Daniel Ek, the C.E.O. of Spotify, is a rock star of the tech world, but he is not long on charisma. At thirty-one, he is pale, boyish, cerebral, and calm. Jantelagen, the Scandinavian code of humility and restraint, is strong in him. He doesn’t greet you with a firm handshake from behind an imposing desk; he doesn’t have a desk. He sprawls on a couch with his laptop, like a teen-ager doing homework. Or he wanders the company’s offices, which form an oval around the open core of a big building on Birger Jarlsgatan, in central Stockholm. The design encourages “random encounters,” which Ek once read was Steve Jobs’s plan in laying out Pixar’s offices.
Ek’s phlegmatic manner makes his unshakable, almost spiritual belief in Spotify burn all the more brightly. His vision, that Spotify is a force for good in the world of music, is almost Swedenborgian: salvation in the form of a fully licensed streaming-music service where you can find every record ever made. Spotify doesn’t sell music; it sells access to it. Instead of buying songs and albums, you pay a monthly subscription fee ($9.99), or get served an ad every few songs if you’re on the free tier. You can listen to anything on the service—the Beatles (as with iTunes, the surviving members are not rushing in) and Taylor Swift (who left the service in a flurry of publicity in early November) notwithstanding—and there is an astonishing amount of music. When Spotify launched, in October, 2008, in Sweden and a handful of other European countries, Ek’s dream seemed like the longest of long shots. Now Spotify is the Netflix of music sites. Mark Zuckerberg, Facebook’s founder, says, “Daniel just saw the opportunities of streaming music before anyone else.”
Spotify appeared nine years after Napster, the pioneering file-sharing service, which unleashed piracy on the record business and began the cataclysm that caused worldwide revenues to decline from a peak of twenty-seven billion dollars, in 1999, to fifteen billion, in 2013. The iTunes store, the industry’s attempt, in partnership with Apple, to build a digital record shop, opened in 2003 to sell downloads, but that didn’t alter the downward trajectory; indeed, by unbundling tracks from the album, so that buyers could cherry-pick their favorite songs, Apple arguably hastened the decline. Legal actions against individuals—thousands of people in the U.S. were sued for downloading music illegally—only alienated potential customers. As bad as the bloodbath was in the U.S., the situation was even worse in Sweden. Pelle Lidell, an executive with Universal Music Publishing in Stockholm, told me that by 2008 “we were an inch away from being buried, and Spotify single-handedly turned that around.”
Ek was one of the pirate band. Before starting the company, he had briefly been the C.E.O. of uTorrent, which made money in part by monetizing pirated music and movies on BitTorrent, a major file-sharing protocol. Later, the Napster co-founder Sean Parker, for years Public Enemy No. 1 to record-company executives, joined forces with Ek. Who would have imagined, as one label head put it recently, that “your enemy could become your friend”?
Spotify is now in fifty-eight countries. (Canada, its latest market, got the service at the end of September.) It has raised more than half a billion dollars from investors, including Goldman Sachs, to fund its expansion, and there are rumors of an I.P.O. in its future, to raise more. Spotify’s user base exceeds fifty million globally, with twelve and a half million paying subscribers. At the current rate of growth, that number could reach forty million subscribers by the end of the decade. To date, it has paid out more than two billion dollars to the record labels, publishers, distributors, and artists who own the rights to the songs. “I’m very bullish on it,” Tom Corson, the president of RCA Records, said. “The all-you-can-eat access model is starting to make sense to people. And we expect that free is going to roll into subscription and that is going to be a really huge part of our business.”
The question of whether Spotify is good for artists is considerably more vexed. The service has been dogged by accusations that it doesn’t value musicians highly enough. In 2013, Radiohead’s Thom Yorke memorably called Spotify “the last desperate fart of a dying corpse,” a remark that “saddened” Ek. In July, Taylor Swift wrote in a Wall Street Journaleditorial, “In my opinion, the value of an album is, and will continue to be, based on the amount of heart and soul an artist has bled into a body of work.” For Swift, streaming is not much different from piracy. “Piracy, file sharing and streaming have shrunk the numbers of paid album sales drastically, and every artist has handled this blow differently,” she wrote.
