Why I am quitting Spotify

For the past few months, we’ve been posting Spotify playlists of 5 albums we each like. After Uniform Motion received yet another ridiculous royalty report from Spotify, I started wondering how they actually pay artists for their music and whether Spotify will still be around in the future.

To be very clear, I really enjoy using Spotify, it’s a great service. I pay Spotify a monthly fee to listen to an unlimited amount of music. Uniform Motion also has some of its music on their service and we receive royalty reports every quarter, telling us how many times our music has been played and how much money that represents.

However, there is an utter lack of transparency when it comes to how Spotify pays artists. They state that they cannot disclose the details of deals made with the record companies and at the same time, one of their arguments for getting people to subscribe, is that Spotify is a legal alternative to file sharing, allowing people to ensure artists are compensated for their work.

So how can I be sure that the artists I’ve been listening to are actually getting paid? If Uniform Motion was getting paid properly then I could be sure that other artists are getting paid too. So I thought I would try to get to the bottom of this. Some of the data I have used is commonly available, some of it is based on educated (more or less!) guesses. Guesstimations. I would welcome corrections from the lovely folks at Spotify if I’ve got any of this wildly wrong!!

First of all, what is Spotify and how does it work? Spotify provides people with access to a catalogue of music that they can listen to on their computers or on their mobile devices depending on whether or not they subscribe to the appropriate service. With their free model, you can listen for free with the occasional advertisement (limited to about 300 tracks per month). If you don’t want to hear the ads, you can choose to subscribe to one of their plans at either 4.99 EUR or 9.99 EUR, which gets you access to additional features (unlimited tracks, mobile application, offline mode, etc…).

On average, their paid premium subscribers listen to about 500 tracks per month. The free users cannot listen to more than about 300 tracks/month (20 hours divided by 4 minutes per song). So this means that when you know how much Spotify pays artists to stream their tracks, well…. you can just about work out how much their users cost them per month.

Spotify pays about 0.001 EUR/stream to independent artists via their rights collection society. (I say independent artists because I have no idea how much the Major record labels are getting but let’s assume for the moment that everyone is getting paid the same amount).

So each Free user costs them a maximum of 30 cents per month. On average, the paid user will cost about 50 cents per month. If all the 9.5 Million free users listen to the full amount of tracks they are allocated per month, then they’re likely costing Spotify 2.85 M EUR/month in royalties. This is the absolute maximum they are paying. It could be less.

The paid users are costing Spotify 250,000 EUR/month. But they’re generating about 4.5 M EUR in subscription fees. (100,000 users X 4.99 EUR and 400,000 users X 9.99 EUR. )

So by my calculations, Spotify are making about 4.5 M EUR+ advertising revenues. But how do you work out their advertising revenues? Let’s take radio for example. Radio ads costs about 1-3 EUR per 1,000 listeners. Spotify is said to be having a hard time selling ad space so let’s assume they’re only doing 10 campaigns per month and that they’re selling the ad space for 2 EUR/1,000 listeners. That’s 190,000 EUR/month (9.5 million/1000 X 2 EUR X 10 campaigns.)

In reality, campaigns are geographically and demographically focused, so this is just an estimation. It could be less, or a lot more. That being said, 200K/month doesn’t change much either way in my calculations.

The reality is that 500,000 users are subsidizing the service for 9.5 million users but that’s another story.

So they generate about 4.7 M EUR/month in revenues and their music related costs are 3.1 M EUR. Translated into annual figures, that’s 56.5 million EUR of gross revenues and potentially 37.2 million EUR in music royalty fees.

That leaves about 1.6 million EUR/month to pay their employees, bandwidth, marketing, taxes, rent, etc….

I initially thought that bandwidth would be pretty expensive but since they are using a peer to peer system and that songs can be cached client side, their bandwidth bills are probably not that huge. I estimate their bandwidth costs at around 50,000 EUR/month. Add to that their hosting costs, let’s say around 50,000 EUR/month. According to a report made by the KTH – Royal Institute of Technology, Stockholm, on behalf of Spotify, 8.8% of data comes from servers, 35.8% from the peer-to-peer network, and the remaining 55.4% is cached data so their servers aren’t overloaded as one might have imagined. It’s actually quite amusing to think that Spotify is ‘saving the music industry’ with the same technology accused of trying to kill it!

