Spotify: The Market Sets The Price

Spotify: The Market Sets The Price

Thoughts on costs, benefits and effects

Published December 11, 2014

Recently, the independent news site Nútíminn, leader among independent news sites named Nútíminn, ran an Op-Ed by a terribly uninformed man who apparently believes he can run a record company without, it seems, having any sort of a business degree. In his screed, he insists that Supply and Demand break up, because their age old relationship no longer suits his specific needs. Furthermore, he seems to believe that record sales and online streaming are musicians’ sole source of revenue, and that free market capitalism should no longer require businesses to either adapt or perish.

Should you be reading this, Haraldur Leví of Record Records, let me explain some things to you that someone in your exalted position should ideally be explaining to a layman like myself.

The future is already the present

The advent streaming and downloading practices has created a new music economy, which presents artists with a different reality, one in which recorded music has become something of a loss leader. In this emerging model, recorded music’s promotional purposes far outweigh its waning power to make a record label any direct return on investment. As far as the artist goes, this doesn’t change much: album sales never made him, or her, the same rate of return as other revenue streams currently do.

In the past, touring functioned as a promotional device, meant to drive record sales. However, through increased visibility of—and access to—“free” music, studio recordings have now become the engine that drives the touring circuit. A touring artist eats a much larger slice of the concert income pie than a recording artist does of the table scraps his label feeds him. With easier and cheaper access to music, the consumer is free to discover artists that he’d previously had to pay a substantial amount of his hard earned cash to even check out. And then, he might not even like them. That’s a sunk, un-recoupable, cost, if you will. With all the cash saved, the consumer—who has by now cultivated a burning interest in a much greater number of artists than during The Golden Age of the Majors—can now spend that money on experiential services like concerts (indeed, ticket prices have risen exponentially in the last few years due to—you guessed it—- supply and demand).

As that pie keeps getting bigger, economies of scale and scope provide the artist with an ever-growing piece of it. At these concerts the artists is able to sell a steadily increasing number of merchandise, chief among them the T-shirt, which, as maybe even you will realize, Haraldur, is like having your ad agency paying YOU to do business with THEM. For the artists, the margin of return on those T-shirts is also much higher than on the physical copies of their album.

But let’s not dwell unduly on physical copies. Your gripe was after all with the greatest bane to piracy the world has seen: Spotify.

The Spotify pricing model in action

In your article, you expound a theory as leaky as the Titanic. You seem to think that Spotify should shun such time proven concepts as the aforementioned relationship between supply and demand, and steer away from trying to achieve economies of scale and scope. According to your theory they should rather alienate the casual music listener, who, believe it or not, constitutes the majority of music listeners outside of your music loving social circle. The calculations you present only make sense when you apply them to people such as you and I, who live and breathe music, and not to the overwhelming majority of casual music consumers that make up Spotify’s core demographic. These are people whose lack of passion for the artform failed to drive them to piracy, as opposed to your average music aficionado (who embraced it). Once the aficionado had instant, free, access to everything, he simply had to have everything, even though he obviously didn’t actually have the budget to be able to afford “everything.”

These people—the casual listeners—are the people who subsidize Spotify for YOU and make their low price tag possible. These people would have spent even less money per month on physical copies than what they do via their Spotify accounts. Granted, I’m working with year-old numbers here, but 2013 statistics show that the average U.S music consumer annually spends $25 on music, while the average Spotify user spends $41. I’d really like to see you get up in front of the directors at the Spotify board room and pitch them the idea of your proposed 5,000ISK subscription fee ($40 per MONTH, as opposed to $41 per YEAR).

You see, their pricing model is built on careful calculations that take into consideration numerous focus group sessions that in turn determine what is the maximum amount of money that the maximum amount of consumers is willing to pay for a service that is available for free elsewhere. This makes a lot more sense than basing the price model on what someone with your passion for music and above average disposable income would personally be willing to pay for a product that most people do not feel they should have to pay for anymore—in order to supply “struggling” artists with an outdated form of revenue stream.

I did it my way…

But, again, I’m straying from the subject of your ill-informed rant. You were making an example based on Spotify streams of a non-professional, Icelandic reggae band and the money that they would have made on physical sales in a distant and inefficient past. Regardless of the fact that Icelandic music consumers do still buy physical copies of Icelandic records at a much higher rate than records by foreign artists, an additional 100,000 ISK in income makes for 10,0000 ISK pre-tax per member of the ten-piece band.

That, as you claim, is obviously a great loss of income. Imagine if the band had that sort of cash to throw around. They could, for example, go for a meal at an upscale restaurant, where they could celebrate that all was still good with the world. And not a single step of progress had been made.

They would be probably be so jubilant over the extra 10,000 ISK that they’d head straight to the studio later that night and record another hit album with the potential to maybe even make the band a whooping 200,000 ISK. This would surely serve to reverse the decline in quality releases that you predict will result from the new music business climate.

