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Spotify and Artist Compensation: What’s the Fair Price For Streaming a Song?

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Though I only tuned into the Grammys a few weeks ago to catch a glimpse of Hamilton, I couldn’t help but catch the not-so-subtle references to the influence of streaming services like Spotify on the music industry. It culminated in an exasperated plea to the TV audience from Neil Portnow, the president of the National Academy of Recording Arts and Sciences, “Isn’t a song worth more than a penny?”—a reference to the estimated price Spotify pays artists per play of a song on the service.

Spotify maintains that it does offer fair compensation to artists for their intellectual property and serves as a bridge to give would-be illegal downloaders a legal alternative to piracy. Spotify co-founder Daniel Ek writes that Spotify is “working day and night to recover money for artists and the music business that piracy was stealing away.”

Portnow’s question is a good one to ask though, and researchers are trying to find out. A recent study by Luis Aguiar and Joel Waldfogel, “Streaming Reaches Flood Stage: Does Spotify Stimulate or Depress Music Sales?,” found that while Spotify pays a price that fully compensates artists for lost revenue from consumers who switch from buying music to listening on Spotify, it doesn’t help artist recoup earnings from consumers switching from pirating music illegally to Spotify.

Using data derived from Spotify’s published top-50 charts and comparing to sales in various places where Spotify was in the process of being introduced, Aguiar and Waldfogel apply a methodology that utilizes a natural experiment to estimate the substitution effect between streaming services and sales.

They find that for every 137 plays a song gets on Spotify, the rate of song purchases on a CD or via a service like iTunes goes down by one. After the CD manufacturer and iTunes take their cut, that purchaser pays artists an average of 82 cents per song. Spotify pays royalties of just under a penny each time the song is played, usually between 0.6 cents and 0.9 cents (I’ll round to 0.7 cents). So revenue from 137 plays on Spotify adds up to approximately 96 cents by the time it displaces a song purchase, roughly comparable to the estimated 82-cent loss in revenue for artists from the displaced purchase.

For instance, if I couldn’t listen to the Hamilton soundtrack on Spotify, I probably would have purchased the album. But as 137 is actually probably not a bad estimate for the number of times I’ve played the album, the revenue for Lin Manuel Miranda and company is about the same.

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Extrapolating from this result, streaming services substitute for sales, but revenue is largely unaffected.* In fact, the artists revenue is slightly higher on average for top-50 artists.

Yet this only tells half the story.

Spotify’s price per play would be a decent deal for artists if the market for music consumption consisted only of streaming services and legal purchases. Paying for play and paying to own would simply be substitutes (much like the choice between renting and buying a DVD). But Spotify and other online streaming services cannot be considered in a vacuum. The truth is that digital content theft is so pervasive and rampant that any comparison that does not include piracy is irrelevant.

While plays on Spotify displace legal purchases, Aguiar and Waldfogel show that plays also displace illegal downloads. And that effect is even more noticeable. While every 137 plays reduce legal purchases by one, only 47 plays are need to reduce the rate of pirated downloads by one. That is almost three times the rate for legal purchases.

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So Ek is correct, Spotify does reduce piracy. However, this result also shows that while piracy is reduced, artists themselves see no additional revenue.

Using Aguiar and Waldfogel’s math, 137 plays displace roughly four downloads of a hard copy of the song—one of which is legal and for which the artist is compensated and three of which are illegal and for which the artist receives zero compensation. So while this suggests that three-fourths of Spotify’s customers previously paid nothing to consume music, Spotify only offers the artist compensation for one-fourth who did previously pay.

This is especially problematic because pirates who switch to Spotify are likely the ones most willing to consider paying for music. They are actively listening to the music on Spotify, and paying a subscription service (or muddling through advertising) for the pleasure. By all accounts, these are the listeners who could most likely be brought back into the camp of paying for music with a crackdown on digital theft.

In a world where an artist has monopolistic ownership of her intellectual property, the artist should be able to negotiate for a fair price. However, because those IP rights are diluted by rampant piracy, an artist cannot ask for too much because consumers can opt to switch to a free competing good—the identical download obtained illegally. We also know that all of these songs being considered were in the top 50 at the time, and thus popular enough where there aren’t discovery or exposure benefits for artists.

Is 0.7 cents per Spotify play a fair deal for the artists with top-50 songs? Not really according to this research. Spotify is certainly a step forward in terms of streaming services paying royalties to artists, as many predecessors to Spotify offered much lower benefits for artists. However, Spotify is a bit like paying a security guard to prevent shoplifting. Sure theft goes down, but if the guard’s wages are similar or equivalent to the prevented losses in merchandise, then the only one to truly benefit is the guard.

Though Spotify does reduce piracy, as Ek claims, he is incorrect in the assertion that recovered revenue is being passed on to artists.  To fully match the loss of revenue to the artist from avoided legal sales and piracy (assuming the pirates paid full freight), Spotify would have to pay 2.5 cents per song, not 0.7 cents. That does not mean necessarily that Spotify is taking advantage of artists or collecting high profits. However, if significant steps are taken to reduce digital theft of music, artists will be more able to “not throw away their shot” and negotiate higher royalties from streaming services.

 

*This study only examines revenue for musicians with top-50 hits. It is hard to tell whether conditions are better or worse for artists outside the top 50. Contradictory narratives argue that less well-known artists are either even more severely hit or that exposure from online presence boosts sales. A paper by Scott Hill and Jin-Hyuk Kim examined album sales and songs’ presence on YouTube and noted that while the presence of a song on the site reduced income from an album by 1.6 percent, lost revenue was a bigger problem for albums near the top of the charts than for albums below the top 50.

Photo Credit: Slgckgc, Flickr

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About the author

Adams Nager is an economic policy analyst at ITIF. He researches and writes on innovation economics, manufacturing policy, and the importance of STEM education and high-skilled immigration. Nager holds an M.A. in political economy and public policy and a B.A. in economics, both from Washington University in St. Louis.