You start your day at work. You get a cup of coffee; fraternize with your coworkers about their weekend and start up your computer to start the daily grind. As you start up a small green icon opens a page filled with millions of songs available to stream for free.  This is an everyday reality for over 100 million people across the globe who subscribe to Spotify, the world’s largest music streaming service.  10 years ago, having free access to that much music would make you a pirate, a veritable fugitive from INTERPOL and liable to receive lawsuits filed against you or at least a very nasty cease and desist order from the RIAA (Record Industry Association of America).  How in such a short amount of time did a criminal act become a legal everyday reality? And if all of this music is really free, how are record companies and artists getting paid? The truth is that artists and songwriters are not fairy compensated for their work, however through renegotiation of contracts and the development of a new payment scheme Spotify can still make a profit while fairly compensating content providers.

Streaming would not be a reality without the decade of free digital content and piracy culture that came about in the late 1990’s.  In 1993, mp3 files became the easiest way to convert audio to a digital format.  This innovation, combined with the proliferation of Tim Burners Lee’s World Wide Web meant that people had access to digital audio files through networked computers and public servers.  This is when being a thief went from taking a physical item from a store to sharing an intangible item on the web.  All of a sudden people could share and download digital audio files for free using peer-to-peer file sharing services, the most popular of which was Napster.  Shawn Fanning and Sean Parker founded Napster in 1999 with the vision to  share art and show record labels that they are no longer in charge, it ultimately backfired and ended up angering many artists in the process. Renowned jazz musician Herbie Hancock had this to say about Napster’s philosophy, 

Its [Napster’s] supporters hide behind claims that labels misuse artists and consumers, as if that entitled them to take everything they want absolutely free. Excuse me, but just because record executives give artists a bad deal doesn't mean that everyone else can then go and do worse. Although the appeal to consumers is obvious-who wouldn't want free music? the law, and common morality, forbids stealing. I'm not afraid of technology, and I hope that a system can be worked out that enables consumers that would also reward artists. (Alderman xviii)

The fact of the matter is that through peer-to-peer file sharing, every download of copyrighted material was an individual act of piracy and it didn’t take long for the record companies and the United States Government to take action.  By 2000 Napster had been taken to court by hard rock band Metallica and the case reached the Northern California District Court where Napster was found guilty on charges of copyright infringement, racketeering, and unlawful use of digital audio interfaces (Alderman).  By 2001 several record companies, dozens of artists and the RIAA all filed suit against Napster on the same charges and Napster was forced to file for chapter 7 bankruptcy and liquefy its assets.    But it was too late. The floodgates were opened.  The world had gotten used to copyrighted material being free on the Internet and the music industry was shaking in their boots.  

Sean Parker, co-founder of Napster (who many of you may be more familiar with as the guy played by Justin Timberlake in The Social Network) has since gone on to legitimate business and currently sits on the board of Spotify.  In 2010 Parker negotiated with Warner Music Group and Universal Music Group on Spotify’s behalf before their U.S. launch in 2011.  In this case, is it surprising that Spotify’s contracts with these record companies compensate artists such little amounts? Parker has even gone so far to say that he hopes to “attempt to finish” what he started at Napster with Spotify (King). It does not bode well for the financial future of musical artists and songwriters that a man who got his start illegally sharing music is now in a substantial position of power at the world’s largest music streaming service.  When the world is used to getting music for free, why not make stealing free as long as the record labels get their share.  

So what is the difference between peer-to-peer file sharing/piracy and music streaming services? The difference is money.  Spotify’s base income, which is shared with rights holders and record labels, comes from advertising sales and monthly subscription payments.  In 2014 Spotify claimed to have paid $2 Billion in royalty payments (Ek). However, there is no way of knowing how much of that actually ended up in the hands of artists.  Music contracts are complicated and royalty payments go to all rights holders not just the performers.  There are essentially two parts of copyrights to a song.  The record company often owns the master recording; this refers to the actual audio, what you listen to.  The other part of the rights is the song or the written piece of music.  The songwriter and a publishing company such as BMI or ASCAP often own the written music.  All these people and entities get their cut before the performer and the size of that cut is dependent upon each individual artist’s contract with the publisher and the record company.

