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Essentially no one is happy, and here’s why. Spotify’s dirty little secret is that it’s saddled with a business model that makes it improbable artists will see significant pay and practically impossible for Spotify to be profitable. The company achieved its first profitable quarter in the fourth quarter of 2018, a full 12 years after launch, and has since achieved only a handful of positive quarters. The more it makes, the more it seems to lose. 

That happened again in what Spotify executives labeled a “strong” quarter: Fourth-quarter 2022 losses dwarfed those of a year earlier.

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At its core, Spotify’s pure-play economics simply don’t work. Its variable cost structure burdens, and its gross margins (the amount it keeps from each dollar after its costs of goods sold — that is, the music) are simply too thin. The streamer pays out 70% of each dollar to rights holders: record labels, publishers, distributors, performing rights organizations and collection societies. And these variable costs — which come off the top without even considering Spotify’s operational costs (employees, marketing, infrastructure, overhead) — show no signs of abating.

In fact, they likely will get only worse over time due to understandable industry pressures. Rights holders only earn somewhere around $0.005 per stream. That means 1 million streams pay out about $5,000 on the high end — and artists and composers themselves only collect a small share of that figure from the rights holders. 

All this means that apart from a few mega-artists, Spotify and other streamers put little food on the table. For that, Spotify’s become an industry pariah. 

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Yet is that really fair? The streamer entered the music scene with its basic price structure and monetization constraints already in place after two cataclysmic events disrupted and fundamentally changed music industry economics forever. The first was the original Napster (and other pirate sites of that ilk back in the day) that facilitated outright theft. Napster and its users essentially stole twice — both by taking money directly out of the pockets of artists and then by driving down the perceived value of music to zero.  

The second shoe to drop was Steve Jobs and Apple. In a music industry understandably panicked by Napster’s insidious peer-to-peer pilfering, Jobs promised to be its savior. His solution was $0.99 song downloads. Remember those? Apple essentially stripped out singles from albums to give consumers — those who agreed to pay, at least — precisely what they wanted. Usually, that was one hit song from an album of 12. Apple profited handsomely of course, imposing its now notorious “Apple tax” — 30% of every dollar spent on content — that still defines the content rules of the game (and which is the subject of an epic lawsuit from Epic Games).

The iPod, enabled by and coupled with Apple’s “tax,” transformed the company into the $2.3 trillion juggernaut we see today. The New York Times recently called Apple’s fees its “primary driver of growth.” Jobs’ sleight of hand shifted billions of dollars away from the artists and creators and into Apple’s pockets. And with that one-two punch, Napster and Apple laid the foundation for today’s industry streaming economics.

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In that context, Spotify launched at a price point arguably necessary to compete against the Apple core: $9.99 a month, or about what you’d pay for an album on iTunes. Unlike Netflix, which has raised its price over time, Spotify has struggled to change that initial price point. In 2014, Spotify tried to raise its monthly subscription from $10 to $13, in part to cover Apple’s 30% toll, which it had to pay too. Then Apple launched Apple Music at $10 a month — arguably textbook predatory pricing — and Spotify retreated. Spotify’s price in the U.S. is the same today as it was when it launched in the country in 2011. 

Consumers seem to be the only winners here. We can all now enjoy the entire world of music, over 100 billion songs, anytime, anywhere and on any device, for just a bit more than one Starbucks coffee. It’s an incredible bargain and unmistakable value proposition. The amount pales when compared to the joy music brings us — and the blood, sweat, tears and creativity (not to mention livelihoods) of the artists behind it all. 

Even so, significant numbers of consumers still bristle at paying anything at all. Technology forever transformed the perception of music’s value. And tech’s latest disruptive force, generative artificial intelligence, is likely to do the same. AI can and already does spit out endless streams of new songs without stopping to sleep, eat or tour. Why pay for a musician to write a film score when AI can look at past scores and endlessly recreate new ones?

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Faced with these sobering realities, what can artists do? First, musicians, like all creators, should simply learn, understand and internalize these new threats and realities. Second, they should acknowledge that those forces are here to stay and cannot simply be sued out of existence (which was the preferred method of the RIAA when first faced with piracy). Third, rather than fight new tech and transformed economic realities, artists should learn to leverage new tech as best they can to empower new possibilities. Yes, technology certainly threatens. But technology also can empower and open new doors of possibilities.

Streaming, at least theoretically, enables musicians to build a global audience and community with deeper ongoing engagement. Yes, the streamers themselves add only pennies to the bottom line. But artists now have new tools to deploy to reach out and monetize their fans, and it only takes small numbers to drive bigger numbers. This is the famous “1,000 True Fan Theory” that describes the monetizing power of fandom, even at small numbers. If those superfans pay only $100 each year to support their favorite artist, that’s $100,000 right there. I’m not saying it’s easy, but this is the creative community’s reality. Web3 and the token-gated value it enables hold tantalizing promise here, as I’ve written several times in TheWrap.

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Let’s go back to what many still consider the villain in this story, Spotify. Faced with its daunting realities, sure, it could try raising its pricing. But price hikes come with their own risks. Apple almost certainly would undercut such new pricing, having the wherewithal to outlast Spotify’s stand-alone economics. Spotify’s great subscriber conversion number would also come down, and some might turn back to theft. (MP3s still abound on pirate sites.) 

The more obvious answer is that Spotify ultimately must sell itself. Try as it might, the streamer has yet to significantly monetize anything other than the music itself. And pure-play business models in the world of content — including Netflix on the video side — simply can’t compete against Big Tech competitors Google (whose YouTube is the biggest music service in the world by far), Apple and Amazon. All of those behemoths use content as marketing. YouTube drives more Google ad revenues, Apple drives more sales of iPhones and Macs, and Amazon drives more commerce. 

Only an acquisition of Spotify will make investors happy. But even then, artists understandably won’t be. Maybe the industry needs to take a harder look at Apple.

For those of you interested in learning more, visit Peter’s firm Creative Media at creativemedia.biz and follow him on Twitter @pcsathy.

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