Or, and this is a huge fucking “or,” you might be talking straight out of your rectum. You and I both are old enough to remember a different climate. It’s just that you seem to be recalling that bygone era through a thick haze of nostalgia. I, however, remember having to put aside a chunk of money every month (which I really couldn’t afford to put aside), in order to buy CDs that I hadn’t listened to often enough to determine whether I really liked the music or not. This I did because the music industry’s marketing machine made up exaggerated press releases that were rephrased by music journalists in metal magazines that were far too expensive, but I still had to invest in. I also remember the exact opposite of what you predict in terms of quality releases.

Unless, that is, you consider quality releases to be those that you, as a record label executive, decide to put your advertising budget into, in a straw-grasping effort to remain relevant in a market that will no longer be dictated to.

In fact quality releases are more abundant now than ever before. The difference is that they are being recorded, released, distributed and marketed by artists with access to much cheaper recording and marketing options than in the past. These options allow musicians to operate independently and with full creative control. Some of them, the most talented, hard-working and passionate ones, are able to reach the level where they can hire publicists, press agents, booking agents and managers that push their self released albums hard enough to make professional touring on back of those releases a viable option. All without the exploitative meddling of a record label.

My favourite act at the moment, for example, Black Crown Initiate, has yet to release their debut album. Yet they have been touring extensively (often supporting big bands), seemingly since the day after their first rehearsal (which was, incidentally, last year), solely on the merits of a single, self released EP. An EP I consider to be the single greatest death metal release in the history of the genre. That’s how fast an artist can make it in this horrible Spotified reality you seem to hate so much.

You see, the music business, in stark contrast to the economic realities of the world at large, is undergoing a great shift towards equality, where more people are able to make a modest living, fewer artists have to “starve,” and superstars are fast becoming a thing of the past. In my opinion, this results in a higher quality across the board. Quality isn’t ensured by a creative team (working in tandem with production, management and legal teams) writing an artist’s songs and lyrics, keeping him in perfect physical condition and donning fashionable rags while aggressively marketing him through every conceivable promotional avenue. Quality comes from the relationship between supply and demand, the process of natural selection becoming much more prevalent as the market for music moves ever closer to a perfect ideal of competition.

There are, of course, other issues relevant to those much-maligned Spotify streams you mention. They concern what share of those streams were foreign ones, and the fact that Spotify, to an extent, acts like a substitute product to terrestrial radio. Hence you ought in your calculations rather examine what Spotify pays per stream compared to what radio does. I did the math. It turns out that in this regard Spotify simply crushes terrestrial radio. In fact, they pay the artist between $6,000 and $8,400 per million streams, as opposed to the $41 that terrestrial radio pays. But again, I’m talking U.S statistics, which are perhaps not applicable to Iceland. Not being familiar with your label, Record Records’s level of international distribution, I’m still going to claim with a high level of certainty that these, and future, foreign streams will contribute much more to the reggae band’s success than any 100,000 ISK that they would have made through sales of physical copies.

Concert revenues to the rescue

The major future revenue stream for Icelandic musicians will of course be concerts, much like everywhere else in the world. Local bands and promoters could, and should, make a collective effort to raise the cover charge for small to medium shows, so that it not only keeps up with inflation (which it hasn’t done for a long time), but also eventually reaches international levels. Obviously this is not in line with the principles of supply and demand that I preach above, but as a veteran concert promoter, I’ve come to believe that the current low admission to club shows is due to artists and promoters’ failure to set and maintain a fair standard.

What I think this stagnant pricing stems from is the sheer quantity and quality of the domestic talent, and the overabundance of concerts being held in Reykjavík. This is coupled with the fact that guest lists are probably much larger comparatively than in foreign countries, where, owing to venue size and population make-up, less people have strong ties to the artists performing on a given night. A contributing factor when it comes to the raising of ticket prices should be the steady influx of tourists who are willing, and able, to pay a fair price. This would, to some extent, counterbalance the negative effects increased international tourism is having on the downtown area, currently manifest in the razing of popular venues and how the cultural elite are being priced out of the local rental and housing markets. In my humble opinion, this is a problem you can realistically combat, instead of Quixotically nagging an international conglomerate from atop a tiny blog soapbox. Should we succeed in this undertaking, the extra income made from this would hopefully enable more bands to use their Loftbrú privileges to try to break in to those global markets that now have easy and cheap access to their music through our friend and benefactor, Spotify.

In closing, let me quote the musician, producer, and all-around genius, Steve Albini.

“Music has entered the environment as an atmospheric element, like the wind, and in that capacity should not be subject to control and compensation. Well, not unless the rights holders are willing to let me turn the tables on it. If you think my listening is worth something, OK then, so do I. Play a Phil Collins song while I’m grocery shopping? Pay me $20. Def Leppard? Make it $100. Miley Cyrus? They don’t print money big enough.”


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