To Damon Krukowski & Everyone Who Is Concerned About Spotify's Impact On Music

Damon Krukowski of Galaxie 500 and Damon & Naomi, recently published an article on Pitchfork, titled Making Cents. He reported his experiences as an artist with Pandora and Spotify, in a straightforward fashion, and came to the conclusion that "As businesses, Pandora and Spotify are divorced from music."

I think Damon's experiences, feelings, and most importantly, his way of thinking is typical among some indie artists. As a music fan I would like to see good music heard by more people, and musicians getting paid fairly so they can keep on making music; as an observer of the music industry I believe Spotify is bringing a positive change to the ecosystem that will eventually benefit both the musicians and music fans. So I would like to elaborate my view.

Please allow me to state that this article is not a rebuttal to Damon but a personal viewpoint on Spotify and streaming in general. I just hope that he, and people who care about the issues that concern musicians are able to see another picture from the viewpoint of the average listener and also my views on the impact of Spotify for the longer term benefit of musicians.

Damon: Leaving aside why these companies are bothering to chisel hundredths of a cent from already ridiculously low "royalties" ($0.004611 rate)...

Me: I do not have insider info from Spoify regarding payments, though I work with an aggregator who is Spotify's content provider, and I have read intensively on this subject, so I might be able to explain this.

Spotify does not pay at a fixed rate. As far as I understand, the pay per stream rate varies because Spotify has different types of services. When a paid user streams a track, it generates more royalties than from a free user. Mobile streaming requires different licensing from the desktop version and it pays differently.  And, Spotify also offers Pandora-like mobile radio service to free users in the US; those non-on-demand streams pay at the same rate as Pandora. So, each quarter, your music is streamed by a different mix of users, and the rate varies.

Damon: "Well, that's still not bad," you might say. (I'm not sure who would really say that, but let's presume someone might.)

Me: Yes that's not bad.

1. A stream is not a download. $0.004611 is indeed far less than $0.70 (royalty from one $0.99 iTunes download), but it does not mean Spotify will definitely make the artists worse off. Because:

a. Every stream pays. People who like your music stream many times; people who stream your music once and lost interest would/should never buy your music anyway.

b. The potential audience for your music on streaming services is much wider than CD/Downloads buyers. See the picture below:

The quantity differences between every group might be much bigger than the picture shows. And if all those people stream from services which pay at Spotify's current rate, how much could a band like Galaxie 500 make?

Galaxie 500's tracks were scrobbled 4,361,876 times by 215,191 users on Last.fm, since the service's founding in 2002.

As of 2012, Last.fm claims more than 40 million active users. Roughly 3% of the total population of US, Europe and Japan (I saw two Japanese users on their recent top listeners page). I did not use global population because about 90% of the music industry's revenues come from these three regions. It is very likely that on average Last.fm users listen to more music than the general public, but please also note that not all (monthly) active users scrobble all their plays. Let's just say, between age 12 and 70 there might be 800 million music listeners of all kinds in the aforementioned regions, and 40 million last.fm users covers 5% of them.

Galaxie 500 was active between 1987 and 1991, which means their music probably was played many more times between 1987 and 2002 (when Last.fm came into existance), than the past 10 years. But let's just assume the annual play numbers are the same, then the total plays from 1987 to 2012 is about 2.5 times the plays of 2002-2012 (as counted by Last.fm).

OK, here is the revelation...

4,361,876 plays * 2.5 / 5% = 218,093,800 plays

218,093,800 plays * $0.004611/play = $1,005,630.51

That is the revenue from "selling" recorded music alone, for Galaxie 500, in a "all streaming, no content ownership" world. This band only existed for four years. And this $40,000/year revenue stream will continue coming at no cost of the band.

That figure is, most likely, a huge understatement. As I said their music might be played many more times during the 90s. Last.fm did not become a huge service years after 2002. Even active users left many plays unscrobbled (like, when they play CDs in their cars). And for people outside US, Europe or Japan, their little spending on music does not mean they do no listen to music (welcome to one of your Chinese fan pages, Damon). Their presence will be felt once the freemium services launch in the rest of the world. Lastly, many more people would listen to your music if they can stream it "for free" (a better expression would be: at no extra marginal cost) instead of having to buy a copy. Since Damon is also a Spotify Premium user, he must can understand this as I do. Personally I have listened to hundreds of artists which I would not have known if not for streaming.

