In the late 80s, people needed to buy commercial compact discs (CDs) and a CD player to listen to music. Today, a phone with a mobile music app is all what’s needed. Technology changed the way music is produced and consumed. This is possible thanks to the creation of streaming platforms like Spotify. Launched by Daniel Ek in 2008, this Swedish digital platform connects the supply in the music industry (artists) and the demand (subscribers) by gathering 140 million active users and over 30 million songs (“Spotify,” 2018). Most of the basic features are free (limited mobile listening with shuffle-only mode) while other features are not (enhanced sound quality and listening offline with no ads) (Swanson, 2013, p. 2).
The increasing popularity of Spotify participated to the transition from the physical music format towards the online streaming format, which makes the files easier to share. (“Global Investor 2.15 – The Sharing Economy – Credit Suisse Publications,” n.d., p. 20)
Their intangibility impacted significantly the way people in the music industry make profits. Its disruptive potential attracted criticism from the artists and created a lot of controversy between researchers on the subject.
In this paper will be discussed the extent to which Spotify affects the artist revenues
A literature review will be used to answer this research question. This literature will consist of academic articles on the effects of digitalization, its effects on the music industry.. and how Spotify participates to the sharing economy. This will be complemented by the second section with a discussion about the digital piracy danger related to the app and in what way did Spotify impacts artists revenues.
Digitalization is a technology creation defined as “the practice of moving services and data onto computers and online “. Its application to the music sector refered to “technology diffusion” and had as an effect the creation of digital firms like Spotify (National Academies of Sciences, 2017, p. 22). Spotify is a music aggregator that does not produce any good or service. It contributes to the sharing economy by allowing file sharings (songs) on the platform, between the producers (artist and record labels) and consumers (the subscribers). It is called an ‘interactive streaming mode’ because consumers do not own or buy the music they listen to on the app. As It was explained by “pipiples” in “pipelines’, this type of platform is different from a pipeline firm because it only facilitates interactions and exchanges between the two partis instead of being responsible of creating value on the supply chain (Alstyne, Parker, & Choudary, 2016). Spotify creates a better match between supply and demand by proposing over 2 billion playlists that correspond to the subscriber’s taste and mood. Spotify proposes two versions with some common features : possibility to create playlist, to follow artists, to share the songs on social media and to listen to the radio. The first version is free : subscribers can listen to music on a suffle-mode only, with internet connection and advertisement. The second version cost 9$ per month : subscribers can decide what song they will listen to, offline, with no advertisement. Because most of the features are free, Spotify follow a system called a “freemium model”. Subscribers pay either in a direct way or in an indirect way by listening to advertisement. As a result, in 2013, Spotify profits were around 317 million euros (Heywood, 2016, p. 5). Each song uploaded on Spotify by the artist or record label generates a certain number of streams (the number of time it has been listened to). Traditionally, the money is sent to the record label that then gives back a margin of it to the artist itself, based on pre-negociated rates.
The platform pays an unsigned artist 3.8$ for 1000 plays as royalties and artists on a label l are paid $.00029 per stream. These low rates created controversy in the music industry to the point of some famous artist like Taylor Swift remove their albums from the app (Marshall, 2015, p. 2).
Record labels have a major impact on the artists’ revenues, this is why it is crucial to understand how did apps like Spotify impacted them
……….. Some researchers agreed on the idea that streaming platform like Spotify had a disruptive potential for the whole music industry. That means that it breaks down the industry barriers and former successful business models (Peter Weill, n.d.).