In early November, when Swift’s new album, “1989,” was released, her label, Big Machine Records, not only declined to make the album available on Spotify but also removed her entire catalogue from the service. Is this a gesture of artistic solidarity, or, as one insider put it, “a stunt to wring the last drop of blood out of what is a dying model”—i.e., album sales? Swift’s impressive first-week sales of “1989,” which were just under 1.3 million albums, making her the year’s top seller, are still well short of the all-time first-week high, 2.4 million, set by ’N Sync, in 2000. And the sixty-nine-per-cent drop-off in “1989” ’s second-week sales suggests that Swift’s seventy-one million Facebook fans didn’t rush out and buy the album when they couldn’t get it on Spotify. They just streamed whatever was available on YouTube, which pays artists even less than Spotify does, or on other sites. Or they set sail for the Pirate Bay, where the album was also No. 1.
On Spotify, music consumption is “frictionless”—a favorite word of Ek’s. In tech terms, we’ve gone from a world of scarcity to one of abundance. Nothing is for sale, because everything is available. The kind of calculations you make on iTunes, such as “I like this song, but not enough to buy it,” don’t matter. It is a music nerd’s dream, which may be why the user population on Spotify tends to lie outside the mainstream. On Spotify, the Pixies’ top songs have about four times as many streams as Neil Diamond’s biggest hits.
The difference between Spotify and Internet radio services, like Pandora, is that Spotify is interactive. You can sample the complete catalogue of most artists’ recordings. (Spotify also has a non-interactive radio component.) Spotify now has some twenty million songs on the service, and twenty thousand new ones are added every day. If you are a “lean forward” listener—that is, the kind of motivated fan who takes the time to discover the music you want—Spotify is a celestial jukebox. But, for Spotify to continue its rapid growth, it must bring in the “lean backers” Pandora caters to. Spotify tries to do this with playlists. It has staff-curated playlists, and users can also make their own—there are more than a billion on the site. The playlist is the album of the streaming world. Spotify is working on getting its service into car stereos, and is negotiating agreements with automobile companies; one such agreement was announced this week. The power of playlists will only grow.
When Spotify launched in the U.S., in 2011, it relied on simple, usage-based algorithms to connect users and music, a process known as “collaborative filtering.” These algorithms were more often annoying than useful. You think because I listened to Neil Young that I want to listen to America? America ripped Neil Young off! But over time the algorithms have improved. Earlier this year, Spotify bought a Boston-based startup called the Echo Nest, which has developed a form of artificial music intelligence—a kind of A.I. hipster that finds cool music for you. The Echo Nest powers Spotify’s automated radio stations and is also behind an in-house programming tool called Truffle Pig, which can be told to sniff out music with combinations of more than fifty parameters, such as “speechiness” and “acoustic-ness.” Now that the Echo Nest is part of Spotify, its team has access to the enormous amount of data generated by Spotify users which show how they consume music. Spotify knows what time of day users listen to certain songs, and in many cases their location, so programmers can infer what they are probably doing—studying, exercising, driving to work. Brian Whitman, an Echo Nest co-founder, told me that programmers also hope to learn more about listeners by factoring in data such as “what the weather is like, what your relationship status is now on Facebook.” (In 2011, Facebook entered into a partnership with Spotify.) He added, “We’ve cracked the nut as far as knowing as much about the music as we possibly can automatically, and we see the next frontier as knowing as much as we possibly can about the listener.”
All this, Ek explained, will help Spotify to better program the “moments” of a user’s day. “We’re not in the music space—we’re in the moment space,” he told me. The idea is to use song analytics and user data to help both human and A.I. curators select the right songs for certain activities or moods, and build playlists for those moments. Playlists can be customized according to an individual user’s “taste profile.” You just broke up with your boyfriend, you’re in a bad mood, and Justin Timberlake’s “Cry Me a River,” from the “Better Off Without You” playlist, starts. Are you playing the music, or is the music playing you?
