Not You, ARPU: Another Way to Value Streams on Spotify

[This post first appeared on MusicTechPolicy.]

By Chris Castle

I recently co-wrote with the noted international economist Professor Claudio Feijoo a paper for the World Intellectual Property Organization on a new “streaming remuneration” royalty to be paid to all musicians and vocalists by streaming services. Part of our justification for the new royalty is that these creators, especially “non-featured” musicians and vocalists are not paid at all for streaming which is rapidly replacing radio (for which they are paid through SoundExchange). The value that the streaming remuneration would try to capture is not just revenue based (which is how all streaming royalties are derived currently) but also derived from the market valuation conferred on companies like Spotify. Spotify remember is more like YouTube would be than say Google because it is essentially a “pure play” music stock, kind of like Pandora was.

Claudio has done considerable work on trying to capture and express this value, so for today let’s do some rough justice using one of the approaches from the paper. There are more bells and whistles to the calculation than I’m going to give you here, but you’ll get the idea that a stream is assigned a much, much lower value when calculated on the revenue side of loss-making organizations than when calculated on the extraordinary wealth-making side of the public markets valuation of Spotify. And if you want to make a causal connection between low royalties and high market value, who am I to stop you?

The formula is simple: Divide Spotify’s market capitalization by the number of royalty bearing streams in a month and you have a rough idea of how much value each stream confers on the monopoly streamer.

Spotify’s recent market capitalization is $41,056,000,000 give or take an Arsenal in the rounding. A recent number of monthly plays as reported by the MLC is 24,815,407,149.

Divide market capitalization by number of streams. The result is $1.65 per stream in market valuation. According to the last Trichordist streaming price bible, Spotify’s per-stream rate was $0.00348 and for songwriters, even less.

$1.65 versus $0.00348. Where oh where might that delta go? It goes somewhere and it’s not to the people who made them rich. Not a perfect metric, but you get the idea.

You might say how do they sleep at night? The answer? Sleeping very well on much nicer sheets than you, thank you, and for one reason–they do not give a flying hoot about your problems because Daniel Ek doesn’t think you’re working hard enough to make him and all his employees richer.

@ashleyjanamusic’s Video Tells You All You Need to Know About Spotify’s Attitude Toward Artists

By Chris Castle

[This post first appeared on Artist Rights Watch]

Mansplaining, anyone? If you remember Spotify’s 2014 messaging debacle with Taylor Swift, we always suspected that the Spotify culture actually believed that artists should be grateful for whatever table scraps that Spotify’s ad-supported big pool model threw out to artists. They were only begrudgingly interested in converting free users to paid subscribers, which still pays artists nothing due to the big pool’s hyper-efficient market share revenue distribution model. 

And then there was another one of Spotify’s artist and label relations debacles with Epidemic Sound–Spotify’s answer to George Orwell’s “versificator” in the Music Department that produced “countless similar songs published for the benefit of the proles by a sub-section of the Music Department.”

The common threads of most of Spotify’s crazy wrong turns–and they are legion–is what they indicate: An incredible heartless arrogance and an utter failure to understand the business they are in. A business that ultimately turns on the artists and the songwriters. As long as there is an Apple Music and the other music streaming platforms, artists can simply walk across the street–which is why Taylor Swift could make Daniel Ek grovel like a little…well, let’s just leave it at grovel.

But–this long history of treating artists and especially songwriters poorly is what makes it so important to preserve Apple Music as a healthy competitor to Spotify and the only thing that stops Spotify from becoming a monopolist. A fact that seems entirely lost on their boy Rep. David Cicilline’s anti-Apple bill that “seems aimed directly at Apple and has Spotify’s litigation against Apple written all over it.” (Mr. Cicilline runs virtually unopposed in his Rhode Island elections, which if you know anything about Rhode Island politics is just the way the “Crimetown” machine likes it.)

Why are ostensibly smart people given to such arrogance? Mostly because they are rich and believe their own hype. But never has that reality been on such public display in all its putridness than in a truly unbelievable exchange at the Sync Summit in 2019 in New York between home town independent artist Ashley Jana and former Spotify engineer Jim Anderson who was being interviewed by Mark Freiser who runs that conference (and who doesn’t exactly come off like a prize puppy either). 

Ashley recorded the entire exchange in (what else) a YouTube video and Digital Music News reported on it recently. Here’s part of the exchange between Ashley and Mr. Anderson after Ashley had the temerity to bring up…money!

