By Alex Macre
Wake Forest University
As the technological era is increasingly influencing society and markets, everything is becoming faster, smarter and more user friendly. Phones now have the processing power of computers and can access nearly any part of the world wide web. With Apple revolutionizing the phone industry, smartphones have advanced so much that they basically can do anything and everything. Despite the new advancements, one of its original features, listening to music, still dominates its primary usage. According to Pew Research Center, nearly 64% of people ages 1829 and another 39% of people ages 3049 use their phone to listen to music. Spotify saw this trend and pounced on the opportunity to maximize the capability of smartphones by introducing streaming. Streaming allows consumers to pay a monthly subscription and have unlimited access to a large selection of songs from a diverse range of artists. Successful bundling promises an increase in revenues, profits, and consumer surplus and gets rid of unpaid consumption of tracks and deadweight loss. Although widely criticized, streaming has several positive economic repercussions. This act of bundling affects how much the artists earn if they sold their music independently. In addition, the act of illegally downloading music decreases with the increase of access to a musician’s catalog. Streaming also introduces a new market that allows other businesses to enter with few barriers of entry.
Several artists have stepped forward to voice their concerns and criticisms of streaming services such as Spotify. Vocalist Taylor Swift pulled her catalog of songs off of Spotify last year to encourage her fans to pay for her music through iTunes. Since streaming services have been introduced, ownership of songs has greatly decreased, and customers have opted from paying $1.29 (iTunes) per song to paying a standard monthly fee of $10 (Spotify). However, the offset in prices does not affect the artist’s profits as much as the public believes. Economists Luis Aguiar and Joel Waldfogel researched this topic and found that, “137 spotify streams appear to reduce track sales by 1 unit. Consistent with the existing literature, our analysis also shows that Spotify displaces music piracy. Given the current industry’s revenue from tracks sales ($0.82 per sale) and the average payment received per stream ($0.007 per stream), our sales displacement estimates show that the losses from displaced sales are roughly outweighed by the gains in streaming revenue” (NBER)
This means that the streaming market is revenue-neutral for the music industry. Artists actually do not lose that much revenue compared to selling their music per unit; if the streaming payment is large enough in correlation to sales displacement, then streams can still raise overall revenue. In addition, streaming allows access to an extensive array of music and artists, so the act of piracy, or illegally acquiring music, largely decreases. Contrary to popular belief, streaming is not as bad for the music industry as it may seem.
Spotify has made huge steps in decreasing piracy and illegally downloaded music. Ironically, Daniel Ek, Swedish entrepreneur and founder of Spotify, was once the CEO of uTorrent, the pirating website that wreaked havoc on the music industry. Sean Parker, founder of Napster, decided to team up with Ek to create a streaming service that had the perks of piracy but gave recognition and royalties to the musicians they were once ripping off. When Spotify finally took root and began to thrive, the amount of music that was pirated dropped to 25 percent, and in the past year it has dropped nine percent (Digitaltrends). Although the market is not necessarily happy with Spotify, the drop in illegal downloading is a huge win for artists. While pirating was at its peak zero recognition and little to no profits would go to the artist, crippling their possibility to earn money. Now, those users that once were active on uTorrent or Napster are now paying for a subscription with Spotify, and that money is then turned into royalties for the artist. CEO Daniel Ek illustrates that, “We have succeeded in growing revenues for artists and labels in every country where we operate, and have now paid out more that $3 billion USD in royalties to date (more than $300m of which was paid out in the first three months of 2015 alone)” (spotify artist). Thus, Spotify is killing illegal downloading and making a positive difference in the music industry.
Daniel Ek struck gold with his streaming idea, and several other companies have shifted their focus into following this model. The war between purchasing and streaming seems to be over with Spotify being the clear winner. Apple has had to adapt to this shift, introducing Apple Music in the summer of 2015, with its main feature being streaming. Before, Spotify was almost a monopolistic company, dominating the music streaming market. That has changed with more wealthy entrepreneurs who can afford the steep startup cost of the company, Spotify will begin seeing tough competition in the coming years. Along with Apple, Jay Z, Beyonce, Madonna, Rihanna and a few others have joined the game, launching Tidal, a streaming service run by artists. Deezer, a Paris based company, is also going to be relevant in the next few years, according to the Wall Street Journal its revenue is anticipated to have strong growth by selling monthly subscriptions to music libraries . The reason the streaming market is possible is because of the limited barriers of entry, there are few start up cost and the small amount of land, labor and capital needed saves money. Business Insider reporter Pascal-Emmanuel Gobry discusses how Spotify’s biggest cost is “cost of sales”, in other words, licensing all the music. With that being said, however, between 2009 and 2010 Spotify saw a 458% jump in revenue, offsetting the huge start up cost (Business Insider). Having a new market stimulates the economy because it creates jobs and the money that is earned is reinvested instead of saved. Spotify is seen as destroying the music industry when in reality it is very beneficial and this new market significantly helps the economy.
Spotify has made huge steps in the right direction for revolutionizing the way music is acquired. It does not have a major negative effect on artist revenue, even though the public widely believes it does. It has managed to decrease illegal downloading while created a brand new market. This is the future; streaming has resurrected the dying music industry and set a precedent for future companies. Spotify is the cornerstone in a new era of the music industry.