Tech Brew Ride Home - The Economics of Spotify With Victor Luckerson of @ringer

Episode Date: February 10, 2019

Remember this longread piece? Is Spotify’s Model Wiping Out Music’s Middle Class? It's stuck with me because, a) I didn't quite understand how the math worked out and b) I thought it was an interesting take on the ARTIST side of the equation as we move to a streaming/subscription/one-app-for-that future. So, we're talking to the author of the piece, Victor Luckerson, for more insight. Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another bonus episode of the tech meme right home. I'm Brian McCullough. Do you remember that piece that I did?

It might have been a long read. It might not have been about the economics of Spotify and music streaming generally and how the way things are structured right now, there's no way for a, quote, middle class artist to thrive. If you pay your $10 a month to Spotify, some percentage of that is going to Justin Bieber, whether you listen to him or not. that piece really stuck with me because of the implications it had for artists generally as we moved to this subscription for Everything Future.

So I called up the ringers Victor Luckerson, who wrote the piece to talk about this, because there are a lot of reasons why the current model could and should be improved. Aside from the economics, there are also questions of play fraud and even how music itself might be getting warped by these incentives. But first, okay, let's talk about the economics of music streaming with The Ringers Victor Luckerson. This piece that you did, I think I did it on the show a couple weeks ago, about the basic economics of Spotify, really stuck in my head. Let's stick with the basics in terms of, as you say in the piece, I think I knew this, but I think most people are surprised about how Spotify actually works in terms of, as you say in the piece, I think I knew this, but I think most people are surprised about how Spotify actually works in terms of, of how artists get paid. So let's do basics first.

If I pay my $10 or whatever a month, and over the course of that month, I only play, say, Morrissey songs or something. My whole $10 or even whatever, the percentage of it, it doesn't all go to Morrissey, right? Yeah, that's right. So first off, the artists are going to get about 70% of it $10, but it's not necessarily going to be for the people that you listen to

because Spotify essentially puts all the streams of everybody into one big pot and then the artists get their share of the total streams. So if you listen to Spotify a lot during the course of a month, then you're going to be contributing more money to artists than other subscribers. You don't use the service as often as you do. Well, that's the other wrinkle of it. So if I pay, if I listen, not at all, not even a second, but I'm still paying my $10.

So then the $10, how does that get divvied up? So that $10, or sorry, the $7 after Spotify's cut, that gets divvied up based on the most popular streams that month? That's exactly right. So really your $10 is going to a gigantic pot of money for all of the artists. And then whether you listen to a single song or not, somebody's still going to get that money. So that's going to make it so the artists who are able to attract the most,

repeat streams again and again, I'm going to be making more money than artists who don't get as many streams, sort of regardless of whether or not people like either artists more, basically. Right. So even if I've never listened to Justin Bieber in my life, every month, chances are some pennies of mine are going to Justin Bieber. That is very, very likely, because he's really good at getting a lot of streams on Spotify. Yeah, actually, we're going to come to that in a second. So in your piece, you spoke to one of these, what you call middle class artists that is very vocal about how this sort of economics is unfair to what you termed as, you know, the musical middle class. I think we're familiar with the idea, because we've seen headlines for years. This artist said that, you know, she, there were two million streams for a combined total of 190,000 hours.

And she only received $12,000 or about a half a penny of stream. I think we understand that. But how does, if she's describing herself as a middle class musical artist, how is that harming her in the sense that she's not getting a big enough slice of the pie? Yeah, that's kind of the idea. For somebody like Zoe Keating, who is this avant-garde cellist who is in Vermont, she might have fans who don't necessarily stream her songs on repeat as often. She's creating these sort of like moody instrumentals that you're not going to necessarily play a lot of necessarily play like the late Justin Bieber pop song, for example. The songs are also longer. Her songs are like five to seven, maybe eight minutes long. So just the fact that takes you twice a long to play the song means she's getting half as much money essentially as you would. if you play the Bieber song twice. So there's a lot of different factors that sort of make it so that it's likely that if we were going to a different model

where my money went to the only arts that I listened to, she could very well end up better off. Right, so describe that model. I believe a couple maybe overseas streaming services have moved to this model, but basically it would be almost exactly what we're describing where if I listen to only Morrissey,