So it is a safe assumption that, a band at Galaxie 500's level of popularity could make millions from streaming alone. And I guess the artists can also sell more tickets or raise more money on KickStarter, after their music was heard by many more people outside their current core fan base.

If this calculation involves too many uncertainties, let us look at it in a straighter way:

The track "Tugboat" made the band $29.80, in a quarter, on Spotify.

Spotify has about 20 million monthly active users.

If the worst happens and Spotify dominates, and has 1 billion users.

"Tugboat" would make the band, which ceased to exist since 1991, at least $1,490 every quarter, or $119,200 in 20 years. I would say it looks nice for a single that was released more than 20 years ago.

So, should Damon avoid Spotify until it has a billion users? I do not think so. Most manufacturers want their products available on Walmart and your neighborhood grocery store at the same time, as long as "the payment model" is fair. I will explain more about the model later.

Example: Jonathan Johansson made more than $20,000 from streaming services alone in the first month of his music being available.

Damon: Growth of the music business? I think not. Daniel Ek means growth of his company, i.e., its capitalization.

Damon also said this on Twitter:

if Spotify and Pandora were non-profit, the central point of my piece wouldn't apply: that only their owners benefit from them financially
— Damon K (@dada_drummer) November 21, 2012

Me: I am not sure about Pandora, but Spotify pays 70% of their total revenue (from subscription and advertisement) to the rights owners as royalties, the same as iTunes does. Major labels and indies (like Damon's self-owned label) are treated the same. This is confirmed by Spotify staff, and various online sources.

Daniel Ek should have no guilt for being a multimillionaire under 30, just like Steve Jobs was. He is rich not because he is ripping off the artists. His personal wealth is from his shares in Spotify, the company he co-founded and runs, not because he writes a big pay check for himself every year. And his company is valued at $3 Billion is because the investors believe the company would be valued even higher, or become profitable one day, and they are going to make money from their investments.

A profitable Spotify that pays 70% total revenues to rights owners is a good thing to the whole music ecosystem. And Daniel Ek has every right to enjoy his success, because his company created huge value for the music industry, just like Steve Jobs had done with iPod/iTunes Store.

On Spotify's prospect of being profitable, please read Andy Doe's post.

Conspiracy theorists: "Only major labels are making money from Spotify", or "Spotify is paying a (much) lower rate to indies."

Me: If every user pays for Premium ($9.99/month) and on average listens to 1,000 tracks a month (at 4 minutes a track, that's just 2.5 hours a day. I listen to much more than that). The royalties rate is:

 ($9.99 / 1000 plays) * 70% = $0.007/play

Right now only approximately 20% users pay. And Spotify is paying at $0.004611 rate for Damon's indie label. I rest my case. Further reading.

Another urban legend: "Spotify is making money for the music industry/labels" but not the artists."

Me: Every signed artist gets their royalties from their labels, and their labels from aggregators (unless they signed deals directly with Spotify). It is the same with CD, and iTunes. People who make a fuss about this simply does not understand how the music industry worked for the past century. If they really want to help the artists, please put the pressure on the labels and ask them to sign better deals with artists, not to spread false alarms about services that has nothing to do with how the royalties are re-distributed. As for the claim that "Spotify should make things easier for indie artists and bypass the in-betweens - yes it is one thing they could do. But labels/aggregators also serve the artists who need them. If you ever tried to upload your album to iTunes and dozens of other top digital platforms, you will know that they all use different formats and it may take days even weeks to do it all by yourself. Also Spotify''s catalog might be as messy as Youtube's, if everyone can upload stuff. I think one day there will be a better solution, but for now, if you want to make a dent in the music universe and you are not Radiohead, you probably still need a label. (Radiohead also have XL for distribution).

Damon: As businesses, Pandora and Spotify are divorced from music.

