Many of you know the prevalence of music piracy and the decades of battling that industry groups like the RIAA have facilitated against peer to peer sharing networks. First, there were services like Napster and Kaaza. Then, slowly, innovative solutions like Pandora and Grooveshark popped up. Except Pandora is far too restrictive in terms of choice and Grooveshark was caught not paying royalties for the music that they provided. Somewhere during the time that Pandora started to wane, Spotify was introduced.
Spotify started in Sweden and the UK and then made they way over to the US, where I believe they are really making a serious impact. Especially with their Facebook integration and understanding of the social implications of music and how people want to share it. The great thing about Spotify is that they still offer a great base-level of service and if you want portability and no advertisements, you simply pay the $9.99 a month (which I do) in order to get those things.
Now, if you think about it $9.99 a month isn't really all that much in order to have access to millions of songs on or offline. But, the catch is that you don't retain any ownership to the songs once your membership expires. If you buy an album for $9.99 you do retain ownership forever, even though many record companies will argue you don't have the right to copy that disc or to distribute it digitally. Now, Spotify has grown to an absolutely gigantic music service and they are now in excess of 30 million users. And they wanted to explain to their millions of users
how the company's service works for them, their users, and the artists that make the music.
In their blog post titled How is Spotify contributing to the music business?
they go over a lot of questions that people have about the company and how they make money as well as the artists that provide them with content.
One of their biggest arguments is based on the IDC report that the average music buyer spends about $55 per year on music, while the average Spotify user will spend $120 on music per year. Do keep in mind that both the $55 and $120 are without the retailer's cut or in Spotify's case, the service provider's cut (30%).
70% of the company's revenues are in the form of rights holders payouts. This means that the $500 million that Spotify paid out last year in royalties was 70% of their revenue for that year. Meaning that Spotify is slowly closing in on $1 billion in revenue. They've already stated that since their creation, the company has already paid out over $1 billion in royalties to their rights holders.
Those payouts are split up among Spotify and the record labels, who then pay their artists based upon whatever the agreed upon rates are. Do keep in mind that Spotify does offer artists the ability to go almost direct to Spotify and not deal with the record labels and retain more of their royalty payouts.
Some people believe that artists are paid per play, but this isn't accurate. An artists payout is calculated using Spotify's monthly revenue which is then multiplied by the amount of streams an artist gets divided by the total amount of streams on Spotify. Meaning, the higher the percentage of Spotify's plays/streams a song gets, the bigger cut they get out of that month's revenue. That cut is then sent to the publishing/record labels who then pay the artists their percentage that has already been agreed upon by contract.
The above chart displays exactly what an album could make in terms of royalties (the 70% cut) for a rights holder. That could either be the artist directly or through a record label/distributor. Spotify expects these numbers to grow vastly if they were to reach 40 million paid subscribers. Currently, Spotify has a very free-mium heavy user mix with most users still being free users, which means Spotify must pay for the music through ads and promotions.
As you can tell, Spotify currently has somewhere between 24 millon and 30 million users. They reported 24 million users in March, and one would expect that they are probably closer to 30 million now. However, their problem is that out of 24 million users, only 6 million actually paid the $9.99/£9.99/€9.99 per month, which puts them at a 25% paid rate of subscribers. I do believe that this ratio has probably increased since March, but the truth is that Spotify needs more subscribers to make their model successful or else someone else will attract the next generation of independent artists and make Spotify irrelevant.
Overall, this data is incredibly fascinating and gives Spotify users a good idea of how big Spotify really is and how much money changes hands. It is also good to know exactly how those 9.99 are distributed and that listening to the same song over and over to make your artist more money doesn't actually help that much. Spotify is a great alternative to YouTube and piracy and I have seen many people, including myself, switch to Spotify and significantly reduce their digital download consumption. Spotify could be the only way that the record labels survive in the future, because it will only be a matter of time until all artists are independent and there are just a few sites out there that enable them.
I suspect that this blog post could be hinting at a possible IPO from the company, as they are currently privately owned. I believe that they may be looking to go public and want the general public and potential investors to understand how their business works before they start spreading rumors about an IPO. With the success of Twitter's IPO, I believe that Spotify has a real chance at an IPO and should merely be a matter of time.
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