Richard Burgess, head of the American Association of Independent Music, says "when you look at the revenue from the ad-supported section of the service, it pales into insignificance compared to the subscription payments."
In a public dispute, singer Taylor Swift pulled her music from Spotify because "music should not be free," she wrote. Spotify CEO Daniel Ek told CBS that he went on a campaign to convince her to rejoin Spotify, which she eventually did.
This is the chicken-and-the-egg problem. Spotify can't grow unless it offers a free version, but that doesn't generate enough cash for the labels or Spotify. The record labels, on the other hand, don't like to give away music, but very much need a music streaming service like Spotify to succeed.
Skeptics, like Pakman, call this "an unhealthy co-dependency." But Burgess and others in the industry are optimistic Spotify can be profitable eventually.
"We need to find that sweet spot, between a price that still works for the labels but that doesn't crush the streaming services and does encourage them to grow," Burgess says.
For competing services like Apple Music or Amazon Music (36 million paid subscribers) or Amazon Music ("tens of millions" paid subscribers), not making profit on music is okay, because they have plenty of other profitable products. Spotify doesn't. The company has tried to branch out into video and podcasts, but the real profit might lie somewhere else — like replacing the record labels.
"Record labels used to decide what we listened to. They would decide what songs ended up on the radio and the TV and got released when," Mark Mulligan, an industry analysts for the investment research firm MIDiA, says. "All of that is changing. Spotify is dismembering the albums, if you like. Taking the best bits, cherry-picking the killer tracks, putting them onto playlists, deciding what goes where, using data to help inform those decisions. And that use of soft power is really terrifying for the record labels."
Spotify has invested heavily in artificial intelligence. The company says almost a third of all listening is chosen not by users but by Spotify and its algorithms. It's a significant change that undermines the role record labels have traditionally played. However, Mulligan says the new business model opens the doors for new investments into the industry. Those doors have been shut for the last twenty years since people first started pirating music on the internet.
"Now is the time when we find out whether the rest of the marketplace feels as confident of the music business as the music business does itself," Mulligan says.
It will likely take at least a few months for Spotify's stock price to stabilize. Once it does, the major record companies will have to decide how to position themselves — and what to do with the roughly 16 percent stake they took in Spotify in exchange for more favorable licensing terms. The companies have said they will share the windfall with the artists, but there's nothing in the standard contracts that says how much, if at all. Billboard reports that the industry is wrestling with those questions now.
Songwriters and publishers are also wondering, what about them? They have sued Spotify over miscalculations in their royalty payments. Spotify has settled one suit, but more are pending.
All of this over a company that hasn't yet made a profit.
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