Spotify has the music world gripped – but it won’t be a panacea for squeezed artists

Steve Dinneen
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SPOTIFY is taking over the world, wrapping its tentacles around the music industry like the alien flora from HG Wells’s War of the Worlds. Over the summer it finally announced its long (very, very long) awaited expansion into the US. Then came a transformative deal with Facebook, allowing users to log in and share music over the social network. In less than two months it has reportedly attracted more than 4m new users to Spotify, a massive boost to the 10m it already had. More than 1.5bn songs have been shared, with its average daily users jumping to 2.5m.

You can download it onto your iPhone, Android or Windows Phone; and to use the service on a mobile requires signing up to its premium £9.99 a month service, which is where Spotify makes its real money. It has also penned a deal in the UK with Virgin Media to feature Spotify on its fast-growing TiVo service. It is expected to post its first profit this year — compared to a £26.5m loss last year — and a recent round of funding valued it at $1bn. It’s little wonder founder Daniel Ek won City A.M.’s entrepreneur of the year award in September.

It hasn’t always been plain sailing: when Spotify struggled to sign up the big four labels in the US, its American dream looked over before it began. The labels were right to be worried: Spotify is a low-margin company and its royalty payments are low too.

But nobody has had much success against illegal downloaders — attempts to strong-arm fans through legal threats have been laughably ineffective; at least with Spotify they can make something back. To highlight just how much the landscape has changed, Vivendi made as much money selling video games through Activision last year as it did selling music through Universal. The industry had to adapt and Spotify is one way of doing it. So everyone is a winner then? Not quite.

Ten years ago, Courtney Love did some sums on the back of a napkin to illustrate how badly paid her band was. Working on the assumption her latest album would make $1m (and bear in mind this was the year 2000), she calculated the flow of cash. First, $0.5m to recoup costs of recording, editing, distributing and marketing. A cool $100,000 to pay the manager’s 20 per cent. Legal and administrative fees were another $50,000, leaving her band with $350,000. Take away taxes of $170,000 and split it in four and you’re left with a paltry $45,000 for each band member. And being Courtney Love costs significantly more than $45,000.

Based on this, Courtney would have a heart attack if she took a look at Spotify’s royalties. I did some calculations on a napkin of my own, based on some figures leaked by indie band Uniform Motion. The band – which describes itself as an “illustrated indie-folk band combining music with visual arts” but don’t let that put you off, they are actually pretty good – says it makes just $0.0041 every time one of its songs is played on Spotify, equating to $0.04 if you stick around for the full album. In contrast, they say they make almost $6 for every physical album sold. If these figures are right (and I couldn’t get through to Spotify to check), a band would need to get 250m song listens to earn Courtney Love’s elusive $1m, equating to about 25m album plays. To put this in perspective, U2’s The Joshua Tree sold around 2m copies in the UK, discounting re-releases. So record 10 of those and you’re a Spotify millionaire. But it’s not easy — U2 certainly didn’t manage to record another nine decent albums.

Now admittedly not many people only listen to a record once after buying the CD (although I imagine this is the case for the last nine U2 offerings) and no musician hopes to survive from Spotify alone. It can also be a formidable marketing tool. Fans use the service to discover musicians based on recommendations and many then click through to buy songs or end up paying to see them live.

There is also the argument that Spotify’s key demographic – young and internet-savvy – are exactly the same people who would download tracks illegally from file sharing sites. That wasn’t enough to convince Coldplay though, with the band refusing to put their latest record on the service (personally, I think fewer Coldplay records is another reason to sign up).

A few bands opting out won’t be enough to stop Spotify’s march to world domination. Digital sales of music have increased 1,000-fold in the last seven years, according to the International Federation of the Phonographic Industry, while the industry as a whole has lost a third of its value. Even the record labels have woken up — very late and with an outrageous hangover — to the fact that endless strings of 1s and 0s are the future of the industry and Spotify, having battled through its own problems, is the darling of this new digital wave.

Just don’t expect it to make anyone very rich.

Steve Dinneen is City A.M.’s technology correspondent.