How is Spotify contributing to the music business?

It all used to be so simple. People would hear a tune they liked on the radio, then go to a shop and buy the physical recording of it. Over the past few decades, this simple standard has fragmented into a diversity of consumption activities, from piracy and iTunes downloading to on-demand streaming from YouTube and others. Unfortunately, the majority of music consumption today generates little to no money for artists. We are working hard to fix this, and are proud to offer music fans a legal and paid service capable of generating for artists the royalties that they deserve.

By bringing listeners into our free, ad-supported tier, we migrate them away from piracy and less monetised platforms and allow them to generate far greater royalties than they were before. Once they are using our free tier, we drive users to our premium subscription tier, at least doubling the amount that they spend on music, from less than $5 per month (the average spent by download consumers in The US) to $9.99 per month for Spotify.

We have succeeded in growing revenues for artists and labels in every country where we operate, and have now paid out over $1 Billion USD in royalties to-date ($500 million of which we paid in 2013 alone). We have proudly achieved these payouts despite having relatively few users compared to radio, iTunes or Pandora, and as we continue to grow we expect that we will generate many billions more in royalties!

The chart below shows the decline in the recorded music industry since 1997. Whilst the growth of digital downloads has replaced some of this value, the majority of revenue in the industry has evaporated. This rapid decline is not due to a fall in music consumption but to a shift in music listening behavior towards formats that do not generate significant income for artists. 

The decline in the recorded music industry over the last 15 years. Digital downloads have not been able to make up for the decrease in physical sales. Spotify is attempting to restore much of the lost value by convincing music fans to pay for music once again.

The decline in the recorded music industry over the last 15 years. Digital downloads have not been able to make up for the decrease in physical sales. Spotify is attempting to restore much of the lost value by convincing music fans to pay for music once again.

Spotify’s model aims to regenerate this lost value by converting music fans from these poorly monetized formats to our paid streaming format, which produces far more value per listener. The chart below shows the money a Spotify Premium customer spends per year compared to the average spend of a US music consumer who buys music (not including those who spend $0 on music).

*According to Russ Crupnick of NPD Group, a respected music consultancy, of the U.S. Internet population of 190 million, only 45% buy music of any form. What’s more notable is that the average annual spend of that minority is only $55.45.

*According to Russ Crupnick of NPD Group, a respected music consultancy, of the U.S. Internet population of 190 million, only 45% buy music of any form. The average annual spend of that minority is only $55.45.

A Spotify Premium user delivers more than 2 x the amount of revenue to the industry (per year) as the average US music consumer currently does. Spotify’s goal is to convince millions of people around the world to become Premium subscribers and by doing so to re-grow the music industry. The next section shows Spotify’s progress in achieving this so far. 

Spotify’s progress so far

Spotify has already made considerable progress towards restoring the value lost to piracy and other less well monetized forms of music consumption. As of March 2013, Spotify had over 24 million global users. 18 million of them were using our free tier, wherein listeners pay for their consumption by viewing and listening to advertisements. At that time, as well, more than 6 million users were paying a $9.99 / £9.99 / €9.99 monthly subscription to use Spotify’s Premium tier.

The chart below shows Spotify’s rapid user growth over the past few years:

This chart shows Spotify's user growth per year since launch. The darker green shows the proportion of those users that are paying subscribers.

This chart shows Spotify’s user growth per year since launch. The darker green shows the proportion of those users that are paying subscribers.

The important fact to note is that for every new Spotify user, we increase the amount of revenue we receive and, in turn, the amount of royalties we pay out to the industry (see section below on how Spotify’s royalties relate to revenues). The chart below shows how our user growth has resulted in rapid year-on-year growth in the amount of money Spotify pays out in royalties.  

Total Annual Royalty Pay Out

This chart shows Spotify’s total royalty payments per year. To-date, we have paid out over $1bn in royalties, with $500m of those paid in 2013 alone.

In addition to increasing the royalties Spotify contributes to the industry, we’ve also successfully grown the amount of money each of our users is worth. By 2013, the amount of money we earn per user (average revenue per user) has grown to $41 per year. This is an average between our premium users who spend $120 per year and our free users who pay for their consumption by viewing and listening to advertising.

