Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

The Finances of Spotify

by Henry Stockwell

 

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In March of this year, Spotify CEO Daniel Ek announced that the company had reached 30 million paid subscribers, making it the gold standard in the music streaming industry. Spotify’s growth hasn’t stopped in the months since-- some estimates put the company’s current number of paying users closer to 40 million. And in 2015, the company’s revenues were up 80% from the previous year, totalling a whopping 2.1 billion dollars.

 

But Spotify’s soaring revenues do not mean that the creators of its product, the artists, are seeing the same sort of money. This isn’t news to anyone who follows the industry; the demise of music’s finances in the digital age has been well-documented, from New York Magazine’s condemning 2012 piece on the indie-rock band Grizzly Bear to Taylor Swift’s public breakup with Spotify. A quick, if not entirely accurate, Google search will tell you that Spotify pays its artists roughly $.006 to $.0084 per stream. In fact, Spotify is often painted as a cash-hoarding villain robbing artists of money that is rightfully theirs. But here’s the problem with that depiction: Spotify doesn’t make any money either.

 

Somewhat surprisingly, Spotify is losing money in spades. In 2015 the company lost 206 million dollars, and in 2014, losses totalled $184 million. Taking the glass half-full approach, that means Spotify’s losses increased at a slower clip from 2014 to 2015 relative to the company’s revenue over that same time period, a hopeful trend. But the reality is that the most important company in digital music’s fastest growing sector, streaming services, is almost a quarter of a billion dollars shy of turning a profit. Even if Spotify’s revenue and losses continue to trend as they have been, it will be many years before they’re in the green.

 

The bulk of Spotify’s revenue is eaten up by the roughly $1.8 billion the company paid this past year in royalties and distribution fees. That means that the company pays roughly 70% of its revenues each year to rights holders, leaving roughly 30% with which to cover all its other expenses and, one day, to actually create profit. The important piece here is that Spotify doesn’t pay the artists directly; rather, it pays whoever owns the rights to the music to which is provides users access.

 

In most cases, that means Spotify pays 70% of its revenue stream to labels, publishers, or distributors. These various entities eventually give a percentage to the artists themselves. And this is a wildly oversimplified version of how money flows from your clicking a track on spotify to a musician’s bank account; in reality, there are myriad ways in which that original 70% figure is diluted before it makes it to the artist.

 

Because of this convoluted process, streaming is one of the least important ways in which modern musicians pay the rent. Artists make the vast majority of their money off of touring or selling merch directly to consumers. But perhaps the best way to make money as an artist in today’s music climate is to remain independent-- that is, unaffiliated with any record labels. The problem with going independent is that until recently, it was thought to be impossible to make a living without the help of a label. But through the help of the internet for publicity, and streaming services like Spotify who will pay independent artists directly, that impossibility is becoming more realistic. Chance the Rapper, whose album Coloring Book debuted at number eight on the Billboard charts this year, a wholly unprecedented feat for a streaming-only album, has yet to sign with a label. As a result, Chance makes more per Spotify stream than any of his label-signed peers like Vince Staples or Childish Gambino.

 

In a modern music utopia where artists’ profits were all that mattered, all 40 million paying users would drop Spotify. We would all buy new albums as vinyl straight from the artists, our only clothing would be artist merchandise, and we would all pay full price to see shows multiple times a week. That’s what we should do if we want to pay artists what they deserve. But we don’t live in a music utopia, and very few of us have enough money to realize that vision.

 

Spotify does not pay its artists enough money; it pays them as much as it can without going under. Daniel Ek’s streaming service is flawed. But in a world where pirating music is more convenient than going to the post office, Spotify has shown that about 40 million of us are willing to pay something, when we could be paying nothing.


Ten years ago, the financial future of the music industry looked bleak. Today, it seems there may be enough light in that darkness to show us the way forward. And while the industry as a whole must find ways to better pay its creators, we should recognize Spotify for continuing to work towards a brighter future for artists’ wallets.

 

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