Spotify's tilted economics are a major problem

The streaming giant's grip on reality slips further, as bold claims by founders that the service can provide liveable incomes for a million artists quickly crack under minor scrutiny. Coronavirus deprives smaller artists of gig incomes, but Spotify won't help either.

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Picture this. An eclectic but vibrant collection of posters plastered on every inch of a record shop you habitually visit. You lose track of time, as you browse through a vast collection of vinyl’s, CDs and tapes, discovering a new world of music- everything from the greatest hits of your childhood to obscure underground music. The record shop experience is not only unique in itself, but immerses you in a sense of community by allowing people to connect with like-minded individuals through the craft of music. Now imagine this experience distilled onto your phone. Over the last decade, the status quo of music distribution has transitioned from record shops and physical points of sale to a streaming landscape dominated by services like Spotify.

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Spotify’s subscriber base has snowballed, reaching a staggering 155 million premium subscribers in 2021, indicating a nine-fold increase since the first quarter of 2015. There is no doubt that Spotify is currently the king of streaming, claiming more than 34% of the online music streaming market share. As any user would agree, Spotify’s music library contains what seems like every record ever made. From a listener’s point of view, the subscription fee is undoubtedly worth the unparalleled convenience of streaming music at the touch of a button. However, do artists share this enthusiasm? Dru Benell, an independent rapper and student musician in Leeds, reveals that, while there are some benefits to being available to Spotify’s subscriber base, the rewards are very limited, particularly for fresh artists.

“It’s better to have your stuff on Spotify, purely from an exposure point of view, and smaller artists still need to be heard by wider audiences. But it’s definitely not going to be where most of your money comes from when you’re starting out as an artist. I don’t think, especially when live gigs aren’t happening, that you could make a living solely on Spotify.”

Dru also revealed that, despite using Spotify as a listener, he strays away from the platform when releasing his own music. Instead, he praises SoundCloud, an online audio distribution platform based in Germany. “I always use Spotify for listening, it’s so convenient, and Soundcloud is a gem for unreleased tracks and things the artist may not have necessarily put on Spotify. I released my tape on Soundcloud mainly because I used a lot of instrumentals off Youtube that I didn’t have the copyright for, so it felt more OK to release on Soundcloud.”

One of the most prominent issues posed to Spotify is how royalties are distributed. Artists featured on the platform are allocated revenue based on a concept called stream-share. Essentially, Spotify takes the total revenue generated in a particular market, for instance, by region, and divides it by the overall number of streams rather than paying artists a fixed amount per stream. This means that Spotify creates a royalty pool and splits the money in proportion to the number of streams an artist receives in a specific market. Loud & Clear, a website launched by the company to provide transparency in their approach to artist compensation, explains this concept.

“So if an artist received one in every 1,000 streams in Mexico on Spotify, they would receive $1 of every $1,000 paid to rights holders from the Mexican royalty pool.”

The concept of stream-share was developed since Premium subscribers pay a monthly subscription fee, rather than pay per stream, making it difficult for Spotify to have absolute values to compensate artists per stream. Interestingly, stream-share is also criticised from a consumer standpoint, particularly by fans who are looking to support a lesser-known or more local artist. Jack Flynn, guitarist for a Sheffield-based reggae band named Rogue Siesta, describes what he believes is a major issue with the current structure of Spotify.

“So essentially a huge percentage of your £9.99 per month subscription fee actually goes to artists that you don’t personally listen to, which I think is INSANE. If I subscribe to Spotify, and play nothing but The Skints, then I want a fair share of my £9.99 to actually go to The Skints and not to Drake!”

Dru Benell also outlines some serious issues with Spotify’s current ideology of maximising profits, characterising the business model as detrimental to smaller artists.

“Spotify won’t pay much because everyone gets the music fairly cheap via subscription. So now, if you drop a song or an album, it’s basically to promote your live shows. With that gone, the way that the music streaming services have made music so cheap, it’s definitely had an impact on artists.”

Spotify’s CEO, Daniel Ek, has bold visions of the heights his company could reach, stating that the service could develop into a global community and allow a million artists to earn a living wage solely from Spotify royalty pay-outs. But when the company’s pay structure and financial activity is analysed, that vision appears disconnected from reality, especially when considering the impact of a pandemic on the live music industry. Independent artists, who cannot rely on money from gigs to sustain themselves, find Spotify equally unhelpful. Given the lack of income from live gigs, should Spotify be doing more for all the artists on its platform? Flynn certainly thinks so.

“I think we would need regular streams in the multi-millions to earn minimum wage for even 3 members of the band, let alone 5. So I don't even consider Spotify as a source of income. Our income all came from gigs and merchandise, which have all dried up.”

Spotify’s problematic compensation schemes are magnified when delving deeper into the figures. The platform hosts, as of 2018, upwards of three million artists , with a substantial number of them being independent musicians like Rogue Siesta. However, it was revealed that roughly 43,000 artists take home nearly 90% of total streaming pay-outs. In a letter to Spotify’s shareholders, Daniel Ek refers to this select group of artists as the ‘top tier’ of Spotify’s creators, who only represent roughly over 1.5% of all artists. Going by figures reported in 2020, the top 1.5% of Spotify’s artists earned £800 million in the last quarter of the year, while those outside the bubble were left with a paltry £162 million shared amongst them. Spotify’s website Loud & Clear states that just 184,500 out of three million artists earned over $1,000 in all of 2020. To make matters seem worse, Spotify reported £6.7 billion generated in total revenue last year.

