Spotify CEO: If We’re Paying the Labels, Then “By Definition” We’re Paying the Artists…

So, how long does this game work, exactly? Here’s Spotify CEO Daniel Ek and Sean Parker offering their latest artist compensation angle to Wall Street Journal tech critic Walt Mossberg. The interview is transcribed, verbatim.

danielek_d10

Mossberg: So there have been some complaints from artists that they’re making very little money off your service, compared to what they make off the download services.  You guys have talked about the value of artists, here and elsewhere, how important artists are, you go around telling them how important it is to make great music.  Some of them seem to feel that you’re not paying them enough.  What’s your answer to that?

Ek: So, the answer really is that – again – this is a new model, it works entirely different than it’s ever worked before.  If you think about the old model, you used to buy a record, there was a transaction going on.  If you think about that translating to iTunes, there’s a transaction going on here.  The difference with Spotify is you get paid every single time someone plays your song.  And that’s not the same as if someone buys it, but that adds up –

Mossberg: But their sense has been, that in this new model, which works pretty well for you, they don’t feel it works pretty well for them compared to the transaction model on – again – iTunes or Amazon, or, whatever.

Ek: Right, I don’t agree, because we’re the second-largest digital revenue stream for labels in Europe already, after iTunes –

Mossberg: We’re talking about artists not labels.

Ek: Sure.  But again, ya know, our relationship right now – we pay out the money to the labels, and the labels are in turn paying out to the artists.

“But if you think about it for a moment, if we’re the second-largest revenue stream for the labels, that means by definition we’re also the second-largest revenue stream for artists.”

Mossberg: Depending on what their formula is for paying the artists…

Ek: [Waves hands in agreeement]

Mossberg: …and whether it differs from a transaction versus a subscription.  And I don’t know, maybe you guys do know.

Ek: We don’t know –

Sean Parker: It doesn’t, it doesn’t really, not in most cases.    The idea, the idea of paying for portability, that ownership means portability and access everywhere.  It’s such a new and radical idea, and to your point, we’re just starting out, our userbase is not enormous in the US.  There’s a big difference between a paying customer – right – who has access to portability, and a free–tier customer, who’s basically discovering music and building their collection.  We want users to sit on the product, build a library, build playlists, and eventually get to the point where they say, ‘damn I want this playlist in the car, I want to take it to the gym with me, or I want to burn it to a CD and give it to my parents,’ whatever.  There will come a time when you’ll want that accessibility, and the only way you get that is by becoming a paying customer.

 

The full interview, from the D10 conference, is here.

34 Responses

  1. HansH

    The truth is basically very simple. How many songs do people stream in a month? I guess the average is about 700 a month. You pay $10 a month, 70% is for royalties, so $ 7 is paid out to labels and artists. Now let’s do the math:

    $7 for 700 streams means $0,01 per stream

    Okay, this is in a perfect world where every user pays 10 bucks a month. You know that is not the case, only 20 % is paying. Still Spotify was able to pay $ 0.0048 per stream in December 2011. Not that bad if you ask me, advertising revenues are quite well I take it. And because the number of streams in a month varies the pay out rate also varies.

    I do realize that this calculation is oversimplified, but it explains why Spotify just cannot pay more per stream. No streaming service can pay more without raising subscription fees or limitations on the number of streams.

    And it doesn’t matter if Spotify has a thousand or a trillion paying users. The revenue may rise but the number of streams will rise in the same proportion. The per stream payment will always be a fraction of a penny.

    Why doesn’t Ek or Parker grab a marker and writes this calculation on the white-board?

    Beats me!

    The real problem lies in the low number of streams, not the per stream rate! But artists just don’t get that, they keep whining for no good reason. “I only get pennies for 500 streams” 500 streams is peanuts. Why doesn’t Spotify get that message across?

    Reply
  2. Visitor

    I agree, Paul. It really should be Spotify’s responsibility to make sure artists have decent contracts with the majors that don’t screw over the artists. It’s only fair.

    Reply
    • NRY

      That would be nice of Spotify, but it’s really not their responsibility to make sure artists have decent contracts with their labels. The contractual relationship between an artist and his/her label is between them (and their lawyers).

      Reply
      • Visitor

        Totally agree….It’s not Spotifys’ problem. If you want to blame someone, blame the labels for giving artists scraps while they keep the lions share of earnings. Missdirected anger at spotify isn’t going to change the fact that artists are getting shafted by labels.

        Reply
  3. driver49

    We had a workshop (sponsored by NARM) here in Nashville a couple of months ago about setting up a streaming service (among other things), and one of the points that was made was that the labels are NOT obligated to pass any of the advances they are paid by the Spotifys of the world to the artists whose music the labels are licensing to those services. I’m pretty sure I got that right, bizarre as it sounded at the time.

    So Mr. Ek might want to check with his signatories. It’s entirely possible that none of the money he’s paying to the labels is in fact filtering down to the artists.

    Transparancy? Yeah, good f’ing luck with that.

    Reply
    • Roger Bixley

      Out or curiosity, what would be your methodology for paying out advances? How would you alocate it when you don’t know how much each artist is going to eventually receive?