You can design your own Spotify day. You wake to the “Early Morning Rise” playlist (Midnight Faces, Zella Day), and get ready with “Songs to Sing in the Shower” (“I’m hooked on a feeling/I’m high on believing”). Depending on how much work you have, there’s “Deep Focus,” “Brain Food,” or “Intense Studying.” By eleven-thirty, you’ve hit “Caffeine Rush,” and, after a sandwich at your desk (“Love That Lazy Lunch”), it’s time to “Re-Energize” (Skrillex, Deorro) for the afternoon. A late-in-the-day “Mood Booster” (Meghan Trainor) gets you pumped for your workout (there’s a “House Workout,” a “Hip Hop Workout,” and a “CrossFit Mix,” to name just a few). Then it’s “Happy to Be Home” (Feist, the Postal Service). After “Beer n’ Burgers” (rockabilly) or “Taco Tuesday” (Celia Cruz), you “Calm Down” (Wilco, the National) and then, depending on your love life, click on “Sexy Beats” or “Better Off Without You” (or maybe “Bedtime Stories,” for the kids), followed by “Sleep” (heavy on Brian Eno, king of the z’s).
My problem with playlists is not the Starbucksy rubrics, or the spying on my embarrassing Lana Del Rey obsession. My problem is that I end up skipping most of the songs anyway. I lean forward and check the next song when I’m supposed to lean back. The human or the A.I. who chose Pharrell’s “Happy” for the “Mood Booster” playlist isn’t getting the job done for me.
By the time he turned twenty-two, Daniel Ek had achieved his life’s ambition: he was rich. A gifted programmer, he had been making money by working on Internet-based tech products since he was fourteen. After selling an Internet advertising company called Advertigo, in 2006, he retired. He rented a big place in Stockholm. He bought a red Ferrari and drove it to night clubs, where he arranged for good tables for friends and attractive female companions, whom he plied with expensive champagne. He lived like this for a year or so, until one morning he awoke to a startling realization. “I was completely depressed,” he said.
“I realized the girls I was with weren’t very nice people,” Ek went on, “that they were just using me, and that my friends weren’t real friends. They were people who were there for the good times, but if it ever turned ugly they’d leave me in a heartbeat. I had always wanted to belong and I had been thinking that this was going to get solved when I had money, and instead I had no idea how I wanted to live my life. And no one teaches you what to do after you achieve financial independence. So I had to confront that.”
Ek describes himself as “missionary,” by which he means he likes to formulate five-year missions for himself. “That’s how I think about life,” he said. “Five years is long enough for me to achieve something meaningful but short enough so I can change my mind every few years. I’m on my second five-year commitment on Spotify. In two years, I will have to make my next one. I will need to ask myself if I still enjoy what I’m doing. I’m kind of unusual that way, but it gives me clarity and purpose.”
Ek sold the Ferrari, got rid of the apartment, and moved to a cabin near his parents’ place in Ragsved, a Stockholm suburb, where he meditated about what to do with his life. He had soul-searching conversations with Martin Lorentzon, the Swedish entrepreneur who had bought Ek’s advertising company, and was himself looking for a new project. “And we always came back to the music industry,” Ek said. Like many teen-agers around the turn of the millennium, Ek had become infatuated with Napster—in particular, with the idea of a site where all the world’s music was available for free. Radio offered free music, too, of course, but radio wasn’t interactive; you couldn’t pursue your own interests, the way you could on Napster. Ek said, “Before that, I was listening to Roxette,” a Swedish pop-rock band from the eighties. “I discovered Metallica and learned that they were inspired by Led Zeppelin, and King Crimson, and then I got into the Beatles. And from there I went to Bowie and the whole British scene from the Eurythmics to the Sex Pistols. Hearing the anger and frustration of the Sex Pistols or the Clash made you feel like you were in the seventies. You started to understand culture. It was pretty magical.
“It came back to me constantly that Napster was such an amazing consumer experience, and I wanted to see if it could be a viable business,” Ek went on. “We said, ‘The problem with the music industry is piracy. Great consumer product, not a great business model. But you can’t beat technology. Technology always wins. But what if you can make a better product than piracy?’ ” Ek continued, “Piracy was kind of hard. It took a few minutes to download a song, it was kind of cumbersome, you had to worry about viruses. It’s not like people want to be pirates. They just want a great experience. So we started sketching what that would look like.”
Their “product vision,” in tech parlance, was that the service had to give the impression that the music was already on your hard drive. “What would it feel like?” Ek asked. “That was the emotion we were trying to invoke.” The key was to build something that worked instantly. Streaming, whether audio or video, tends to have built-in delays while you wait for the file, which is stored on a server in the cloud. But if the music starts in two hundred milliseconds or less—about half the time it takes, on average, to blink—people don’t seem to perceive a delay. That became Ek’s design standard. He told his lead engineer, Ludvig Strigeus, a brilliant programmer he had worked with before, “I don’t accept anything that isn’t below two hundred milliseconds.”
