Spotify and its Revenue Model


Spotify and its Revenue Model




For the past five years, Spotify has been the dominant music streaming services provider in the U.S. As of Spotify stated in its 2018 Q3 quarterly report,  it now has 87 million Premium subscribers, who are charged $9.99 per month. In addition, Spotify has 107 million ad-supported active users, users who are not a Premium member but uses the app listening to ads as well as music. As we finish the documentary "Downloaded" in class, I become interested in Spotify's revenue model. As an active Spotify user who pays the monthly fee, I want to see where my money goes, and who they benefit.

How Spotify Works

Spotify could be seen as the improved version of Napster. However, instead of music files being shared across users, Spotify establishes it's own music bank. Spotify is house to 35 million songs, all of which gets stored on its own servers. It purchases a license from labels, artists, publishers, and other rights holders for streaming their music on its platform. This means there will be no legal issues with copyright and angering the music industry. It uses a very complex algorithm to determine the royalty per stream to be paid to these artists. The average per stream payout to the rights holder at Spotify lands somewhere between $0.006 and $0.0084.

How Spotify Makes their money

Spotify makes its revenue in two ways: Advertisement and subscription. In the time span of three months, Spotify has made €1.352 billion in revenues. 

Advertisement:

The free version of Spotify allows users to browse through the catalogue of songs and play them. However, much like the old records and albums, the user has no control over which song they select. In addition, audio ads will be inserted in-between songs, which ranges from 10 seconds to half a minute. For advertisers, these ads cost $25,000 minimum to insert, with each individual ad inserted costing about $0.015-$0.025. As of the year 2018, Spotify has made 542 million Euros as ad revenue. 

Subscription

The premium version of Spotify offers uninterrupted access to music across all devices, including smartphones, tablets, and televisions. Premium users pay $9.99 every month for their provided services. As of the year 2018, Spotify has made 4.7 billion Euros as subscription revenue.

Spotify and Artists


To my surprise, artists aren't benefiting from Spotify as much as the company itself. The $0.006  per stream paid to the holder of music has to be split among the record label, producers, artists, and songwriters. This means smaller artists with less listening per month sometimes can not profit from their music. Another calculation shows that 1 million plays on Spotify translates to around $7,000, and one million plays on Pandora generates $1,650. With the failure to gain revenue from these streaming services, artists have to rely on tours to make money. This makes lesser-known artists even harder to have the resources to become successful. 

The modern music industry, in my opinion, has seen a decline in quality: More non-mainstream music is being less appreciated, therefore artists could not make enough money to sustain themselves as a musician. For the past few years, mainstream music has become repetitive, with many artists using similar styles of music from the few producers. The dominant revenue model of the modern music industry plays a role in causing this phenomenon. 



Source:

https://www.forbes.com/sites/sophiecharara/2018/11/01/spotify-q3-2018-results-apple-music-streaming/#a87896149a5e

https://www.cnbc.com/2018/01/26/how-spotify-apple-music-can-pay-musicians-more-commentary.html

https://www.feedough.com/how-does-spotify-make-money/








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