Is Spotify Really Sustainable? Is a ‘Family Plan’ Option Even a Reasonable Expectation?

I went into this piece with the assumption that Spotify needs a family subscription option, but with massive annual losses and allegations of paltry payouts, can the company afford it?

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I went into this piece with the assumption that Spotify needs a family subscription option — a way to add other household family members to a Spotify Premium account without paying the full $10 a month extra the company currently charges everyone.

In my family of two actively listening adults (our child is less than a year old), both my wife and I use Spotify on our computers and smartphones. Since we’ve chosen to share a single account, she has to sign in with my info. When she’s listening, I can’t, and vice versa (whoever’s clicked “play” last knocks the other off).

I’ve recently come up with a workaround William Golding could get behind: She gets to hold the conch, I get to hold…well, an external hard drive loaded with my own music. It gets the job done until I need to go for a run, or run an errand, at which point I’m back to curating tracks from my library to play on my space-limited smartphone.

A family option would be helpful here, say $5 for each additional account, or just a lump monthly sum for a given number of simultaneous streams. Microsoft offers something like the latter with its Xbox LIVE game service, for instance, selling four memberships in a “family pack” for the price of two. And music streamer Rdio, which, like Spotify, also charges $10 a month for unlimited streaming, already offers family options: $18 a month for two accounts or $23 a month for three.

Earlier this year, Spotify chief content officer Ken Parks reportedly told The Verge that family plans were “definitely coming.” Great! Except that’s all he said — no timeframe. We’ve heard nothing since. Which, since we’re closing out 2012, had me well and ready to scribble a piece titled something like “Get the lead out, Spotify!”

And then I read this streaming music royalties breakout piece at Pitchfork by Galaxie 500 and Damon and Naomi drummer Damon Krukowski. In it, Krukowski lays out how royalty payments through services like Pandora and Spotify work, each service based on a pay-for-plays model. He divulges actual figures, and it’s not a pretty picture, at least not for Krukowski and his bandmates.

“[The] music industry seems to have done everything it could to screw up that simple model of exchange,” he writes, referring to the relationship between artists and consumers. “[Today] it is no longer possible for most of us to earn even a modest wage through our recordings.”

Here’s Krukowski’s prime example:

My BMI royalty check arrived recently, reporting songwriting earnings from the first quarter of 2012, and I was glad to see that our music is being listened to via these services. Galaxie 500’s “Tugboat”, for example, was played 7,800 times on Pandora that quarter, for which its three songwriters were paid a collective total of 21 cents, or seven cents each. Spotify pays better: For the 5,960 times “Tugboat” was played there, Galaxie 500’s songwriters went collectively into triple digits: $1.05 (35 cents each).

To put this into perspective: Since we own our own recordings, by my calculation it would take songwriting royalties for roughly 312,000 plays on Pandora to earn us the profit of one — one — LP sale. (On Spotify, one LP is equivalent to 47,680 plays.)

Spotify’s per-play rate, according to Krukowski, is $0.004611 — roughly five-one-thousandths of a buck paid out each time someone plays a Spotify song.

Krukowski’s point seems less to gripe about his and his bandmates’ plight, than to illustrate how services like Spotify and Pandora — instead of being the digital captains of a metamorphosed music industry that more fairly remunerates its artists (the ideal, anyway) — seem more like creatively divorced venture capital companies, and that music in their model is “just another form of information, the same as any other that might entice us to click a link or a buy button on a stock exchange.” He indicates that Spotify has been hemorrhaging cash faster than Justin Bieber, Gotye and Adele sell albums — in 2011, the company’s net losses soared to $56.6 million, up from $37.2 million in 2010. To Krukowski, Spotify and its ilk exist purely “to attract speculative capital.”

Follow Krukowski’s piece with a quick read of Nashville-based label Thirty Tigers’s president David Macias’ partial rebuttal and you’ll find a wildly different, surprisingly detailed insider-y explainer piece. Macias corrects Krukowski’s math (I’ve listed it correctly above), then goes on to break out how Spotify splits the $10 those of us with premium subscriptions pay monthly: $6 to the recording owner, $1 to the publishing copyright holder and $3 for itself.

That’s more or less Apple‘s iTunes model, says Macias, and so he argues that “the economics of Spotify conform to the economics that have existed in the music business for some time.”

He appears to be correct. According to this InvestingAnswers piece, “In the popular digital realm, a $9.99 download on a program like iTunes nets artists a modest 94 cents — less than a 10% cut. The record company takes $5.35 and Apple keeps the remaining $3.70.” And if you look at the traditional label-based relationship, the artist’s cut is essentially the same: “Every contract is different, but the average high-end royalty deal with a record company will pay musicians $1 for every $10 retail album sale.”

So about 10%, whether you’re dealing with a label based on physical media sales, or selling your music through a digital storefront like iTunes.

In case you’re thinking Macias sounds like an industry apologist:

My defense of the music business stops (maybe) at the financial relationship between artists and traditional record labels … the reason the amount of money on [a band’s] royalty statement, as it pertains to Spotify, might look so small could have to do with the split of money between their label and the band. Even that can be defended, given that labels often provide all of the risk capital, but just because an act isn’t getting paid by their label, doesn’t mean that Spotify isn’t paying the owner of the recording a just amount. Many acts that own their recordings are, in fact, making money.

I’m not sure who’s more right here in terms of the anecdotal data — Macias’ arguments, which cover more ground and jibe with other data sources, ring truer.

But speaking strictly as a Spotify user, and jumping back to my original point about consumer-angled conveniences like a family subscription option — a perk for families, sure, but a potential loss leader for Spotify to the extent it knocks back revenues from families currently paying for multiple subscriptions — I’d almost rather see Spotify figure out how to make a reasonable profit first and offer better per-play-rates to bands (whether directly or via label arrangements), than see the company gouge itself further. When Spotify’s CEO Daniel Elk says “The question of when we’ll be profitable actually feels irrelevant. Our focus is all on growth. That is priority one, two, three, four and five,” you can’t help but worry things are going to get worse for artists before they get better.

Put another way, I’d actually be willing to pay more, if that’s what it takes, to see Spotify swimming sooner, and the payment model improved for artists. (Consider for just a moment how much you pay a month for an entry-level cable television package, then — depending how many hours in a day you listen to music — think about how much more you’re getting, on demand, from a service like Spotify. Spotify supposedly had over 18 million songs in its catalogue, as of July 2011.)

Or maybe I’m wrong, and a family subscription option would increase the number of Spotify users, assuming more of the market looks like my household, i.e. one account shared, intermittently (no simultaneous playback), among multiple users. If that’s the case, and I assume Spotify’s done or is currently doing the demographic research to determine this, then by all means, bring it on.

In any case, I’m sympathetic with Krukowski. “The music business is a harder slog than it used to be,” writes Macias. It surely is. I have several close personal friends who’ve been slogging to make ends meet in it all their lives.