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Spotify Shouldn't Explain Itself

The Swedish startup didn't do itself any favors by disclosing what it pays for streamed music.
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In her memoir, I Feel Bad About My Neck, the inimitable Nora Ephron likens the thought of death to "considering the alternative." Sure, your skin is sagging and your bones are about to break, but hey. Consider the alternative.

In a post published Tuesday putting its own business practices under the microscope, music streaming service Spotify sent musicians a similar message. "At least you’re earning a penny for each song you write," the authors seemed to suggest. "Would you get that from piracy or iTunes?" 

The answer is probably not, but neither musicians nor venture capitalists are impressed at this point. The fact of the matter, says David Pakman, a VC and the former CEO of eMusic, is that there’s been "a pretty dismal track record of investors betting on digital music companies." Pakman called Spotify’s recent $4 billion funding announcement a "flat round," or sign that the company’s growth had stagnated. 

In terms of investment dollars, the category is small and venture capitalists are far less interested in companies like Spotify than they are about unsexy but lucrative business-to-business start-ups, for example. "It’s a sector that the majority of investors avoid," says Pakman of the streaming music business.

In opening up the kimono, Spotify made itself look worse in the eyes of artists-slash-royalty advocates like Radiohead frontman Thom Yorke by revealing it only pays between $0.006 and $0.0084 per song to rights holders. At the same time, it underscored that its business model--in which it pays 70 percent of its revenue to rights holders--still isn’t working

On one hand, Spotify claims the aim of its model is to "regenerate" lost value to the music business by "converting music fans from poorly monetized formats to our paid streaming format, which produces far more value per listener." Whereas the average music listener only spends $55 per year, argues Spotify, premium subscribers in the U.S. spend $120 per year.

But with 24 million users globally, Spotify doesn’t quite stack up against heavyweights like YouTube, which has some 1 billion users, and Apple’s iTunes, which has almost 600 million users. And getting its current users to pay more for its content will be hard to pull off. In fact, in order for it to grow, says Pakman, "Spotify needs to charge far less than $10 per month," especially in developing markets like Maylasia, Mexico, China, and Signapore. 

Meanwhile for artists, the company's launch of a webpage called Spotify Artists Tuesday--though easy on the eyes and generally helpful in terms of orienting artists to the service--likely did little to allay concerns over compensation.

In fact, it feels a little too late. Although it's heartening to see Spotify trying to improve its relationships with artists after founder Daniel Ek expressed disappointment with their dismissal of the service, many will find it hard to get behind the story that they're being paid fractions of a penny every time their song's played.  

Last updated: Dec 4, 2013

JILL KRASNY | Staff Writer

Jill Krasny is a staff writer for Inc. magazine, where she covers the intersection of entertainment and startups. Prior to Inc., she was a writer for MTV and Esquire and an editor at TheStreet. She is a graduate of the University of Southern California with a degree in communication. She lives in New York City.




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