Strigeus responded, “It can’t be done. The Internet isn’t built like that.”
“You have to figure it out,” Ek insisted.
The solution involved designing a streaming protocol that worked faster than the standard one, as well as building their own peer-to-peer network, a decentralized architecture in which all the computers on it can communicate with one another. In four months, they had a working prototype.
“And I knew when we had it that it was going to be very special,” Ek said.
Ek’s original idea was to launch Spotify in the U.S. at the same time that he launched the service in Europe. Ken Parks, Spotify’s chief content officer, said, “Daniel thought he could just go down to the corner store in Stockholm and pick up a global license.” He didn’t realize that he would have to negotiate directly with all the different copyright holders, a herculean task. Not surprisingly, the labels weren’t interested. Ek was an outsider—a techie, and a Swedish one at that. Parks, an attorney who’d worked at E.M.I., recalled, “We needed to overcome the music-is-free mentality that Spotify represented.” Of the labels’ attitude, he went on, “If you have something you’ve invested a ton of money in, and you’ve been selling it for a lot, and you feel raped by piracy—to say to that person, ‘The only way to beat this is to co-opt the people who are stealing from you,’ that was a challenge.” Ek said, “If anyone had told me going into this that it would be three years of crashing my head against the wall, I wouldn’t have done it.”
Eventually, Ek decided to start regionally and prove that his concept worked. “And I invested all of my personal money in it,” he told me, “saying, you know, here’s my balls on the table. For them, the risk of trying it was kind of zero.” Swedish labels, gutted by piracy, literally had nothing to lose.
Sean Parker lives in the Plaza Hotel, in a private residence in the northeast corner of the building, looking out at Fifth Avenue and Central Park South. The grand, high-ceilinged dining room has commanding views in both directions, and it was there that the thirty-four-year-old billionaire was sitting on a warm fall afternoon, dressed in jeans and rust-colored high-tops, drinking tea from a white china cup. It was a setting that would have impressed Edith Wharton, even if the owner’s attire might not have.
Parker was talking about Napster, which he and Shawn Fanning started back in 1999. “Napster had been this cultural revolution, much more than it was ever a legitimate company,” he said, stroking his neatly trimmed beard. Napster, which had sixty million registered users at its peak, taught the world how to get music from the Internet. Parker says he had always wanted to go legit, by making a deal with the record industry, but instead the labels put Napster to sleep. “There was this unique opportunity in history. We said, ‘If you shut down Napster, it’s going to splinter, and you’re going to have a Whac-A-Mole problem on your hands, where you’re fighting service after service and you’re never going to get all those users back in one place.’ And that’s what happened.” From the dragon’s teeth sprang Kazaa, Grokster, Morpheus, and Limewire. “It was one of those things where it can be totally clear to you and everyone in your generation and you can explain it in the clearest of terms, not as a threat or a negotiating tactic—just, ‘Look, you just have to see this.’ And they couldn’t see it.” Napster was the enemy, pure and simple, and it had to be killed. “This was the biggest existential threat to the music business and they wouldn’t listen.”
Parker sipped his tea. “So I went off and did other things”—he became president of Facebook in 2004, and helped turn it into a company, which helped turn him into a billionaire—“but in the back of my mind I was thinking about the untimely fate that Napster had met. That aborted mission.” He had watched while other entrepreneurs tried to realize the dream that was Napster. “They’d try to negotiate with the record labels and they really didn’t speak the language and they’d end up adapting their product vision to the terms they were able to get,” he said. In 2009, a friend told him about a Swedish service called Spotify. Parker had never heard of it. He sent Daniel Ek an e-mail and they arranged to meet.
“The thing that made Spotify very different when I first met Daniel and Martin was that they had this incredible stubbornness,” Parker went on. “In a good way. They were willing to let the product vision lead the business deals.” He agreed to invest in the company and help Ek in his negotiations to enter the U.S. market. “Daniel said, ‘I think it’s going to take six weeks to get our licenses complete.’ It ended up taking two years.” Of the four global music companies at that time—E.M.I., Sony, Warner Music, and Universal—Ek had managed to get E.M.I. and Sony on board, but Universal and Warner were holdouts. The latter was led by Edgar Bronfman, Jr., who had spearheaded the move to close down Napster, back in 2001.