One of these models was the music distribution with physical sales. The rise of the Internet and the creation of new devices that play digital audio formats shifted to the right the demand for digitally-produced music (Bockstedt, Kauffman, & Riggins, 2006, p. 5). It has indeed more advantages for the consumers who can get a larger choice of songs with low prices. By paying one subscribtion, he or she can have access to millions of musics and playlist, for the same price of one physical album. This was explained by the professor Juliet Schor in “Debating the Sharing economy” when she stated that sharing economy sites are generally lower in cost than market alternatives (“Debating the Sharing Economy,” n.d.). It Is also more convenient because the listening can be done anywhere at any time. As a result, the Recording Industry Association of America (RIAA) reported declining revenue in nine of the past 10 years, with album sales falling an average of 8% each year. Physical music sales decreased from about $19 million to $3 million. (Koh, Murthi, & Raghunathan, 2014, p. 373). Don VanCleave, the current manager for the Nashville based band Moon Taxi declared that “the checks artists receive from Spotify are miniscule compared to the checks once given to artists for CD sales in the 90’s” (Carver, 2016, p. 4). All of these arguments might explain why it is a common belief that artist make less money than before with the rise of streaming platforms. But another important element to mention is that streaming platform did not participate alone to the fall of physical sales. Before the creation of streaming platform, consumers use to pay to download music instead of buying CD’s. Mike King, the vice president for enrolment management at Berklee College of Music said in an interview that “the average download consumer spends 60$ a year while an average premium subscriber pays 120$ a year with Spotify”(“Spotify’s D.A. Wallach Explains How Spotify Pays Artists,” n.d.). This theory can be supported by one graph provided by “Credit Suisse” that represent the market value of the music industry since 1973 in the context of a study on the sharing economy. The music industry was already starting to collapse since the launch of iTunes in 1998. The revenue due the physical sales went from 28 billion dollars in 1998 to 7 billion dollars in 2013. The digital download revenues were also decreasing since 2003 and so is the value of the music industry. However, it could start catching up with the subscriptions revenues generated by the streaming market. This means that the streaming industry helped remonetize the music industry. Platforms like Spotify can also be considered as disruptive because they lower the industry’s barriers to entry. Indeed, artists have always been able to write and perform their songs alone. But other skills need the support of the record label professionals and involve some important costs : recording costs, manufacturing (or pressing), promotion costs, shipping costs and warehousing costs digital services pay. But with the creation of these digital streaming platforms, musicians are able to record their songs themselves without any advanced materials, on their computer and learn how to edit it. They can promote it on social media without any specialized skills and add it to online music stores or streaming platforms. The cost of distributing went close to zero with digitalization. Once the song is recorded, it is cheap and easy to replicate it. (drdave, 2013). Consequently, artists are becoming more independent by adopting a “do-it-yourself” approach (Bockstedt et al., 2006, p. 18). Moreover, when an artist takes care of the process of music distribution through the Internet, he or she can minimize their cost and keep most of their revenues instead of only getting a small margin of it.(Bielas, 2013, p. 24).This also equilibrates the balance of power between records labels and artists that are now also entrepreneurs (Hracs, 2012). The idea that record labels are the one that exploit the artist’s intellectual proprety was defended by Jared Welsh a famous music lawyer (Marshall, 2015, p. 7). Some records labels like Warner tried to create their own music marketplace but at the opposite of streaming apps like Spotify, the choice of songs offered were too limited and they couldn’t gain enough market share (Bielas, 2013, p. 26). Some researchers at the opposite believe that artist should think in a more patient way with long-run vision. Artists should see streaming platforms like Spotify like an addition to other type of revenues (live sales or physical sales) (Marshall, 2015, p. 10).
One type of advantage of these types of digital firms is their market reach. Anyone with a credit card, a phone and an internet connection anywhere in the world can discover new musicians and their songs on the app. This has a positive impact of live ticket sales and consequently on their revenues (Carver, 2016, p. 7).
Another type of indirect benefit can occur if the artists know of to promote their new pre-release streams on the platform. The famous singer Justin Timberlake used this streategy to promote his new album 20/20 experience. As a result, the songs were streamed 7.7 million times, he sold 980 000 copies during the first week and became one of the most played songs in the radio (Swanson, 2013, p. 222). Brad Sanders, the Digital Content Manager for Secretly Canadian Distribution argues that those royalties payments may keep increasing with time. He also defends the idea that Spotify helps the fight against digital piracy and is an opportunity like any other to monetize music (Swanson, 2013, p. 218).
A provisional answer to the research question would be that digital streaming platform like Spotify did not affect drastically the artists’ incomes but rather the way they get their revenues from. However, to give a better and more precise answer, further studies on how they impacted the rate of digital piracy or research that compare an artist revenue before and after the digitalization process would be needed..
This paper has a main goal to show this extent to which streaming platforms like Spotify did influence the artists’ revenues. This serves as an example of how can a digital firm that participates in the sharing economy, affect one important actor in an industry. The revenues received directly from the apps may be inferior to the ones coming before from physical sales. But on the other hand, it allowed their increasing popularity which lead to bigger live ticket sales thanks to a better market and advertisement contracts with brands . This technology creation had as a first a disruption effect on former business models, like the supply of physical sales which impacted negatively the artists’ revenues. It also impacted negatively another major actor record labels that are way less needed for the artists to thrive in the industry. By reducing their cost of distribution and getting higher independence, artists are now able to create with digital platforms opportunities to create profits .