Spotify is cool, but i think we need some back of envelope calculations to determine whether its business model can sustain a music industry of the sort we’ve been used to in the UK over the last 50 years. Otherwise all the hype is a bit meaningless…
Headline – the music industry is making less money
Record sales are declining:
2005 2006 2007 2008
£1,856m £1,623m £1,379m £1,289m (1)
Sales are declining:
2005 2006 2007 2008
179 177 159 156
(in millions of units – ‘album equivalents’ (1))
I‘ll save that for another post!
What can Spotify contribute?
a) How many subscribers would Spotify need to save the UK music industry?
How many subscribers at the current £10 per month rate would Spotify need to make the equivalent amount of UK record sales in 2008?
-> £1,289m / £120 per subscriber per year = 10.7 million subscribers
Hmm that sounds like quite a lot considering that the BBC have 25m licence fee payers (enforced by law!) And doesn’t even take into acount that Spotify might want to take a cut themselves to make a profit, and may just possibly need to pay for all that bandwidth.
b) How about just the difference between the 2006 & 2008 totals, which is £300m?
£300m / £120 = 2.5 million subscribers
Not such an absurd number, but still quite high. Considering Spotify has 4 million UK users in total though…that’s kind of interesting.
For comparison, Sky have 9 million subscribers.
So how close are Spotify to either of these totals?
Spotify curently have 4m UK subscribers, and ‘less than 10%’ are paying (2).
If we guess 5% are premium subscribers, that makes 200,000 subscribers raising £24m.
Quite a lot of money, but only 1.8% of the big number, (£1.3bn), and 8% of the £300m.
Oh, that sounds bad then
Well, it is if we want to rescue the UK music industry entirely, but it could make some contribution and certainly be able to sustain itself as a business.
(If it’s received $50m in funding from the Asian billionaire La Ka-shing, then my estimate of subscriber turnover of £24m even at the current numbers sort of makes sense. Not that I know much about investing in start ups..)
Note: I’ve discounted revenue from ads as I assume that to be negligible.
Royalties – the unknown
I wonder if Spotify pay royalties to composers, song-writers and artists at the same rate as other digital services? As an artist I make 56p on an iTunes song sale, but only 0.01p on a Rhapsody stream of the same song. I would expect Spotify, as a streaming music service to pay out on the Rhapsody type rate. Which is actually quite a small number and not great for the industry on the face of it..
Still, like anything, it’s all about the volume so the trick is to have millions of songs streamed or bought to generate the proper cash for the artist/label, so the normal method of buying popularity through marketing will need to continue.
What have I shown? At the very least that Spotify isn’t (yet) the complete solution to the music industry’s declining revenue, but could be a useful part of the mix. The only question is whether low-royalty paying streamed music cannabilises other music sales to such a degree that artists decide it’s not worth their while to be included on such services and the available library goes down.
On a slightly separate note, I can’t help think that the future of music distribution must eventually disappear properly into the cloud so that any piece of recorded music made in the last 100 years is available to listen to on a whim. Millions of people carrying around their own duplicate of the exact same file is really lame.
Oh, and I’ve got two invites for Spotify accounts, if anyone needs em.
(1) http://www.eraltd.org/_attachments/Resources/yearbook.pdf / http://www.bardltd.org/content/stats.asp