pockets of the musicians whose music they enjoy). Already unforgiving pure-play economics would be battered further by these subscription losses.
Meanwhile, Apple Music, Amazon Music, and YouTube (the biggest Big Tech music streamer of them all) boast massive war chests because of their parent companies and multiple revenue streams. That means they can withstand user defections more easily and with significantly less stress to their bottom lines. Revenues from their music services represent drops in their overall monetization buckets after all.
Those behemoths also have the luxury of being able to essentially "eat" some or all of the 50% subscription “tax” because their streamers essentially function as a marketing expense. Their primary purpose is to drive brand engagement so that users buy more of their underlying core products. That’s a fundamentally different raison d'etre than it is for Spotify and the other pure-play DSPs that monetize only one thing – the music itself.
Big Tech Music Streamers Have No Skin in the Game
Let’s face it. Apple, Amazon and YouTube have no real skin in the game to increase subscription pricing to ultimately benefit artists. In fact, they are at least arguably incentivized to compete with each other by driving subscription prices down, essentially subsidizing their services which, in turn, devalues music even further. The incentive for Spotify and the other pure-play DSPs, on the other hand, is to drive monthly pricing upward much like Netflix, the leading independent pure-play DSP on the video side, has done over and over again. The only problem is that Spotify and the others can’t for the reasons noted above.
So while the sentiment behind Representative Rashida Tlaib’s proposal is commendable -- and the musicians' cause is just -– the bill, at least as it stands, likely wouldn’t be good for anyone in the music industry, including the musicians it’s intended to benefit. Big Tech likely would just get bigger, and Spotify and the other pure-play independents would just face increasing economic pressure that places them at even greater financial and competitive risk. And the fewer independent music DSPs that compete with Big Tech, the worse it likely would be for artists. Big Tech would control the music industry’s overall rules of the game even more than it does today.
One Possible Fix?
One possible fix is to give independent pure-play DSPs like Spotify a fighting chance against the Big Tech behemoths. Spotify and other independents significantly depend on Apple’s App Store and Google’s Play Store for distribution. Apple, of course, notoriously charges a 30% “tax” on most purchases in its App Store. That’s quite a hefty (some would say usurious!) transaction fee. Imagine your credit cards charging you 30% for the luxury of enabling purchases.
Spotify has historically avoided paying Apple’s crushing toll by essentially forcing its new users to subscribe via a separate step outside of the App Store. That inefficient second step, of course, causes friction that likely sheds a significant portion of those who otherwise would have paid at the time of download.
Apple’s 30% windfall tax is under significant regulatory scrutiny right now both in the U.S. and EU, and we already see changes. The EU just passed The Digital Markets Act that finally gives Spotify and other app developers the ability to make in-app purchases without triggering the Apple tax. This potentially places them in a better position to ultimately pay artists more.
But the ultimate tax here that harms musicians is the tax set by Steve Jobs and Apple two decades ago when they diminished the monetary value of music in the minds of consumers. Although Jobs’ $9.99 album download price certainly was a massive improvement over the original bad Napster’s outright P2P theft, it essentially set the bar for pricing by legitimate music alternatives. And once consumer expectations are set, it’s very hard to change them - especially when Big Tech players control the playing field.
Representative Tlaib’s bill certainly can’t fix that.
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