 The financial reality of music streaming is harsh.  On average artists are receiving $0.0073 per stream from Spotify.  According to David McCandless, an information graphic designer for British newspaper The Gaurdian the average artist with a record deal must receive 1,117,021 streams in a month to earn the monthly U.S. minimum wage.  That is compared to only 5,478 purchases of single track from traditional media purchasing sites like iTunes.  The number of streams for artists to receive average minimum wage decreases for unsigned artists to only 180,000 but for many unsigned artists without the marketing power of a major label even reaching 180,000 per month is unthinkable.   

This leads to the questions, “ Why do artists receive such a small amount per stream?” and “How does Spotify really contribute 70% of revenue to rights holders?”  The answer is contracts.  Even in the days before digital media, most artists had to make a living by going out on tour.  Artists could never really rely on record sales to account for a livable wage.  That being said artist popularity and potential has long been measured by album sales, which often lead to artists being able to record more music in the studio and renew their contracts with record labels.  While artists couldn’t rely on album sales before, they certainly can’t rely on music streaming.   For example, Roseanne Cash, a twelve time Grammy nominated artist and daughter of country music legend Johnny Cash reported that she received only $104 for 600,000 streams on Spotify (Seabrook). This is obviously not entirely Spotify’s fault. Cash is released her last album under a subsidiary label of the Universal Music Group. It goes like this; Spotify has different contracts with each music label.  Online publication The Verge obtained a copy of Spotify’s 2011 contract with Sony Music. Sony Music received an advance of $42.5 million from Spotify for the three-year contract (Singleton).  This means that Sony Music received at least $25 million before the first song was streamed and artists and songwriters did not see any of that money.  Furthermore the contract tells us that Spotify receives up to 15% off the top on select advertising sales (Singleton).  Spotify claims to split their revenue 70/30 with the 30% going to Spotify and 70% going to rights holders, but no matter how you slice it, that 15% for ad sales is not figured in to this ratio. Marc Ribot, an acclaimed jazz guitarist, told The New Yorker’s John Seabrook his analysis of Spotify’s current 70/30 payment scheme, 

Here’s the simple fact that no one wants to talk about. Spotify says it pays out seventy per cent of its revenues to rights holders. Well, that’s very nice, that’s lovely. But if I’m making a shoe, and it costs me a hundred dollars to make it, and the retailer is selling that shoe for ten dollars, then I don’t care if he gives me seventy per cent, I don’t care if he gives me one hundred per cent—I’m going out of business. Dead is dead.

 Music is art but it is also business and even artists need money to survive and to keep making that art.  While the findings from this contract show that the numbers Spotify had told consumers were untrue, it is still impossible to determine how much an artist may make per stream due to contracts being different between Spotify and each record label and between each record label and each individual artist. 

Many artists have taken umbrage with Spotify’s poor compensation rates; the biggest of these critics is Taylor Swift. In 2014 Taylor Swift removed all of her music from Spotify before the release of her album 1989.  In a statement to the press Swift said,

Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for. It's my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album's price point is. I hope they don't underestimate themselves or undervalue their art. (Linshi)

This may be easy for Taylor Swift to do because as of January 2017 1989 has sold over 6 million units in the US alone (Caulfield).  Many saw Swift’s move as a way to sell more physical albums directly before the release which if true seemed to work.  The truth here is that people will buy popular music no matter what. Rock band, Radiohead front man Thom Yorke has also been vocal in his objection to Spotify calling it, “the last desperate fart of a dying corpse.”(Dredge). Yorke elected to release his solo music through BitTorrent, which allows artists to name their own price and receive 100% of profit.  While several high profile artists have protested against Spotify, some have used it to their advantage.  Ann Arbor, Michigan Funk band Vulfpeck, raised over $20,000 to go on tour by getting their fans to stream an album of silent tracks on Spotify while they slept (Jonze).  While the band was able to raise enough to go on tour, after seven weeks Spotify removed Sleepify from their catalogue (Bonanos).  While others still formed their own streaming services. Jay Z, Beyoncé and Kanye West started Tidal, their own Spotify competitor that is more artist and quality oriented and have seen little success thus far with 580,000 paying subscribers. So, the message thus far is clear; Spotify streams to not amount much money for artists and many of them are unhappy about it.