Me: This is what I fundamentally disagree, and I think what could hurt the artists is this way of thinking, not Spotify. So I have to write this response.

Let us look at the whole picture:

In the US, average spending on recorded music was $26 in 2011. In many other developed countries, like Italy and Spain, the number is much lower.

Spotify Premium is $120/year, and if everyone uses Spotify, even if the current freemium conversion rate (20%) does not go up further (it was 3% in 2009, so most likely it will), and considering the huge ad revenue (think about Facebook, whose sole revenue source is ad) for a service at that scale. The average spending would actually be higher.

Since Spotify is paying out the same percentage of revenues as iTunes, the artists, as a whole, would be better off than 2011.

And since Spotify calculates royalties based on the popularity, I think it is actually more fair than the current model. You might regret buying music you do not like now, but you only stream the music from artists you like, feel curious about, or at least find tolerable. Your payment to the music industry always goes to the artists you want to support at this moment.

This is the foundation of all my macro-assumptions. Streaming is not a race to the bottom for artists royalties.

The Culture Impact: Why New Music Needs Spotify Even More

The culture impact that Spotify could cause is immeasurable. I am not a tech zealot who claims that every new invention must be good. I just want to demonstrate it is a step forward, like gramophone, CD and iPod.

When people complain that less and less people are buying music, they tend to forget about all the music people have already bought. Recorded music ownership is increasing - just more slowly than before. A CD lasts decades, a download lasts until disk failure. Have you every considered the possibility that many people are just content with the dozens/hundreds/thousands of albums they have already bought, and content with the small dose of new music from Youtube/public radio/library. They might want to listen to the new stuff, it is just that everyone has a limitation of spending, and shelf space.

"I think in the long run, streaming will be the way people consume music - classical music and other music...in five years, 50% of our business will be in all kinds of streaming." - Klaus Heymann, founder of Naxos

I am a "classical music blogger", and personally I am have lost hope for the traditional distribution method in this genre. There are thousands of new classical releases every year (my 2012 New Classical Releases Index (Collaborative Playlist) counts 1,400 so far, and that is not counting re-issues and re-packages). Total classical album sales in the US was 3.8 million in 2011, including back catalog. Take one look at Amazon's classical chart and you will get an idea of how little of them are new music purchases.

It is good that different people like different things, and every one identify with their own niche. But to really know the niche you feel belong to, you might need to have a basic knowledge of modern music. Let us assume a newly graduated 20-year-old wants to start a music collection now.

Does he need at least 6 Beatles and a couple of Stones? Does he need some Dylan? Some Kinks? Some Hendrix? Some Beach Boys? Some Lou Reed? Some Bowie? Some Clash? Some Prince? Some Motown? Some early blues? Some proto-metal?

For a wanna-be classical fan, the situation is even more helpless.

Do you need at least one Beethoven symphony cycle? And at least half of the quartets and piano sonatas? At least one Mahler cycle? At least a dozen albums for Bach? Mozart's mature operas, piano concertos, symphonies and chamber works? Schubert? Chopin? Brahms? Tchaikovsky and some other Russians? Dvorak and some other Czechs?

We will reach 100 albums very quickly, before even reach 1990s in pop or any living composer in classical. And of course you also need some jazz and world music, even if you are not crazy about it.

In fact, I think if you have not listened to 1,000 albums of various genres, you probably do not really understand your niche either.

Yes the 20-year-old probably have listened to all the classics from his parents' collection. And that is exactly my point: in a streaming world, every play pays.

And there is no use to pretend that people will keep on buying a copy for everything they want to hear, or the artists will go starving if people buy even less CDs.

Nowadays music is bought by people who are really into music, and want to support musicians. That is good, but that is not the only way.

Thousand-dollar headphones are consumed, and talked enthusiastically about, by a small group of people. Because it takes thousands of dollars to manufacture a piece, and only wealthy people can afford.

Recorded music, after it is been recorded, can be digitally replicated and streamed at almost 0 cost. Selling 1,000 copies to your core fan base is great, but what about getting 10,000 people to stream your album 100,000 times? Or even more? It is at least possible, as Galaxie 500's Last.fm stats shows.