This time, Parker was more persuasive. “He did know a lot of people,” one top label executive said. “Daniel Ek didn’t. And he worked it non-stop.” The Swedish trial period was key. The record industry’s total revenues in Sweden grew by more than a third between 2008 and 2011. Piracy plummeted. As the label executive recalled, “It was like—O.K., proof of concept, we should be doing this if we can get the right license.”
Another factor in the labels’ thinking was Apple’s iTunes store, which had proved to be an unsatisfactory business partner. Music had been an important part of Apple’s business when Steve Jobs first negotiated the iTunes licenses, back in 2002—the music helped sell the iPod. But by 2011 music was more important to the Apple brand than to its business. Apple would not even let Android users, who today represent more than eighty per cent of the global mobile business, have iTunes on their phones, because it wanted to sell iPhones. Spotify offered a way out of a troubled marriage.
Thomas Hesse, who led the negotiations for Sony, told me, “The main reason it took so long for Daniel to get all the majors on board was that he had this free tier, where all the music was on demand. Was that going to cannibalize the download world?” In the end, the free tier was limited to personal computers, so users would have to pay for subscriptions in order to listen on their mobile devices, a major incentive to convert to the paid tier. Nevertheless, Hesse continued, there was “a lot of discussion about how much Spotify needed to pay for the free streaming and how many paying subscribers it could potentially guarantee.”
After Universal made a licensing agreement with Spotify, Warner was virtually compelled to join the other major labels in negotiating. At the time, the company was also looking for a buyer. Parker told me that he tendered an offer to buy Warner with Ron Burkle, the Los Angeles-based venture capitalist. When another buyer, the Russian oligarch Len Blavatnik, expressed interest, Parker said that he told him, “Look, if you make Spotify contingent on the deal, I will withdraw my offer and you’ll get the company.” In 2011, Blavatnik bought Warner, for $3.3 billion. Parker became a Spotify board member and helped broker its partnership with Facebook.
The exact terms of the licensing deals that Spotify made with the majors are not known; all parties signed nondisclosure agreements. In addition to sharing with other rights holders nearly seventy per cent of the money Spotify earns from subscriptions and ad sales—about the same revenue split that Apple provides on iTunes sales—the majors also got equity in Spotify, making them business partners; collectively, they own close to fifteen per cent of the company. Some analysts have questioned whether Spotify’s business model is sustainable. The company pays out so much of its revenues in fees that it barely makes a profit. It operated at a loss before 2013. (The company maintains that its focus has been on growth and expansion.) The contracts are renegotiated every two or three years, so the better Spotify does, the more, in theory, the labels could ask for. This makes Spotify unlike many Internet companies, in which the fixed costs of doing business become relatively smaller with scale. For Spotify, scale doesn’t diminish the licensing fees.
When Spotify began in the U.S., labels demanded up-front payments as the price of getting in the game. These payments were not always passed along to the content creators, even though it is their work that makes the catalogues valuable in the first place. Month by month, Spotify pays the major labels lump sums for the entire market share of their catalogues. How the labels decide to parcel these payments out to their artists isn’t transparent, because, while Spotify gives detailed data to the labels, the labels ultimately decide how to share that information with their artists. The arrangement is similar on the publishing side. Artists and songwriters basically have to trust that labels and publishers will deal with them honestly, which history suggests is a sucker’s bet. As one music-industry leader put it, “It’s like you go to your bank, and the bank says, ‘Here’s your salary,’ and you say, ‘But what is my employer paying me? I work for them, not you!’ And the bank says, ‘We are not going to tell you, but this is what we think you should get paid.’ ”
Parker’s tea had grown cold, and he poured some hot water into it. The October light dimmed in the high Plaza windows. He pondered the progress of the tide of humanity flowing up and down Fifth Avenue. For him, Spotify was a do-over—a second chance to get Napster right. And that felt “very vindicating.”
The deals that Spotify made with the major labels launched on-demand streaming in earnest. But although the way the consumer gets access to music had changed, the way the creators of music are paid for their work had not. Somehow, the billions of micro-payments parcelled out in the form of streams have to be reconciled with a royalty-payments system that is rooted in a century-old sales model. No economic infrastructure exists for that apples-to-oranges transformation.
