Music Business

How Spotify Can Fix Its Songwriter Problem [Mark Mulligan]

Spotify New $While it seems easy to blame Spotify for joining Google, Amazon and Pandora to appeal a 44% increase in streaming royalties paid to songwriters, the issue is not that simple. In fact, it's so complex, writes MIDiA analyst Mark Mulligan. that "both sides are right: songwriters need to be paid more, and streaming services need to increase margin."



By Mark Mulligan of MIDiA and the Music Industry blog

Songwriter royalties have always been a pain point for streaming, especially in the US where statutory rates determine much of how songwriters get paid. The current debate over Spotify, Amazon, Pandora and Google challenging the Copyright Royalty Board’s proposed 44% increase illustrates just how deeply feelings run. The fact that the challenge is being portrayed as ‘Spotify suing songwriters’ epitomises the clash of worldviews.

The issue is so complex because both sides are right: songwriters need to be paid more, and streaming services need to increase margin. Spotify has only ever once turned a profit, while virtually all other streaming services are loss making.

The debate will certainly continue long after this latest ruling, but there is a way to mollify both sides: price increases.

spotify netflix pricing inflation

When Spotify launched in 2008, the industry music standard for subscription pricing was $9.99. So, when its premium tier was launched in May 2009, it was priced at $9.99. Incidentally, Spotify racked up an initial 30,000 subscribers that month – it has come a long way since. But now, nearly exactly ten years on, Spotify’s standard price is still $9.99. Its effective price is even lower due to family plans, trials, telco bundles etc., but we’ll leave the lid on that can of worms for now. Over the same period, global inflation has averaged 2.95% a year. Applying annual inflation to Spotify’s 2009 price point, we end up at $13.36 for 2019. Or to look at it a different way, Spotify’s $9.99 price point is actually the equivalent of $7.40 in today’s prices when inflation is considered. This means an effective real-term price reduction of 26%.

Compare this to Netflix. Since its launch, Netflix has made four major increases to its main tier product, lifting it from $7.99 in 2010 to $12.99 in 2019. Crucially, this 63% price increase is above and beyond inflation. An inflation-adjusted $7.99 would be just $10.34. Throughout that period, Netflix continued to grow subscribers and retain its global market leadership, proving that there is pricing elasticity for its product.

Spotify and other streaming services are locked in a prisoner’s dilemma

So why can’t Spotify do the same as Netflix? In short, it is because it has no meaningful content differentiation from its competitors, whereas Netflix has exclusive content and so has more flexibility to hike prices without fearing users will flock to Amazon. If they did, they’d have to give up their favourite Netflix shows. Moreover, Netflix has to increase prices to help fund its ever-growing roster of original content, creating somewhat circular logic, but that is another can of worms on which I will leave the lid firmly screwed.

If Spotify increases its prices, it fears its competitors will not. Likewise, they fear Spotify will hold its pricing firm if any of them were to increase. It is a classic prisoner’s dilemma.  Neither side dare act, even though they would both benefit. Who can break the impasse? Labels, publishers and the streaming services. If they could have enough collective confidence in the capability of subscriptions over free alternatives, then a market-level price increase could be introduced. Rightsholders are already eager to see pricing go up, while streaming services fear it would slow growth. Between them, there are enough carrots and sticks in the various components of their collective relationships to make this happen.

However – and here’s the crucial part – rightsholders would have to construct a framework where streaming services would get a slightly higher margin rate in the additional subscriber fee. Otherwise, we will find ourselves in exactly the same position we are now, with creators, rightsholders, and streaming services all needing more. When Netflix raises its prices it gets margin benefit, but under current terms, if Spotify raises prices it does not.

The arithmetic of today’s situation is clear: both sides cannot get more out of the same pot of cash. So, the pot has to become bigger, and distribution allocated in a way that not only gives both sides more income, but also allows more margin for streaming services.

Streaming music in 2019 is under-priced compared to 2009. Netflix shows us that it need not be this way. A price increase would benefit all parties but has to be a collective effort. Where there is a will, there is a way.

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  1. Some info to add. Netflix in the UK has 3 price tiers of £5.99, £7.99 and £9,99. Spotify is free or £9.99. Spotify has this almost universal flat fee where everything any country pays 9.99. Where as Netflix seems more adjusted for currency exchange rates.
    Personally i feel £9.99 for Spotify is over priced. Having tried free and premium the only difference i noticed was the lack of adverts. Is this worth £120 a year? not for me. $9.99. Now that’s a more attractive price.

  2. The larger issue is the sustainability of streaming all together! Even if the monthly fee is adjusted for inflation, the per stream payout to songwriters would still be ridiculously low. Currently, it would take about 2,222 spins (on average) for a songwriter to earn just $1 (USD) of streaming revenue.
    This is not a sustainable rate for any professional songwriter or artist. Keep in mind that an independent artist is often acting as singer, musician, producer, engineer, publisher and songwriter and has not been paid for any of these roles as the team of a traditionally signed artist would have been. Each of these people (producer, engineer, musician, etc) would have already been paid/contracted to perform each of these duties in the making of the record before it ever hit a streaming service catalog. An independent artist does not have this upfront funding provided by a label, they only get paid thru live performance (if they perform) or the direct exploitation of their songs via TV/Film or Streaming. No one is downloading (buying) music these days. Apple iTunes has announced that they are doing away with downloads all together. Target, Best Buy and other retail outlets have pulled Compact discs from the shelves and are phasing out the sale of physical product.
    I have a detailed article on the subject here:
    I welcome any feedback and possible solutions to this very serious problem

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