The New Pirates of the Music Business

Musicians will have to hack the system in order to survive this new streaming paradigm.

Spotify went IPO. The streaming music giant’s initial public offering gave it a market valuation of $26.6 billion for a company that never had a profitable year since its foundation. Far from that, Spotify operation losses increase every year.

As the chart points out, cost of revenue consists primarily of royalties, consuming more than three-fourths of Spotify revenues. That explain, for the most part, why the company net loss more than doubled from 2016 to 2017. The strategy of renegotiating deals with record labels to cut its losses is already backfiring. The business model is broken because, for the audience to be happy, subscription prices must be very low or freemium but, for artists to make any money, subscription fees must go UP to the ceiling. Someone must be charged for those deals between Spotify and the big three Recording Companies and, this time, musicians are paying that bill more than ever.

In December 2016, to earn $100 from ad-supported streams, a song would need to be played 448,672 times. Spotify paid out $0.00022288. Yet, just one month later, the number dropped down to $0.00013508. To earn $100 from ad-supporter streams, a song would have to be played 740,302 times.

Piracy has been institutionalized by streaming and recording companies. In the past, piracy was just taking money out of the market, no one was making big bucks because of it. In other words, a teenager sharing music from its computer through Napster was not making any money, just preventing musicians and record labels to make more or any. Now, someone is taking $0.99977712 per stream from this ad-supported revenue out of the musicians pockets. For every $100,00 that a musician makes out of ad-supported streaming, the middleman makes $730.000,00. In the old days, musicians made 10 to 20% of album sales, depending on the contract after deducing the investments made to record and promote the album. That was already far from being fair but, at least, it was easy to understand and plan for. Now, 0.013% per stream is not OK at all and, as data show, this number is always changing for less as new deals with Labels are being made along the way. Although payed subscriptions usually return more money to artists and Labels -- the average return per play, including add-supported and subscription, goes to 0.00397 (~0.4% per stream) for Spotify -- video streaming services like YouTube are a living proof that the future for streaming is to be freemium and add supported only.

So, if the future of streaming is Freemium and the biggest and fastest growing Music Stream company cannot find a formula to be profitable, how in heavens this company with a broken business model in this scenario has a market value of $26,6 billion dollars? A bubble, maybe? Well, only time will answer that. One thing is for sure though, musicians must find workarounds to deal with that scenario. Recorded music is only profitable when musicians do things the old way by selling hardware (CD, Vinyl, mugs, Shirts, etc) directly to their audience, cutting out the middleman, throughout channels created because of the relationship with the communities they are in.

The next big company in the music industry will be one that explores this workarounds and community driven cooperation alongside artists. The good news is that while every one else is inflating the streaming paradigm, this other market is here for the taking!