Spotify is only one of many streaming sites. There are competing services like Rhapsody (which recently bought a rebranded, fully licensed Napster), Rdio, and Google Play Music, but there are also thousands of other sites where songs are streamed. Labels, publishers, and performing-rights societies struggle with dozens of different technologies to monitor this welter of outlets. And with any given stream of a song there is a myriad of copyrights—performing and mechanical rights apply to both the recording and the composition—which makes sorting out who’s owed what no easy matter. Liz Penta, an artist manager in New York, told me that, in addition to larger payments, she regularly gets checks for one penny from the Harry Fox Agency, which administers mechanical royalties for Spotify, among other streaming services. YouTube, which is by far the largest streaming-music site in the world (it wasn’t designed that way—that’s just what it became), is notorious among rights holders in the music industry for its measly and erratic payouts. Spotify’s exponential growth rate suggests that the chaos in royalty collection is only just beginning.
Not surprisingly, companies that specialize in digital royalty collection constitute one of the hottest growth sectors in the music business. Among the leaders is Kobalt, founded, in 2001, by Willard Ahdritz. Part collection agency, part music publisher, and part tech platform, Kobalt has built a system of enormously complex Oracle databases that compute billions and billions of transactions and royalty lines from all over the world, and collects on behalf of some two thousand artists, including Paul McCartney, Maroon 5, and Skrillex, while the rest of the industry uses Excel spreadsheets to try to piece everything together. On YouTube, Kobalt’s proprietary song-detection technology, ProKlaim, detects unclaimed videos for its clients. Ahdritz says, “We create transparency, which drives liquidity, and the money is now flowing.”
Spotify’s payouts to indie labels and digital-music distributors such as Tunecore are considerably more transparent than its dealings with the major labels. Spotify sends out monthly statements showing the total streams per artist, broken down into individual songs. To come up with the royalty rate per stream, Spotify divides the monthly streams of a single artist’s work by the total number of streams on Spotify that month, and arrives at the artist’s share. It multiplies that number by the total monthly revenues, and keeps thirty per cent. Labels, publishers, and distributors then pay the artist according to their royalty deals.
But exactly what is the royalty rate for a single stream? It depends on many factors. The more popular you are, the higher your metric. Some countries’ streams are worth more than others’. Free, ad-supported streams are worth less than subscriber streams, because the company makes less on ads than on subscriptions. (One of the reasons that Swift left Spotify was that her label wanted her music to be exclusive to the premium tier in the U.S.; it was willing to make her catalogue available for free in the rest of Spotify’s markets.) According to the company’s Web site, the average stream on Spotify is worth between six-tenths and eight-tenths of a cent. If you do the math, that means that around a hundred and fifty streams equal one ninety-nine-cent download. But that metric is hard for many musicians and record executives to accept. (I don’t stream my Lana favorites close to that many times.) On the other hand, seven-tenths of a cent is better than nothing.
Some artists are already making real money from Spotify. Swift’s music was earning about five hundred thousand dollars a month at the time she pulled it. E.D.M. artists like Avicii and David Guetta are seeing payouts in the millions. Avicii’s “Wake Me Up,” the most streamed song on Spotify, has more than three hundred million spins, which, using Spotify’s benchmark per-stream rate, would be worth about two million dollars to the rights holders. Daniel Glass, a music-industry veteran who is the founder of Glassnote Records, an indie label, told me that he is very happy with the royalties Spotify pays his artists, who include Mumford & Sons, Phoenix, Childish Gambino, and Chvrches. “We’re getting big beautiful checks from them!” he exclaimed.
At a recent series of educational meet-ups with the music industry in New York, Nashville, and L.A., Spotify representatives tried to reassure managers and artists, offering rosy-sounding future royalties, based on growth projections. A niche indie album, which now earns thirty-three hundred dollars a month, will receive seventeen thousand dollars in royalties a month when Spotify hits forty million paid subscribers. A breakthrough indie album, now earning seventy-six thousand dollars a month, will pull in three hundred and eighty thousand dollars. A global hit album, currently earning four hundred and twenty-five thousand dollars a month, will get $2.1 million. How likely are these projections to come true? When I asked Ek, he said, “Is there a definitive way of knowing? Of course not. But I’m not the only person who believes it. Pretty much everyone is in agreement that streaming will keep on growing over the next few years.”