      If the artists are supposed to be paid for actual revenue for sales and streams, why would they be entitled to any of the advance money?

      Reply
      • Visitor

        Hold the advances. Pay out based on usage. This isn’t rocket science.

        Reply
    • mdti

      How do you secure exclusivity if you don’t pay an option (advance) ?

      You count on the artist not knowing what they are into ? it can work…..

      Reply
  4. Nasa

    I find it incredible that people are comfortable with some “new technology” built by a non-music entitiy ripping off artists as opposed to the major labels doing it. If you don’t see that Spotify IS an arm of the major labels, maybe you’re a bit naive. Spotify has sweetheart deals with the majors in order to guarantee access to their catalogs. The contracts aren’t written better to this end for artists by the very nature of the quotes above. This technology and delivery system is not to the spirit of what the artists signed up for, Spotify knows it, the majors know it. Just like when some artists got ripped off because they did not own the digital rights to their music, only for physical product. This was an unforseeable add on in any contract written prior to 2008ish.

    Spotify, or Spitify is a part of a corrupt system. They are working hand and hand with the majors and at the same time are doing nothing, I repeat NOTHING, for the independent artist. It would be one thing if there were a different entry or payment point for indie artists that haven’t signed over their rights to a major, but there isn’t.

    Everyone on Spitify is getting the same (to some degree) bum deal of 0.000009 cents per play (or some such). How is this different then say Pandora or Last.FM? Because Spitify is ON DEMAND, meaning it has ZERO long term music discovery qualities that can lead to a full on purchase down the road. It’s a warped hybrid of radio (exposure through Pandora is comparable) and the retail store (Itunes being the digitized version). It places itself in between these two mediums and claims almost all the money generated for itself.

    Ultimately, there is no example in human history of anyone renting music. Music is about ownership, that’s why people have stolen it illegally for so long. Spitify is ultimately a music rental company, because contracts expire and/or are torn up. And if a listener wants to hear Led Zeppelin today, they will be upset when they’ve paid 10 bucks a month and suddenly can’t tomorrow.

    Some day all of this technology will work FOR artists AND fans and not AGAINST them.

    Reply
    • Mark

      You’re right about the majors idea… Ultimately, they give no shit about independents. It’s a tool created to work in the majors’ favor, those with LARGE catalogs of music that can take advantage of that low streaming rate. There appears no reason to really be on it as an independent artist with only a few records out, if you ask me.

      But do I think we should be pissed off about it? No. Why should Spotify be responsible for deals that artists signed with their labels? To give them some credit, they’re navigating relatively uncharted waters, and I do find their service truly useful when deciding to buy someone’s record.

      I realize I’m in the minority, however, in actually purchasing my music. But can’t the same be said about users of Netflix? I haven’t bought a movie or had a cable subscription for years, but regularly use the service, legally, for less than the price of a couple coffees each month.

      I just think entertainment is severely under-valued, but am I going to yell at Netflix for providing me with the service for too little money? Hell no. At the same time, I won’t try to protest price increases. And if I change my mind, I’ll just walk.

      Which would be the same advice I’d give to artists using Spotify to distribute music. If you don’t like the terms, don’t use it until they change the terms.

      Reply
  5. pete

    It is as simple as stated in the interview. Retailers make deals with labels and labels have deals with artists.

    So any artist complaint is with a label…and don`t believe it is only Major labels involved here as most artists are signed to Indie labels.

    A new model but easy to understand…

    Reply
  6. Corey Tate - www.spacelab.tv

    It seems obvious: in a product based world we paid upfront at a premium price for an album. Most people would take a CD home and and not listen to it that much after the first couple of weeks. Remember how people would joke that they bought an album and listened to only 2 songs and ignored the rest?

    Now we’re living in a world where artists get paid based on how much people actually listen, and artists are surprised that everyone isn’t playing their music millions of times. Listening habits are the same, what’s changed is artists are paid based on performance.

    It’s also worth considering that artists are getting screwed by their labels, something Ek always alludes to but never says out loud, because they’re his business partners.

    Reply
    • driver49

      That’s the most insightful thing I have read yet about this whole topic.

      It is arguable that the “price” of recorded music (as opposed to its “value”, which is an abstraction) has been vastly inflated compared to its actual use by virtue of its delivery in product form since the advent of recordings.

      Now it’s price is determined by levels of use, and perhaps we are actually coming to the realization that by that metric, the “price” is finally reaching a level commensurate with the actual “value.”

      Reply
  7. QSDC

    Not sure what Spotify is supposed to do to please DMN. They don’t have any control over the contracts that artists sign with their labels.

    *****
    A MUCH more important question is how much is Spotify paying artists who are signed up to services like TuneCore and iTunes (outside of labels). Are these artists getting decent payouts? If so, then Spotify is doing their job.

    Reply
    • Seth Keller

      I will answer that question anecdotely. A former client of mine who self-released an album independently in 2009 submitted it to Spotify in 2010 through Zimbalam (Euro service similar to tunecore) before Spotify was available in the US.