Jana: We’re not making any money off of the streams. And I know that you know this, and I’m not trying to put you on the spot. I’m just saying, one cent is really not even that much money if you add 2 million times .01, it’s still not that much. And if you would just consider —

Anderson: Oh, I’m going to go down this road, you know that.

Interviewer (Mark Frieser): This is really not a road we’ve talked about before, but I’m gonna let him do this —

Jana: Thank you again.

Anderson: Do you want me to go down this road? I’m gonna go down this road.

Frieser: Well, if you need to.

Anderson: Wait, do I go down the entitlement road now, or do I wait a minute?

Frieser: Well, you know what, I think you should do what you need to do.

Anderson: Should we do it now?

Frieser: Yeah, whatever you feel you need to do.

Anderson: So maybe I should go down the entitlement road now?  Or should I wait a few minutes?

Frieser: Do you want to wait a few minutes? Maybe take another question or two?

Anderson: [to the audience] Do you guys want to talk about entitlement now? Or do we talk about —

[Crowd voices interest in hearing the answer from Anderson]

Jana: I don’t think it’s entitlement to ask for normal rates, like before.

Anderson: Normal rates?

Jana: No, the idea is to make it a win-win situation for all parties.

Anderson: Okay, okay. So we should talk about entitlement. I mean, I have an issue with Taylor Swift’s comments. I have this issue with it, and we’ll call it entitlement. I mean, I consider myself an artist because I’m an inventor, okay? Now, I freely give away my patents for nothing. I never collect royalties on anything.

I think Taylor Swift doesn’t need .00001 more a stream. The problem is this: Spotify was created to solve a problem. The problem was this: piracy and music distribution. The problem was to get artists’ music out there. The problem was not to pay people money.

You really should listen to the entire video to really comprehend the arrogance dripping off of Mr. Anderson’s condescension.

Guest Post: Streaming and the Embarrassment of COVID Riches

By Chris Castle (first appeared on MusicTechPolicy)

We’re starting to see a narrative emerging from the digital music services in reaction to artists chafing under the misery of streaming royalties.  Streamers want lawmakers to focus attention on the allocation of current period revenue that they pay to creators and deflect attention from the company’s stock market valuation (or private company valuation).  That’s a grand deflection and misdirection away from the true value of artists, songwriters and their recorded music to streaming companies like Spotify.  But they can’t escape the embarrassment of riches by discounting the value of stock price through deflecting attention to loss-making revenues that companies like Spotify keep artificially low through a kind of Malthusian reverse pricing power to drive growth.  It may be rational for investors, but it’s not sustainable for the creators of the company’s sole or primary product.

We saw this with Pandora–lawmakers were told how much of Pandora’s monthly revenue the company paid out in royalties as though revenue was the primary metric.  The deflection worked until lawmakers started realizing that Tim Westergren was booking $1 million a month in stock sales.  Then it rang pretty hollow.  But the commoditizers are at it again.

No matter how much Big Tech tries to commoditize music, this is not about selling widgets at a deep discount–it’s about people’s lives.

“Get Big Fast”

Let’s be clear–companies like Spotify don’t get into business to eke out a profit.  They get into business to get their snouts into the trough of IPO stock as fast as possible and share that wealth with as few people as possible.  (And get out of corporate governance before the chickens come home to roost.)  So looking at revenue allocation without the accretive boost of stock market valuation is simply a grand deflection.  Abracadabra!

That deflection is particularly galling when the executives dip into current revenues to reward themselves like drunken sailors.  This is the profit fallacy—I would go so far as to say that in Silicon Valley, “profit motive” is very 1980 and long ago was replaced by the motive of  “get big fast.”  These companies seek to capture public stock market valuation, and share price valuation implies a belief in top line earnings and market share growth–not current period profit or–God forbid–dividends to shareholders.  And “get big fast” is working for Spotify.

share of streaming services

There is also controversy about a perceived “allocation” of music royalties payable by the streaming services particularly between record companies and recording artists or PROs and songwriters (especially the PROs and authors’ societies that Silicon Valley would dearly like to replace).  The allocation theory again focuses on revenue instead of the total value transfer. It goes something like this: Streaming services pay 69¢ of each dollar for royalties. When the artists or songwriters complain, it’s not because the saintly streaming services don’t pay enough, it’s because the greedy record companies or PROs take too much of that 69¢.