AM/FM radio pays the writer of the song on a per-play basis, but gives the performer and the owner of the recording of the song—generally, the record label—nothing. On digital streaming services like Spotify, the situation is nearly reversed: the owners of the recording get most of the performance royalty money, while the songwriters get only a fraction of it. Songwriters, who can’t go out on the road, are particularly hard hit by the loss of publishing royalties. As one music publisher put it, “Basically, the major music corporations sold out their publishing companies in order to save their record labels. Universal Music Publishing took a terrible rate from streaming services like Spotify in order to help Universal Records. Which, in the end, means that the songwriter gets screwed.”
Ek’s answer to the question of whether or not Spotify is good for artists tends toward the tautological. If it’s good for listeners—and almost everyone who uses Spotify likes it—then it must be good for artists, because by encouraging more listening it will “increase the over-all pie.” Many music-business people think he’s right. Richard Jones, the Pixies’ manager, says, “Particularly for artists who are established with solid catalogues and are big live-touring acts, streaming services can be extremely beneficial. I’m a massive supporter.” He said of Swift’s decision to pull her music, “It’s purely P.R.-driven, which is fine. But let’s not pretend it’s artist-friendly. Because actually the most artist-friendly thing here is for everyone to make streaming into something that is widespread.”
Spotify does offer undiscovered musicians new opportunities to break through. Playlists tend to be much broader in scope than commercial-radio playlists. Lorde is often cited around Spotify as an artist who gained crucial early exposure after Sean Parker heard her song “Royals” when a friend played it for him. In April, 2013, before the song was a hit anywhere, Parker added it to his “Hipster International” Spotify playlist, which currently has seven hundred and ninety thousand followers. Parker’s followers added it to their playlists, as did their followers; users shared it with one another; and within weeks “Royals” was the second most popular song on Spotify. Spotify’s director of economics, Will Page, says, “Now, remember, there is no Old World business model here, no radio pluggers or traditional marketing—just a playlist. But it’s like becoming a broadcaster. And you could see the viral nature of growth that led to this artist becoming No. 1 in America before Christmas.” Still, the fact is that Lorde had a major label and its marketing budget behind her. Jason Flom signed Lorde to his Lava label months before Parker playlisted her. “ ‘Royals’ was not to be denied,” Flom told me. “Nothing could stop it.” Even so, he said, “Spotify—and especially Sean—was definitely helpful in establishing Lorde the way we wanted to establish her. It gave her a foundation with the cool kids.”
Record companies are beginning to figure out how to employ Spotify’s potential to their advantage, sometimes by manipulating release dates. “Windowing” releases—start out on iTunes only, and add Spotify after two weeks of sales—is popular at some labels (and very unpopular at Spotify). In Taylor Swift’s case, Big Machine Records decided to keep her previous album, “Red,” off Spotify in the first weeks after its release in order to increase record sales. “Red” was later added to Spotify, before Swift removed the entire catalogue.
But there is another class of musicians whom Ek hasn’t helped so far. For them, Spotify has further eroded their CD and download sales, without coming close to making up the difference in streaming revenues. Ek acknowledges that the switch from a sales model to a streaming model could be bumpy for some artists. “In Sweden, there was one tough year and then the debate changed,” he said. “That will happen in the larger markets. The end goal is to increase the entire pool of music. Anything else is part of the transition.” He added, “This is the single biggest shift since the beginning of recorded music, so it’s not surprising that it takes time to educate artists about what this future means.”
Two artists who are part of that transition are Marc Ribot, an esteemed jazz guitarist, and Rosanne Cash, whose work has won a Grammy and received twelve nominations. Both are mid-level, mid-career musicians who are a vital part of the New York City music scene. Both have worked with major labels. (Ribot is currently releasing his music on indies.)
I met them in New York one October afternoon. Ribot and Cash brought along their Spotify numbers. In the past eighteen months, Ribot reported, his band made a hundred and eighty-seven dollars from sixty-eight thousand streams of his latest album, available on Spotify in Europe and the U.S. Cash had made a hundred and four dollars from six hundred thousand streams. The math doesn’t fit Spotify’s benchmarks, but that is how their labels and publishers did the accounting.