The average amount of money spent by US adults on music is $25, whereas the average Spotify user is worth $41 (our total revenue divided by our total # of users). Simply put, a Spotify customer is 1.6x more financially valuable than the average adult non-Spotify US music consumer. 

The green bar on this chart shows the amount of revenue generated for the music industry per Spotify user, including our free users. The dark bar shows the revenue generated by an average US internet adult taking into account that 1 in 3 adults spend $0 per year on music.

The green bar on this chart shows the amount of revenue generated per Spotify user, including our free users. The dark bar shows the revenue generated by an average US internet adult taking into account that 1 in 3 adults spend $0 per year on music.

All this being said, Spotify still has tremendous room to grow. In December 2013 Spotify launched in over 20 new markets, taking the total number of countries where Spotify is available to 55. In 2014, we plan to continue this rapid expansion around the world and this will help us add millions more users quickly and in turn enable us to pay even more out in royalties. This international growth will augment the already rapid growth in our existing markets. 

Green indicates where Spotify is available

Green indicates where Spotify is available

How does Spotify make money?

Spotify makes money from two sources: a free tier supported by advertising and a paid subscription premium tier.

Free tiers:

Spotify has two tiers which are free to use: one for desktop and tablet computers and one for mobile.

The desktop and tablet free tier allows users to play any song in our catalog on-demand but users must view and listen to advertisements that interrupt their listening. 

Users on our mobile (smartphone) free tier can only play music in “Shuffle mode”. They can not play songs on-demand or offline and face a number of other restrictions including limited song skips as well as being interrupted by advertising. For more information on our mobile free tier, please see this blog post.

Advertisers pay Spotify for exposure to users on our free tiers and in-turn fund the royalties that Spotify pays out for listening that occurs in these tiers. 

Premium tier:

Spotify’s Premium tier gives users unlimited music across all of their devices including smartphones, tablets and TVs. Users can also temporarily download songs to their devices for listening on subways or airplanes, play music at the highest quality and they are never shown advertisements. This tier costs $9.99 per month.

Revenue:

Spotify’s total revenue comprises money received from advertising on the free tier and subscription payments on the premium tier.

How we pay royalties: an overview

Spotify pays royalties for all of the listening that occurs on our service by distributing nearly 70% of all the revenues that we receive back to rights holders. By “rights holders,” we are referring to the owners of the music that is on Spotify: labels, publishers, distributors, and, through certain digital distributors, independent artists themselves. How does this work? Below is an overview of the royalty system Spotify employs. Please also see the next section for additional detail.

We pay out nearly 70% of our total revenue to rights holders. We retain approximately 30%:

~ Approaching 70%. See next section for more detail.

~ Approaching 70%. See next section for more detail.

That 70% is split amongst the rights holders in accordance with the popularity of their music on the service. The label or publisher then divides these royalties and accounts to each artist depending on their individual deals.

When we pay a rights holder, we provide all the information needed to attribute royalties to each of their artists. 

Royalties: in detail

The formula below explains the Spotify royalty system in more detail:

See below for explanations of each item.

See below for explanations of each item.

1. Spotify Monthly Revenue

The total revenue Spotify makes in a given month from advertising and subscriptions as explained above. This varies from country to country depending on a range of factors including how many users we have in that country, how many of them are premium subscribers and how much advertising we sell in that country.

2. Artist’s Spotify streams divided by total Spotify streams

This calculates an artist’s popularity on the service, their “market share.” Dividing an artist’s streams by the total streams on Spotify determines the percentage of our total pay-outs that should be paid for that artist’s rights.

3. Royalties paid to master and publishing owners

Spotify negotiates our royalty economics with labels and publishers in each territory where we operate. Our current payment agreements lead us to distribute (~)approximately 70% of our gross revenues to master recording and publishing rights (both mechanical reproduction and performance) holders. The precise division between these types of rights holders varies by territory in accordance with local laws and negotiated agreements. In the United States, for example, statutes dictate that publishers receive ~21% the amount that master recording owners receive.

4. Artist’s royalty rate

Once Spotify has paid a rights owner the total royalties due for their accumulated streams, that label or publisher pays each artist according to that artist’s contractual royalty rates. This will likely also take into account other factors including recoupment status, which is one reason that different artists in different deals might ultimately receive different royalties from their respective labels and publishers.

