The single biggest problem with Spotify (and other services like it) is that they have completely removed the relationship between the artists and the fan. The labels have leveraged their catalogs as an asset in exchange for equity shares in a tech start up that is subsidized by the artists. And to be clear, that is equity that the labels are not “sharing” with the artists who are making the equity possible. We’re not even sure how this could be legal, but we’ll leave that to the lawyers to figure out.

The second problem is that the money the consumer pays, does not pay the artists the consumer is supporting. The model for Spotify and others is to divide the total pool of revenue by the total number of streams and pay out the revenue on a per stream basis. But that is not the same as a directing each consumers payments only to the artists that consumer is streaming.

So in two very important ways the relationship between the fan and the artist has been broken by completely disconnecting compensation from consumption.

There’s a very simple fix, per stream retail pricing. We are NOT supporting the notion that 150 streams should equal one song download. However for the purposes of this writing that’s where we’re going to start. We feel that Billboard has grossly undervalued the cost of a stream, but we’ll get to that later.

We’re starting with this metric specifically in the context of the new Billboard “consumption” chart whereby every 150 streams = 1 song. At retail, that means each stream is worth $.00666 (we still love the irony there).

$.00666 x 150 = $.99

Here’s what the breakdown looks like PER STREAM:

$.00666 Gross Retail (Paid by Consumer to Spotify)

$.00666 x .70 = $.00467 Paid to Artist/Rights Holder (70% of Gross)

$.00666 x .10 = $.000666 Paid to Songwriters / Publishers from 70% Above

So let’s recap… in context of 150 streams to ONE SONG:

$.00666 x 150 = $.99 (One Song)

$.00467  x 150 = $.70 (70% of Gross) To Artist/Label

$.000666 x 150 = $.09 (Full Stat Mechanical, One Song) To Songwriter/Publisher

$.70 – $.09 = $.61 Net to Artist/Label

These are the exact same mechanics paid on a single song download.

Another way to express this would be to say that the consumer spending $10 a month on Spotify can play 1,500 streams. Every stream the consumer plays then pays out 70% of gross, just like iTunes. In other words, every 150 streams equals the same economics as ONE Itunes Song Download in the distribution of revenue.

A consumer pays $10 for every 1,500 streams they consume at $.00666 retail pricing. If they consume more, they pay more. If they consume, less they pay less.  Compensation is now directly reconnected to consumption!

Simple. Easy. Fair.

We can argue about what the price of a stream should be, but reconnecting the artist fan relationship through compensation for consumption is essential.

Steve Jobs was a genius. He reversed engineered the margins and mechanics of physical retail distribution for Itunes. Jobs made it easy for labels to make sense of digital revenues, accounting, operations and royalties reporting. There is no logical reason why streaming services can not operate the same way.

There is also no logical reason why per stream retail pricing can not exist. That is unless of course the goal is to NOT have a simple, easy and fair ecosystem that is sustainable and supports artists.

We tend to think that the retail price per stream should probably more like two to five cents per stream (maybe more), as we’ve heard Beats may be paying. Whatever the retail price per stream to consumers there should be flexibility in the model for variable pricing bu artists and labels.  Variable pricing exists in digital stores such as iTunes as it also does in physical distribution.

Retail per stream pricing restores the relationship between the fan and the artist whereby compensation is directly connected to consumption. This model works and does not change the margins paid by Spotify (and others). The streaming service still retain 30% of the gross revenue, except now we have the opportunity of moving closer to a fair cost of goods.

No Music = No Business.

Add to the above experiments with new release windowing, value propositions based on bundled tiers, etc, and we can start to see a smart and sustainable streaming business emerging for all stakeholders.

Spotify can chose to “adapt or die.” It’s just math.