only Morrissey gets my $7? That's exactly right. So right now, they need to catch your term for it, but right now the industry is calling this the user-centric model. And the idea is just what you said, that my $10 per month would be distributed among only the artists that I listen to. So essentially, Spotify or whatever service would sort of keep track of your royalties going to each individual artist instead of having a gigantic royalty pool

that the artists all pull from. Do we know why originally in streaming it was this model where it's only, you're only counting streams as opposed to that divving up the money in this user-friendly way? I'm not exactly sure. I mean, the way it currently is much simpler for Spotify because if we go to the user-centric model, they sort of have to track a different royalty output for each individual user and each individual artist, whereas right now they only have to do that for the artists. So I think one thing it might have been a much simpler proposition logistically with the current model. And Spotify actually claims that there would be so much of a burden to switch into this model in terms of the logistics, that the money they would have to spend on that would lower the amount of money they were able to give out. So then middle class artists might not end up making any more money anyway.

Well, and as you alluded to in the piece, I personally call BS on that because the ability to do, analytics on these platforms, the idea that they couldn't keep track and slice and dice the data that granularly is complete BS to me. And then also in your piece, you pointed out that they're able to, at their year end, sort of like, this is what happened on Spotify over the course of the year, they're able to give you that data if they want to. Right, right. Yeah, actually, Zoe Keating used to work in Teggan, San Francisco before she became a full-time musician and her response was that's kind of what computers are for to you had to calculate these kind of things. So I think I definitely agree that if they really wanted to, they could.

And the fact that other services are considering it are planning to implement, means it definitely something that's technically feasible. And to be clear, do we know that all of the streaming services, they all use the same penny per stream model like Apple Music does as well? Yeah, all the mainstream ones have adopted this. similar model. And there's also sort of talk about, well, if one streaming service does it differently, that's going to just create more like logistical headaches when you have different services that are paying in different ways. So there's that sort of an argument too, that the industry needs

to sort of be in lockstep. So if they're going to switch and it needs to all be done at once versus having one service try to do it by themselves. Okay, well, let's get into that. The idea that you could switch to this different model that might cause for less income inequality. So if you're a big star, say a Drake, are you making big money off of streaming or is like, I'm sure Drake is making millions of dollars, but I would imagine he makes more millions of dollars off of touring. You know, that's the whole thing. Is, is, is being on streaming platforms for an artist like Drake? Is that a loss leader or is that a significant revenue stream that they wouldn't want to not give up, but like minimize in any way.

I think it's actually something that's kind of in transition because, you know, I guess when streaming first came out, it was sort of seen as more like the way of the future or something that's something that ours needed to do to be able to attract young people, but it's grown so quickly and the industry as a whole, like recording music has kind of turned around and actually started growing in revenue in the last three to four years after 15 years of decline because of piracy. So we're kind of seeing a transition where streaming, we're streaming. at one point sort of this Velocator type thing like you're saying, but now it's actually becoming

very central to the industry, and they're actually projections that in the 2020-s sometime, like the streaming version of the issue will be just as big as the 90s version of the industry as the CD era. So for artists like Drake, for example, they're going to really want to make sure that whatever the model is, it's going to benefit them because this is going to become a bigger and bigger portion of their revenue pie as time goes on.

Yeah, I've seen those graphs too that looks like the dream of the 90s is still alive. in streaming, but the, um, but you, you raise an interesting point. Um, so, you know, even Spotify famously loses money still. Um, and so the smaller artists aren't making that much money. So is it really the, the bottom line is, is that the people that are doing well in streaming, rising to the four are the record companies because once again, their revenue stream is, is coming back in a meaningful way. Oh, yeah, for sure.

and they also own stakes in Spotify. So whether or not Spotify, the company itself is making money, it's still worth X billion dollars right now. And the record companies bought in 10 years ago when it was worth nothing. So they've actually made a lot of money. And they've actually been debated about whether or not the artists themselves deserve some of that stake

because obviously they're the ones who have built Spotify into this, but really valuable platform. So I would definitely say the record companies are going to make up the best for sure. And then you sort of have the mega artist, who benefit a lot from the way I'm high for my Spotify's design, with the playlist sort of guiding each of their hits. Like, when Jake's last album came out,

like, it was basically, like Spotify became like a Scorpion app, basically, in terms of the promotion for the album. So, like, for big artists, like Spotify came really, really beneficial too. And I think one reason that people like Zoe Keating really interested in this new model is because they're trying to figure out, okay, if the record laborers are going to win and the big artists are going to win, how can I as an independent person also start generating money and sort of in this new paradigm?