This clear inequality in royalty distribution at Spotify is reiterated by Jack Flynn, who details how the current payment structure adversely affects independent musicians.

“Changes should absolutely be made. The idea that there is no money in the music industry is a total myth. There is a lot of money changing hands over at Spotify HQ and sadly almost none of it is going to the independent artist, but is instead being hoovered up by the top acts in the platform.”

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The current system works out well if you’ve reached world-shattering levels of fame like The Weeknd, Drake or Justin Bieber have, and consistently hit streaming numbers in the millions. But lesser-known artists on Spotify find themselves overlooked when payday comes around, and many do not even consider the biggest streaming service in the world as a feasible way to make a living. Another important thing to note is the role of music distribution, particularly the fact that Spotify does not accept music directly from the artist, and chooses to operate via a third-party distributor. Dru Benell shares his thoughts on the complexities of even getting onto Spotify as an artist in the first place, and how that affects lesser-known artists.

“Unless you’re quite a large artist already, you’re not going to make much revenue from being on Spotify. I’ve been learning about it recently and it comes down to how the major labels who represent the bigger artists can go straight to Spotify and kind of bully them into giving their artists a good deal, leaving smaller artists in the dust. If you’re a smaller artist you’ve got to use online, third-party companies that will distribute your music for you but probably won’t be able to get you as good a pay-out deal as the labels do for major artists. You’ve just got to make do with what you’re given essentially which is not much.”

This issue is not new, and has been discussed before. Famously, in December 2019, Digital Media News reported cellist Zoe Keating shared her royalty statements displaying a paltry $753 for more than 200,000 streams and a gross income of $5000 from her last five years of releases. Bearing in mind that Spotify’s total revenues, subscriber base and net users have steadily increased, royalties paid to artists have declined. This is among a plethora of indicators that Spotify’s ambitions of allowing artists to make a living off the platform are a long way from being realised. The composition of Spotify’s compensation scheme and intrinsic inequalities in its distribution hold the service back in a major way, and people are beginning to notice. Flynn gives us his take on how to support lesser-known musicians, who are currently struggling to sustain a living off Spotify pay-outs alone.

“The system is broken and needs to change. I totally understand the convenient consumer appeal of Spotify and I am a user myself, but the least we can do is make people aware of the gross inequality. If they want to support a band, go to a show or buy some merch, and you can make a massive impact on that band’s ability to continue creating music.”

For fans looking to support more obscure artists, platforms like Bandcamp are far more artist friendly and offer a much more generous financial structure. Bandcamp and Spotify are similar in theory but wildly different in execution. A significant difference between the two is that Spotify is a streaming service, which inherently results in a twisted economy, whereas Bandcamp is an online music retailer. The online store may seem like an outdated concept when directly compared with streaming, but Bandcamp’s focus on supporting artists allows creators a freedom and ease that simply cannot be matched by popular streaming companies. Such online music retailers have quickly made a niche market for themselves, resulting in slow but steady growth for the past decade.

Spotify’s streaming economy appears increasingly convoluted and royalty payment structures are shrouded in mystery, often confusing and disappointing creators on the platform. Bandcamp operates with an ‘artist-first’ philosophy, aiming for a more transparent approach that benefits creators on the platform. In an interview with NPR, Bandcamp CEO Ethan Diamond detailed how he, and by extension the company, believed in fair compensation for artists.

Overall, Bandcamp is open to anyone and everyone, creating an environment where talent can shine, and gives artists much more of a say in how much they get paid, usually only taking a 15% cut of sales revenue. Bandcamp is the clear opposite of Spotify’s business first model, evidenced by a number of factors. For instance, Spotify pays a tremendous 52% share of net revenue to five major labels that represent artists in the ‘top tier’, eating into money that could and probably should be going to the other three million artists on the service. The inequalities of stream-share result in a skewed economy, built to favour pop-stars. Spotify’s editorial content has also become an issue, as the service consistently promotes playlists curated by Spotify staff, often giving very little attention to more unknown artists.

Photo by Omid Armin on Unsplash

Services like Spotify, at first glance, appear to be the face of the future. In essence, such a widely available and versatile platform should make it easier than ever for musicians to get noticed and make a profession out of their talent. But in practice, Spotify has done little for smaller artists across the world, and cannot conceivably say it’s a viable form of income for the majority within the music industry. On the other hand, Bandcamp and other similar platforms have cultivated an atmosphere of freedom, opportunity and transparency, opting to support a burgeoning artistic community - a stark contrast to Spotify’s intricate labyrinth of hurdles preventing smaller artists from blooming. Even throughout an unprecedented global pandemic, Bandcamp has remained true to its values and provided a much needed relief for creative communities. Bandcamp is, in essence, a record shop for the 21st century. The experience of connecting with people over music and discovering new sounds and bands still perseveres, and fans get the satisfaction of truly helping to sustain and support an artist they like. The connection between artists and their fans is tangible, it is real and lasting, which, after all, is what music is all about.