When I mentioned that both Ek and Parker seemed to be sincere in their desire to help artists, Ribot replied, “Well, our ‘friends’ in the online-distribution business have helped artists to go from a fourteen-billion-dollar domestic record business to a seven-billion-dollar one, and now Spotify wants to help us reduce it even further. With friends like that, give me the old Brill Building system.”
He went on, “Here’s the simple fact that no one wants to talk about. Spotify says it pays out seventy per cent of its revenues to rights holders. Well, that’s very nice, that’s lovely. But if I’m making a shoe, and it costs me a hundred dollars to make it, and the retailer is selling that shoe for ten dollars, then I don’t care if he gives me seventy per cent, I don’t care if he gives me one hundred per cent—I’m going out of business. Dead is dead.”
Cash said, “I don’t think any of us want to make the streaming services go away. We are not Luddites. We just want to be paid fairly.”
“And we’re not going to say a model is viable unless it’s viable for the creators,” Ribot added. “I know Daniel Ek is going to do just fine. I don’t know that about the people in my band.”
“And, if the artist can’t afford to work, the music is going to suffer,” Cash added, with feeling. “Spotify is not acting in its own self-interest by obliterating us.”
Or maybe Spotify itself will get obliterated. Apple, Amazon, and Google have recently begun to enter the on-demand streaming market. (YouTube débuts Music Key, an ad-free paid-subscription service, this week, which will include access to Google Music Play.) Spotify’s advantage, Ek maintains, is its data and its ability to analyze that information. “We’ve been doing this for years,” he said. “And what we’ve built is the largest set of data of the most engaged music customers. I think it would be really hard for anyone to come in and do what we do better. Maybe someone could lower the cost of a streaming service and make it hard for us to survive. But am I concerned that someone will build a better product? No, because they can’t.”
James McQuivey, an analyst with the Boston-based Forrester Research, is less optimistic about the company’s prospects. “Spotify has shown people value streaming,” he said, “and that means somewhere someone could use that value in a bigger chess game. Someone like an Apple or a Google is already realizing how valuable music is as a customer-engagement tool and will offer something quite similar to this, without making you pay for it, the way Amazon has included video in the Prime membership without expressly charging. And then suddenly you’ve disrupted Spotify.” He added, “If I have to say yes or no will Spotify be as big and strong as it is five years from now, the answer will be no.”
Earlier this year, Apple acquired Beats Electronics, an audio company, which had entered the streaming business via Beats Music. It’s not yet clear what Apple wants to do with Beats. It could try to sign up Spotify holdouts like the Beatles (Taylor Swift hasn’t pulled her back catalogue from Beats, which is subscriber-only) and promote its service as more comprehensive. On the other hand, Apple faces the classic innovator’s dilemma. An Apple on-demand streaming service would undermine its iTunes downloads business. But if streaming is the future of music—and even people who fear the prospect agree that it is—Apple will need to enter the market soon. iTunes’ music sales have dropped almost fourteen per cent since the start of the year.
Apple could pose a real threat to Spotify, by pre-installing a service—iStream, maybe—on the next generation of iPhones and including the price of a subscription in the plan. Siri could be your d.j. That would insure a paying user base in the hundreds of millions almost instantly, easily eclipsing Spotify’s. And, since Apple makes money primarily from its hardware, it could afford to undercut Spotify on the price of a subscription—a scheme it is currently promoting to the labels. Of course, that would require the support of the labels, and they are Spotify’s business partners in streaming. “You might want to take a discount in a business you have equity in,” one label head told me. “You might not want to take a discount in a business you don’t have equity in. Would we subsidize Apple with no real upside for us? We did that once before. It was called unbundling the album.” In any case, the downward pressure on price from increased competition seems likely to diminish the pot of money that the rights holders get to divide.
Even if Spotify does manage to survive Apple, it will take years to complete the paradigm shift to streaming. Meanwhile, album sales will continue to decline—even albums recorded by Taylor Swift. The labels, feeling the pinch in their bottom line, may try to squeeze more money out of Spotify, imperilling its future growth. They may even try to cash in their equity stakes. Proving that, while your enemies can indeed become your friends, the reverse can also be true. ♦
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