Many more people will listen to your music on streaming, not only because it's cheaper, it is also much more convenient. Music discovery is much easier with instant streaming and social networks, and I hope musicians take advantage of these facts.

An example: I am vaguely interested in indie pop, and I subscribed to this playlist:

@MonaFims #MusicMonday (updated every Monday) ♫

I play it once every week when it's updated with 20 new tracks, as background music. I do not pay attention to the artist names etc., and do not know any information about most of the music. If a track really grabs my attention, I star it and may listen more times. So far I starred 3 out of over 100 tracks.

But all the other artists also get paid, even when I do not know who they are. These things can scale.

What about new music?

The current situation is more or less like this: in a city of 10 million people, a million of them are active music consumers and accounted for most of the music sales, while the rest listen casually on Youtube and others. This 1 million people, or most likely, at most 100,000 true music aficionados of them, supported about 1,000 indie music acts of the city. On average they buy 10 albums from these artist every year, and on average an artist can sell 1,000 albums to this core fan base. Of course few of them live on this alone, and most indie artists never did in any time of history. They tour, sell merchandise, or work a day job.

It is not because 99% of the population definitely do not/will not like indie artists' works. It is because most of them never had the chance to fully explore the "mainstream" catalog and have little budget or aspiration left to adventure further.

If you like New Amsterdam's music not just for novelty value, you probably already own over 1,000 albums. Because their artists must have listened to many more than that.

And streaming helps many more users to finish the "basic education" and be ready for more.   

What I see in a Spotified world is this: 8 million people in this city listen on streaming services. Millions who never explored these indie artists before, now have the chance to hear for themselves. As for the music aficionados, they can now stream 100 or more new indie albums every year if they want. Both groups get to know the music better.

And unlike Justin Bieber and the most popular acts, who probably have already reached all their potential audience. The indie artists now has a chance to reach a much wider audience, and take more market share.

My projection, based on reasons stated above. Sales including streaming revenues. The market size could become much bigger, once Spotify launched successfully in more new markets, which current spending on recoded music is much lower than the US level.

Example: in Sweden, 89% of the digital revenues now comes from streaming, and total music sales up 30% in the first half of 2012.

What worries me is: most articles written on this subject so far are from musicians and critics who already own hundreds if not thousands of albums. The music services is to serve the musicians and their fans, of course the musicians' voice should be heard. But they all seem to lack the perception of common people.

And the seemingly jarring payment rate also stirred lots of armchair-moralists to attack streaming without much real understanding of the subject. I am not talking about Damon, he did a great job based on the information he had (and I do hope Spotify themselves can make the payment process more transparent). I am talking about many hateful/cynical commenters on music industry-related sites and blogs. They are not helping the artists in any way. It is easy to talk, but much harder to design a great app that 4 million people pay for a subscription, or just to comprehensive how does it really work.

What I propose is: even the most edgy artists today do not have to rely solely on the few hundreds/thousands people who buy their stuff. There might be another path. Common people have the power than the elites would care to admit. It should not have to be artists & their hardcore fans against the world. People will listen, if you care to let the most innovative minds in the industry help you.

This is not Ellsworth Toohey talking. On the contrary, I see streaming as a chance to bring more richness and diversity to the music world.

For the sake of simplicity I mostly used "Spotify" even when I should say "on-demand streaming services who adopt the same freemium model". But it is also obvious that, so far Spotify is the one that does on-demand streaming right. It may surprise many people that when the music industry first decided to go digital in late 1990s, they tried to sell subscription services. That was years before iTunes. No one used those services because they sucked. The model remains the same, but it took a decade before Spotify came along, set the standard and made a universally-acclaimed product. As a music fan, I feel excited about the times they are a-changin', just like a gadget maven looking at a first generation iPhone. It is not perfect, but so full of potential.

Music will find a way. And the road always lead to where it can be heard by more people, as it broke through the walls of the churches, palaces, and high society salons before.

Thank you for reading. Now I am going to stream some Galaxie 500.

Click, play.