There is a lot that is not said with that fallacious allocation statement. I think a focus on revenue “allocation” is the wrong way to look at the royalty issue from a policy perspective.  The “allocation” focus presupposes there is an aggregate payment for music that is somehow misallocated.  

Pie-ism a la Mode

This allocation or “pie” fallacy is a very familiar argument in the U.S. It often comes from broadcasters fighting equitable remuneration for recording artists on terrestrial radio by attempting to limit their total payment for both sound recordings and songs to the amount that broadcasters historically have paid for songs only.  Instead of acknowledging the value of sound recordings, the platforms confound song performance royalties with “music”.  They say, “We pay $X for music, we don’t care how you allocate it between songs and recordings.”  This is like comparing apples to oranges and producing a pomegranate.

I call this thinking the fallacy of the pie, a derivative of the fallacy of composition.  It makes creative sectors fight each other in a kind of digital decimation.  

There is nothing particularly sophisticated about this strategy.  But the policy challenge for industrial strategists is to how to grow the pie, not to cut smaller pieces for everyone.  Growing the pie is particularly relevant when the platform seeks to monetize its valuation in the public financial markets. At that point, focusing solely on the allocation of revenue to the exclusion of the total valuation transfer is simply a kind of cruel joke.

Here’s the sad reality broken down to current per-stream rates that are entirely based on service revenue:

etude-ecoute-en-continu-streaming-montants-spotify-apple-music-google

This is front of mind as we see reports of Believe Digital (owner of the independent pre-pay distributor Tunecore) contemplating a €2 billion IPO drafting behind the reported COVID-fueled success of streaming and the Spotify public offering.  Government may play a role in requiring a share of riches transferred from the public financial markets to be shared by those artists and songwriters who gave the issuer its valuation, particularly when the issuer did not invest in the creative community.  

Get COVID Profitable Fast

If profit were really the target, one could make Spotify more profitable almost overnight by moving their U.S. headquarters to Syracuse, Cedar Rapids or even Austin rather than multiple floors of the World Trade Center in Manhattan.  One could cut executive compensation, one could do many things to reduce their Selling, General and Administrative costs.  But profit is not the issue for them.  Valuation is the issue and valuation is driven by bets on future growth.   In Spotify’s case, growth is often measured as subscriber growth and subscriber growth implies competing on price because Spotify offers more or less the same product as its competitors in a triumph of the commoditizer.  Which in turn implies keeping retail prices down (and Monthly Service Revenue) in a race to the bottom on subscription price and to the top on share price.  You may find that analyzing the economics of who wins in streaming is similar to who wins a gas war among price cutting petrol stations.

COVID has nearly destroyed the live music business that sustained the artists who previously tolerated their mils per stream Spotify royalties.  Far from being harmed by COVID, COVID has been rocket fuel for Spotify which adds to the unfairness of the “big pool” revenue share royalty system.  As the COVID Misery Index demonstrates, Spotify’s growth in valuation has outpaced its fellow oligopolists:

COVID Misery Index 1-8-21

Given the urgency of the COVID crisis, it is important to understand the difference between the creator community and other workers affected by COVID.  For example, restaurants are not failing while some other entity succeeds in extracting value from their customers.  As the COVID Misery Index demonstrates, Spotify’s stock price has more than doubled since the onset of COVID.

Again, Spotify’s success is largely predicated on keeping both royalties and prices low and bargaining for special royalty treatment.  I don’t object to the company’s pricing decisions so much as the complete failure of Spotify to share its success with independent artists who make up a significant amount of its offering but who are doomed to scrap at the decimal point in search of a positive integer.

Instead of launching billion-dollar stock buy-back programs to juice their share price, it would be a simple thing for Spotify to credit the royalty accounts of independent artists and songwriters with a cash infusion not connected to the revenue share deflection.  They have a direct billing relationship with thousands of artists and songwriters and they could simply deposit some thousands in these accounts which overnight would help balance the inequities and also provide an alternative to government support payments.  We have experienced government payments to creators in Austin, and one of the biggest problems was the mechanics of getting the money from the government’s account into the creator’s account. 

Spotify could just do it today as a thank you for doubling the value of their company while artists and songwriters suffered. Or perhaps Daniel Ek could just pay it out of his own pocket since he loves creators so damn much.

Whether it’s driven by the embarrassment of riches or a guilty conscience, the commoditizer’s grand deflection is back. Don’t let them fool you twice.