Independent artists can retain up to 100% of their royalty payouts from Spotify by using one of our aggregator partners (a small fee may apply). Click here for a list of these partners.

5. Artist Pay Out

The end royalty paid out to the artist after the rights holder royalty split and any other deductions have been applied.

Wait, I thought Spotify paid per stream?

The real measure of Spotify’s success is our progress in 1) convincing music fans around the World to pay for music again (by converting millions of pirates into monetized users on our platform), and 2) increasing the total money spent by paying listeners by graduating them to a much more valuable form of consumption (away from free listening on YouTube and other services to Spotify – see the chart on relative payments above).

Every time somebody listens to a song on Spotify it generates payments, but Spotify does not calculate royalties based upon a fixed “per play” rate. Although much public discussion of Spotify has speculated about such a rate, our payouts for individual artists have grown tremendously over time as a result of our user growth, and they will continue to do so.

The royalties artists see on their royalty statements derive from the formula above on a country-by-country basis, and depend upon the many moving variables specified in the formula. Of course, it is possible to reverse engineer an effective “per stream” average by dividing one’s royalties by the number of plays that generated them, but this is not how we measure our payouts internally nor is it a reliable yardstick for Spotify’s value to artists.

 An artist’s royalty payments depend on the following variables, among others:

 • In which country people are streaming an artist’s music

 • Spotify’s # of paid users as a % of total users; higher % paid, higher “per stream” rate

 • Relative premium pricing and currency value in different countries

 • An artist’s royalty rate

Recently, these variables have led to an average “per stream” payout to rights holders of between $0.006 and $0.0084. This combines activity across our tiers of service. The effective average “per stream” payout generated by our Premium subscribers is considerably higher.

Again, we personally view “per stream” metrics as a highly flawed indication of our value to artists for several reasons. For one, our growing user population might listen to more music in a given month than the month before (resulting in a lower effective “per stream”), while generating far more aggregate royalties for artists. As with any subscription service, our primary goal is to attract and retain as many paying subscribers as we possibly can, and to pass along greater and greater royalties to the creators of the music in our service. Theoretically, another service could generate higher effective “per stream” payouts simply by having users who listen to far less music. We believe, however, that our service and the lives of artists will both be best if the World’s music fans enjoy more music than ever before in a legal, paid manner.

Specific payment figures

How does all of this work out in practice? The chart below shows actual royalty payments for a range of albums for the month of July 2013. We have replaced the names of the artists with descriptions to illustrate their scale.

This chart shows actual, but anonymised, album royalty payments for the month of July 2013.

This chart shows actual, but anonymised, album royalty payments for the month of July 2013.

The bars and $USD figures are the total royalties paid out to rights holders in July for actual albums on Spotify. Current monthly royalty payments for the #1 album on Spotify are upwards of $400k.

But even though we are currently generating millions of dollars in royalties for rights holders for the top artists each year, we’re just getting started and expect to earn artists and rights holders far more as we grow our user base. The chart below projects future Spotify royalties based on our current growth trajectory. 

Projected Future Album Royalties

This chart shows the actual royalties we paid out for albums of different scale in July 2013 Vs the royalties we expect to pay out per month for these same rights holders when we reach a similar scale to Spotify’s most mature markets.

The rapid increase in the overall royalties we pay out results in rapidly increasing individual rights holder and artist payouts, as well. The graph below shows actual annual royalty payouts for a current global star (we have removed the artist’s name) for the last 2 years, and projected payouts for 2 years into the future. In the last 12 months we have paid out over $3 million annually to rights holders for this artist; by this time next year we expect to be paying out over $6 million annually to rights holders for this artist and other artists of similar size. It is also worth noting that this particular artist is not the most played artist on Spotify in 2013 either, there are other artists who have been paid out more than $3m in 2013 alone.

This chart shows Spotify's growth in royalty payouts. The values represent actual royalty payouts for a single global star artist as well as projected payouts into the future based on current growth rates.

This chart shows Spotify’s growth in royalty payments. These figures are actual figures Spotify has paid out to rights holders for one of the top artists on Spotify as well as projected payouts into the future for that same artist based on current growth rates.