      Her songs from that album were collectively streamed 13,000 times over a 12 month period. She received 37 Euros or €0.0028 per stream.

      From what I’ve read, that payment is similar to what independent labels–not artists–are receiving from Spotify, which would indicate that Spotify doesn’t pay more or much more to independent artists who go directly through an aggregator like Zimbalam or Tunecore.

      If that has changed since 2010-11, I’d be interested in hearing from someone who has the updated payment information.

      Reply
      • HansH

        I have updated information. I run a small label and use Zimbalam as well.

        The pay out rate for December 2011 was €0.0035. The best month was September 2011 with € 0.0046.

        I hope to get my Q1 2012 statements tomorrow and will update the info at http://www.spotidj.com/spotifyroyalties.htm

        Reply
  8. the seer

    spotify is great for consumers, horrible for artists. end of story.

    the only leverage artists have is to deny their catalogs until spotify and labels renegotiate their streaming rates- and that won’t happen as they are in bed together. ironically the more traction spotify gains and helps erode sales, their label partners lose revenue en masse.

    ultimately labels have fu***d themselves and as a consequence artists get reamed once again.

    the downward spiral continues to circle the drain.

    Reply
  9. Streamin' eyez

    DSPs cannot take any accountability for the commerical relationship the artist has with a label esp. the majors more than the labels know how the commerical terms SPotify has with its data center.

    What’s interesting is that many of these new business models often come with a label demand for an advance. I know from experience of doing such deals with biggy labels that the artists and managers have no idea how much the label is getting and worse still what it is doing with this funny-money and how the deals are structured.

    There’s no way a DSP can be held accountable so I’m with The Ek here…

    The only solution is to skip the labels….

    Reply
  10. @avighandi

    If artists want Spotify money, then they shouldn’t sign rights over to labels.

    #duh

    Reply
  11. Chuck

    I’m a bit confused….I thought it would have been an artist/publisher issue and not an artist/label issue. It seems to me that when a song is played the artist would recieve a performance royalty then once its burned they would receive a mechanical royalty. If the artist wants more money I would think that they negotiate that thru their publishing rights society, (BMI, ASCAP, Harry Fox) and not the label.

    Reply
  12. John Eppstein

    The idea that paying the labels equals paying the artists only works if the artist happens to be on one of the labels being paid.

    The evidence is that Spotify does not pay all labels equally – they pay the majors preferentially over indies and in fact are partially owned by major labels – UMG has an 18% stake in the company.

    A significant number of indie labels have pulled their catalogs from Spotify for this reason.

    Furthermore artists, even those signed to majors, should not have to go through labels to recieve payment for what is essentially a broadcast useage of their work.

    Reply
  13. Nostradumass

    a. as folks previously mentioned, the major labels love the low royalties and seeing that money paid in quarterly dividends which they don’t have to account to their artists.

    b. it’s a raw deal for current artists as it monetized old/dead catalog. People are lazy and even though they’ve got Fleetwood Mac “Rumours” on their shelf, they’ll just load it up on Spotify. Never mind the inconspicuous consumption of music that folks probably would not have purchased in the physical world but readily consume it as a “utility” like water out of a faucet.

    Reply
    • OutofTheMusicBiz

      I take it you’re one of the Shocklee Bros. ? I could probably best bet you and your brother are NOT seeeing one dime from the Public Enemy streams ?

      Reply
  14. @umanoid

    If We’re Paying the Labels, Then “By Definition” We’re Paying the Artists…

    Are you really? jerk.

    Reply
  15. David

    A lot of these comments seem to assume that the labels are getting profits from Spotify not accounted for as royalties (which would have to be shared with artists, according to the usual contracts).

    How does that work then? Sure, the major labels (and Merlin, I think) have an equity stake in Spotify (reportedly totaling 18%), but they only make money from this if Spotify makes a profit and declares a dividend – which it hasn’t, so far. The labels could also cash in their shareholding and make a profit if and when Spotify goes public, but any whiff of a rumor that the labels were pulling out would immediately crash the share price.

    The other possibility is that the labels have received some up-front payment not accounted as an advance on royalties – aka a bribe. But is there any evidence of this? Surely it would show up somewhere in record labels’ published accounts?

    Incidentally, my own experience of Spotify is fairly recent, but one point is worth mentioning. I resisted signing up to Spotify because it required Facebook membership, which I didn’t want (is there anyone more creepy than Mark Zuckerberg?), but a couple of months ago I had to join FB for another purpose, and decided to try Spotify (the free option) as well. At first, it was fine – I didn’t use it a huge amount, but listened to about 10 hours in the first few weeks without getting a single audio advert interruption. Great!, I thought. But then came the first adverts, and after a few more weeks they were coming thick and fast. The last time I played through an entire album (12 or 13 tracks) there were ad breaks after every 2 or 3 tracks, sometimes with several ads in a break. It’s really annoying – which must be good for the conversion rate to the paid service. I presume this is the same experience for everyone – i.e. Spotify hold back on the ads to begin with, but then crank them up when they think the user is ‘hooked’.

    Reply

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