So if we are going to move to a new paradigm, you said in the piece that the artists have to collectively get together and push for it. But that makes me wonder, like, who would be the one with the most to lose if the current model goes away? Would it be the record companies? Would it be Spotify? Or would it be big artists like Drake or all three? So the exact details are actually difficult to predict. Like there's been some studies. There's a study in Finland, actually, that said that under the current model,

basically the top half of a percent of tracks get about 10 percent of the money. And if we switch to the user-centric model, then those tracks you only get about 5 percent of the money. But you don't necessarily know whether the extra money is going to, let's say, like Drake's back catalog or to people like Zoe Keating. So you kind of have to actually implement them. model at scale to figure that out. So that's kind of up in the air, but I would say that Spotify would not benefit because

there would be less incentive for people to like create extra accounts on Spotify to try to generate streams, that kind of thing. So and also the company would have to do like a more, they'd have to revamp their entire roadway system, which would cost some amount of expense for them. So I think as an industry leader, they have very little incentive to want to change this unless there's a lot of activism about it from artists. or artist pressing labels to do it. Well, or maybe even from fans

so that I don't have to give any pennies to Justin Bieber. But you mentioned two things real quick before we end. In the existing model, there are reasons to shift to a different model because, number one, there are examples of fraud. Like if it's a pay-per-stream sort of thing, you can set up bots. This is actually SoundCloud. more where you can pay for, you know, plays and things like that. But if it weren't, the incentive for the industry to change their analytics would actually be for better accountability. So you,

you couldn't just have these things where, you know, I set up a bot that plays my song a million times or whatever. And then, and then just basically, it's like ad fraud, but for songclays. Yeah, no, exactly. One of the sources I interviewed for my story compared it directly to ad fraud and sort of talking about how, yeah, if you just want to set up an account right now, pay $10 a month and stream 24-7, you're likely not going to be stopped. Like, Spotify has some fraud-tracking technologies, but as we both know, ad fraud is still widely existent. And there was this incident, I guess, a couple years ago, where someone that was a million dollars in royalties in Bulgaria by setting up 1,200 dummy accounts, basically.

So, I mean, I think that there's not really way to get rid of that problem unless you change the incentive structure. And then lastly, I did a piece, I think it was last week, a different piece than yours, about how the length of songs is actually getting shorter because artists are incentivized again to go for this, the more plays, the more pennies. And so the analogy I made is, you know, if you release a three-hour epic movie, it can only play in a theater so many times a day. But if you release a nice 90-minute movie, it can play multiple more times a day. So it's sort of the current model is warping the very nature of the music business at the moment. Yeah, no, that's definitely a really fascinating insight. I think you see that especially in hip-hop with a lot of the artists who sort of started on SoundCloud. A lot of these current pop hits from them are like even underwriting.

three minutes. And for those kind of people, those kind of artists, like they're going to be making more money that way. So it's definitely not only a sort of issue of fairness or even sort of like one to support the artist you like, but also that's like affecting the music you get to listen to. Well, I also said last week that, you know, as technology evolves, that's, that that changes how the music is. Back in the 50s, you could only put three minutes of, of, of of music on a side of a of a single and then when you had albums then it became you put 10 songs on there whatever so yeah do you think that final question do you think that um and this is totally a judgment call do you think that we'd get better music if we switched to this um sort of user-friendly

model in the way that it would be almost realigning the audience with the interests of the artists that they actually care about most. Yeah, I mean, I think it creates, at least at the very least you remove negative incentives for people to make either songs that are short just to be streamed a lot or to make just songs that are going to be put on repeat in, like, coffee shops or boutique stores, which is often like kind of boring music. So I think at the very least it sort of removes negative incentives, and it could create a situation where fans feel a little bit more sort of motivated,

or they feel a little more direct connection between what they're doing on Spotify and supporting artists and maybe kind of getting back to that sense of my music consumption is actually part of my fandom and not just, and all you can listen to buffet that I happen to pay for every month.