Spotify has always been dogged by criticism that it doesn’t provide a sustainable way for musicians to make money. Getting dumped by Taylor Swift in protest of paltry royalties delivered particular sting. Swift dominates the public conversation like almost no other pop star, and most high-profile critics of streaming music tend to be on the downslope of their careers. If Spotify loses Taylor, it’s losing the future.
To prevent that fate, Chief Executive Officer Daniel Ek posted a lengthy defense of Spotify’s business model on Tuesday. He sees the alternative to legitimate streaming as additional piracy, not more album sales.
Spotify has paid $2 billion to artists since its inception, according to the latest numbers from Ek in Tuesday’s post. In December, Spotify said it had paid out $500 million in 2013 and $1 billion in total, meaning that the amount it has paid to artists is on pace to more than double this year.
The company now has 12.5 million paid subscribers and 50 million free users, an increase of about 25 percent over the last six months. “At our current size, payouts for a top artist like Taylor Swift (before she pulled her catalog) are on track to exceed $6 million a year, and that’s only growing—we expect that number to double again in a year,” wrote Ek. In other words: Spotify is a force that artists who don’t have the option of selling one million albums in a week shouldn’t ignore.
Ek makes a few arguments, including that musicians may want to look at their labels to find out what has happened to their share of the money Spotify is sending to them. “Lots of problems that have plagued the industry since its inception continue to exist,” he writes. He says that Spotify’s interests are in line with musicians. As the service grows, both make more money, at the contractually set rate of about 70 percent for artists and 30 percent for the company.
Ek’s main argument—and the prime point of contention between Spotify and Swift—grapples with the question whether free access to music devalues it in a way that hurts artists. This is particularly timely because YouTube (GOOG), a service people use to access music free, is in the final stages of developing its own subscription service. When that service goes live, it will further cement the shape of the digital music business. Music distribution will resemble the predominant distribution model for many other services being developed by Silicon Valley: freebies supported by ads, with a premium tier for a minority of users who are willing to pay.
Swift notwithstanding, many in the music industry far prefer Spotify to ad-supported services such as YouTube and Pandora (P) because they draw higher royalty rates. But Spotify says services that combine free and paid tiers are a better business model. Paid subscription services can’t lure fans from free options, and free options don’t provide enough revenue for artists to make a living. Over 80 percent of Spotify’s paid users started off on its free service. “If you take away only one thing, it should be this: No free, no paid, no two billion dollars,” writes Ek.
This isn’t such a radical departure from the way the music industry has always worked. Swift’s music isn’t available on Spotify, but it is available on radio—free to anyone with a tuner.