For a 200 person software company, we could expect their operating costs to be about 1 Million EUR/month especially if they’re operating in start up mode, keeping costs to a minimum. 1M EUR operating costs. 3.1M EUR music royalties. 100K EUR server costs. 50.4 M EUR/year total costs. 56.4 M EUR/year total revenues. PROFIT = 6 million EUR. before taxes.

So they could be making more than 6 million EUR/year. If their free users don’t listen to the full 300 tracks they are allocated, and if the ad revenues are higher then that figure could be a lot higher. We’re talking up to 30 million EUR per year easily. So where’s all that money going?

For the moment, it’s probably going towards paying any debts they have from losing money the first few years. But sooner or later, the profits will be available. It’s fairly common knowledge that the majors got a prepayment (either in cash, or in shares of the company, or both (some sources point towards Majors owning 18% of the company.) and get minimum quarterly payments, so either way, they’re probably sitting pretty.

My guess is that Spotify is paying the Major labels a fixed amount to get access to their catalogue, and then paying the composers/writers the 0.001 EUR amount per stream. In order to understand how this is possible, one needs to get a grasp of how royalties are paid. In Spotify’s case, they are paying royalties to the rightsholders (the composer) for playing the song on a ‘WebRadio’.  These agreements were signed with organisations like PRS for Music (UK), GEMA (Germany) and SACEM (France). Each Royalty Collection Society handled its own negotiation, which explains why there is no free version available in Germany. So artists potentially earn different amounts depending on whether they are British, French, German or Swedish. Spotify, from a legal perspective, could probably have purchased all the Major labels’ content and launched the service without them but since Major labels generally have a 50-50 publishing deal with the rightsholders, there’s no way Spotify would have been able to get a deal with the Royalty Collection Societies without getting the Major’s onboard.And getting access to the catalogue is a lot easier when the people who own the masters and have all the metadata send you a hard drive full of sound files.

So this is probably where some of the money is going. The rest is going to Spotify’s investors in dividends. Oh, and who are Spotify’s investors? Some of them are Major record labels!!!! Some will say that this is normal, because the Majors represent the most listened to artists and because they produce them, so they are entitled to a higher share of the revenues.

So how come Lala was paying $0.05 per stream? How come Medianet pays $0.1/stream? How come Gogoyoko is paying 0.014 EUR/stream? I’m not surprised Spotify hasn’t launched in the US. They would have to pay the same rates as Pandora and rdio, who are paying around $0.02/stream.

So my position is that Independent artists and labels are allowing a software company to sell their product for 0.001 EUR /song and the 200 people working at Spotify are getting their monthly wage, the major labels are being fed and the top management at Spotify are probably getting a decent salary and benefits.

Something just doesn’t seem right about this, though. It’s not a question of the music being sold cheaply. What really annoys me is that someone IS making money from this venture, and it certainly isn’t the people making the music. Here’s food for thought. An artist who subscribes to a Spotify premium account pays Spotify 120 EUR /year for about 6,000 plays. Spotify pays said artist 6 EUR for 6,000 plays of his or her music.

My conclusion is that my money is not going to the right pockets! I truly hope Apple will take on Spotify. They treat artists with a lot more respect and share revenues more fairly. Apple sells music albums for roughly $9.99 of which it keeps 30%. This is what they take for reselling the product. It’s a fair percentage for selling someone else’s product and it goes towards paying for the development and the maintenance of the iTunes Music Store and related software and processes. There have been plenty of debates about whether Apple actually makes any money from the store so I won’t get into that. Whether or not the record label shares the 70% left with the artist is another question as well. In Apple’s case, the iTunes Music Store was also a great way of promoting their little music gadget, the iPod. So what they may lose, or not, on the Music Store, they gain by controlling the whole ecosystem and selling shiny devices - iPhones, iPads, etc… Actually, since they are more interested in selling the hardware that people use to consume music and content, they’re probably an artist’s best ally. And they sure aren’t scared of the major record labels!

So this is why I am quitting Spotify and why our music will be pay what you want from now on. 

Andy - Uniform Motion