What about small, independent artists? Can they really afford to deny much larger audience Spotify provides?  The simple answer to this question is no.  Streaming is too prominent and pervasive in our culture that denying it at this point would be tantamount to career suicide.  According to online distribution platform CD Baby, which allows independent artists to put their music on streaming services and traditional digital media stores such as iTunes, has said that for their average artist in 2016 46% of their revenue now comes from streaming (Maddux).  Today’s audiences are not buying music and for the first time streaming has become the plurality of revue for your average unsigned artist.  There is also the intangible advantage of marketing and accessibility value grated to bands through streaming services.  One must also consider that with streaming music a payment is made with every listen, providing long-term revenue over a one-time sale.  Though it takes many more streams to equal the money made by that one sale.  Luis Aguiar a researcher for the European Commission Institute for Perspective Technology Studies found “evidence that Spotify displaces piracy, the new revenue generated through streaming payments (coming from formerly pirate consumers, buyers, or individuals that used to forgo consumption) is roughly offset by revenue reductions from the sale of permanent downloads.” (Aguiar 25).  This comes from a study of whether Spotify stimulates or depresses music sales.  Steaming is our reality and Artists cannot afford to stop using Spotify if they want to reach a maximum audience however, as detailed earlier, artists also cannot rely on streaming as a source of viable income.  It is obvious that to truly make this system work Spotify must change to better accommodate artists because audiences will not.  

The one major problem with Spotify changing is that they are yet to make a profit for themselves.  In 2015 Spotify had $200 million in net loss (Abboud).  The main sources of Spotify’s continual losses are the contracts signed with major music labels.  Labels are requiring big upfront payouts like the one from the Sony Music contract in order to license their music to Spotify and Spotify has no choice but to accept.  The clock is ticking.  Spotify is planning their Initial Public Offering (IPO) on the stock market to become a publically traded company by 2018.  Before this happens Spotify must start looking like a profitable company to entice potential investors.  So, within the next year there is no doubt that Spotify will negotiate with the record labels for more favorable percentages most likely below 55% (Abboud).  Universal Music Group, Sony Music and Warner Music own about 80% of major recorded music (Abboud).  If these labels are to receive less money not only in initial payments but also in percentage per stream, all of their artists will receive less money as well.  It is hard to imagine receiving less than $0.0073 per stream.  

With this looming IPO, Spotify will have to renegotiate and with streaming now becoming the number one medium for the majority listeners, something must change to make this system viable or artist output could be damaged.  Listeners want new music but they also want it for free.  Record labels want money and for that people have to keep listening.  But, what if there were no record labels?  Artists could receive 100% of streaming revenue.  Record labels have to see that the future of music is in digital streaming and that old-fashioned music contracts do not take that into account.  Either record labels will have to adjust their contracts with artists and songwriters to ensure a larger cut of streaming profits or artists will have to start signing directly with streaming services.  Labels provide stability for artists by providing agents, endorsements, advertising and marketing, paying for studio time and organizing tours.  All of this is very expensive work, which is why the labels end up taking such a large cut of the profits.  Through modern technology such as home recording studios, recording software and social media artists may be able to provide many of these services for themselves and engage directly with their audiences.  Artists should not stop using Spotify and neither should audiences.  If more people are aware of the issue facing today’s artists Spotify and the record labels will realize that they can no longer sustain artists with fractions of cents and will eventually see total output of artists suffer as a consequence.  