Spotify relative to other services

Spotify is one of the most effective ways to monetize access to music. In addition to encouraging consumers to pay for music again, our rates are higher than many alternative services.

The chart below shows the royalties Spotify pay to rights holders for every 1 million listens of an artist’s music:

The chart shows total royalty payments, including publishing, per 1 million listens on Spotify and a range of other services.

The chart shows total royalty payments, including publishing, per 1 million listens on Spotify and a range of other services.

 

Spotify is paying artists more than 2x the amount that popular video services are paying out (supported by advertising) and significantly more than both online and terrestrial radio services. 

Spotify is still a relatively small service, with only 24 million users around the World. By contrast, YouTube has 1B users and iTunes has over 575 million users, only about 75 million of whom pay for music. iTunes is also the preferred tool for listening to pirated music, which generates nothing for artists. When Spotify grows to even a fraction of the size of these services, for example to 140 million total users and 40 million paying subscribers, we will increase our total payouts by 5x.

Spotify’s high royalty payments in comparison to these other services means that if all of this streaming activity (from video and radio services) was through Spotify instead, then the amount of royalties generated in the US by streaming activity would more than double from $530m in 2013 (actual streaming royalties across all services) to $1.3bn (if all streaming occurred on Spotify). 

Value of Streaming

Spotify’s impact on piracy

Spotify was designed from the ground up to combat piracy. Founded in Sweden, the home of The Pirate Bay, we believed that if we could build a service which was better than piracy, then we could convince people to stop illegal file-sharing, and start consuming music legally again.

A key part of this has been in ensuring that Spotify has a free tier. By offering this free tier, Spotify is able to compete with piracy on cost and bring music consumers into the legal framework. From there, Spotify does a very effective job at converting those users into Premium subscribers.

This theory that ‘given a free and legal alternative, people will pirate less’ has been proven over the last 5 years with significant reductions in piracy across the territories where Spotify is established.

This chart shows the % of each age group choose to pirate less content when given a free and legal alternative. Source: Columbia University Copyright Infringement and Enforcement in the US.

This chart shows the % of each age group who choose to pirate less content when given a free and legal alternative. Source: Columbia University Copyright Infringement and Enforcement in the US.

The chart above illustrates a key challenge in the modern music industry: young people and teenagers are the most likely age groups to pirate content and are also the least likely to pay for a music service. Spotify has been successful in convincing this younger generation to abandon piracy and begin using and paying for a legal service. In fact, over 50% of Spotify’s paying subscribers are under the age of 29.

How has Spotify impacted music piracy in the real world? There have been a number of independent studies into the impact that Spotify and similar legal services have had on piracy. Below are some of the findings and links to the original reports (some reports are not in English):

Sweden

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‘Music Sweden: File Sharing & Download, 2011 Q2’ showed that the number of people who pirated music fell by 25 percent in Sweden between 2009 and 2011.

Denmark

Denmark Flag 

In 2013, the Danish IFPI published research headlined: ‘Streaming services are a pirate killer’. The key finding was that 48% of the users on legal streaming services have previously downloaded illegally, and 81% of them say that they have now stopped.

Norway 

Norway Flag

In Norway, which continues to have the highest digital revenues per capita in the world, a recent IPSOS report showed that in 2008 almost 1.2 billion songs were copied without permission. However, by 2012 that figure had plummeted to 210 million, just one fifth of its level four years earlier.

U.S.A

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In the United States, Sandvine’s most recent Global Internet Phenomena Report states that P2P Filesharing now accounts for less than 10% of total daily traffic in North America. The report also notes that ‘filesharing continues to disappear from many fixed access networks across the globe as Real-Time Entertainment options [like Spotify] are providing subscribers a wealth of content at reasonable prices’. 

U.K.

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The UK regulator Ofcom completed their Copyright Infringement Tracker, Wave 4, in September 2013. Their key finding: of all digital music consumers, three quarters were legal only; just one seventh illegal only and a eighth were a combination of both. 

Netherlands

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In August 2013 Spotify published its own peer-reviewed work entitled Adventures in the Netherlands, which reported an encouraging downward trend in piracy as well as a long tail effect where the hardcore 10 percent of pirates took over half the music files whereas half of the pirate population took three files or less all year.