Brief thoughts on Spotify's business model

A couple of weeks ago, Spotify outed details of how they run their business.  The main gist of the story, especially as reported by some media outlets, is that they don't actually operate under a pay-per-play model, despite references to this sort of figure even in their own literature.

Before continuing onto my thoughts on their business model, I should make sure that anyone reading this knows what Spotify is (which I would expect most would).  The super simple version of the story is that Spotify allows you to play pretty much any song by any artist.  They offer a subscription version ($10 a month) that allows you to listen to anything in any order via the web or on any mobile device without advertisements.  The free version comes with ads, and limits listening to shuffle mode on mobile devices.  There's more to the story than that, but it will do for our purposes.

Under a pay-per-play model, Spotify would pay the rights holder (read: record company) some fixed amount for each time that a user played one of their songs.  The rights holder would then pay the artist some portion of the proceeds, depending on their contractual arrangement.  So more plays always equals more money.  Presumably, it would be up to Spotify to make sure that they are generating enough revenue from subscriptions and advertising to cover the cost of content as well as operations.  As I mentioned earlier, this is NOT how Spotify operates.

What Spotify actually does is pay rights holders approximately 70% (actual figure depends on regional contracts) of their gross revenue from subscriptions and advertising.  The breakdown for individual content owners depends on what proportion of total plays their music got.  This seems good for Spotify in that they're pretty much guaranteed to have money to cover operational costs, and if they get enough subscribers/advertisers they can make a healthy profit.

It may not be a great deal for artists, though, as they are essentially directly competing against each other for a slice of the same pie.  It is possible in this system for an artist to achieve a dramatic increase in plays from one month to the next but yet see decreased income in the second month due to the misfortune of some other artist or group of artists blowing up even bigger than them.  So this probably works out alright for more mainstream artists, but not so much for alternative/niche artists.  And remember that the artists usually (unless they're super huge) only see a tiny portion of that 70% cut that goes to the record label.

To be fair, Spotify argues that as they gain more and more users the cut that goes to record labels and artists will increase.  They provide anonymized numbers that indicate that even niche artists aren't doing so badly at current levels, and that they will be doing even better as the service grows.  However, I'm not sure how to reconcile this with some recent complaints by some established artists that services like Spotify are screwing over emerging artists.

So, basically, I don't really know that this post has a point, other than to briefly explain the situation - I don't know enough at this point to be for or against this business model vs per-pay-play or something else.  I will say, though, that I greatly enjoy being a user of Spotify-like services.  I personally have a subscription to Google Play Music All-Access, which is pretty much the same thing (though I'm getting it for $2/month cheaper since I signed up early).  At this point, I have no need to buy albums or acquire them through "other means" (since I think that a lot of albums are overpriced) any more.  This does mean, though, that I'm definitely contributing less money to artists than I used to, even though I'm actually consuming more (or at least a wider variety) of their content.  But the ones that I really like still get concert and merchandise money from me.