Why Spotify can never be profitable: The secret demands of record labels

Even though Spotify is a "piracy killer" (at least in Sweden, if not elsewhere), I think the labels will be more than happy to bleed it dry and leave its lifeless corpse on the side of the road as they search for the next Big Thing to strangle, bleed dry and leave behind.<p>Two reasons:<p>1. The major labels, like most of the big content producers, are extremely interested in short term gains, even if it means losses down the road. As long as something is still "down the road," it won't affect this year s/quarter's/month's profitability.<p>Take a look at Hulu. It's a shadow of its former self. It used to be a solid site with great content, but those controlling the content have decided it's not making enough money fast enough. The fix? Remove content. Move it around. Chop it up. Stagger releases randomly. Put X season on Hulu but have Y season exist only as a selection of clips or have it go missing entirely.<p>See also: Netflix. Because the major studios are unwilling to trade DVD dollars for digital dimes, they've gone about pricing themselves out of the market. Netflix is also a "piracy killer," but the studios are too concerned with getting the money up front to pay attention to how much content is being leaked out the back.<p>The studios also seem to think that people will follow them to their own sites or digital offerings, but the content they offer is generally crippled by DRM or requires the installation of proprietary software or another set of logins and passwords and people in general just do not have an interest in setting up yet another account just to watch a couple of Lost episodes.<p>2. Even though everything mentioned is a "piracy killer," the simple fact is that, for many people, the service (Spotify, Netflix, etc.) becomes the end product. The services don't lead towards more sales of other physical or digital goods. This doesn't fit into the major labels'/studios' plans at all. They want to sell more of their stuff, not necessarily collect royalties from someone else's service.<p>So, if they manage to drain Spotify completely or at least force it to give up its US operations, it won't hurt them much. By that point, another service will come along and they can pile on and bleed it dry as well. The plan, I suppose, is to keep riding these little income spikes until it's 1994 again, or something.<p>They must still harbor the belief that, once the other options dry up, people will head back to the brick-and-mortar and purchase content in physical forms that carry much higher profit margins.

Forget the labels, Spotify is dead. The corpse just hasn't hit the ground yet:<p>"I am paid $0.00029 per stream of a song on Spotify, and even this amount depends on whether the song is being streamed by a paid user or someone using the service for free. This means it will take upwards of 3,500 streams of a single song on Spotify to earn $1.00 versus that same revenue for one iTunes song purchase...I’ll go even further to say that I actually prefer illegal downloading over Spotify because when you get music illegally it’s at least implicit in the transaction that what you’re doing is potentially harmful to the artist. But with Spotify, your conscience is clear because you’re either enduring ads or paying to use the service and access the music. But from the blue-collar artist’s perspective...there’s little discernible difference between $0.00029 and $0.00...which is why I will withhold any new releases from Spotify in the future."<p><a href="http://derekwebb.tumblr.com/post/13503899950/giving-it-away-how-free-music-makes-more-than-sense" rel="nofollow">http://derekwebb.tumblr.com/post/13503899950/giving-it-away-...</a><p>Read the whole blog, it jam packed with more than enough insight to make it worth multiple readings.<p>Even absent the labels, Spotify is a lousy deal for individual music makers.<p>The search for a viable, sustainable online business model for music is still underway, but unlimited streaming for a low monthly fee is not it.

More generally, this is why no one who owns neither content nor un-disintermediatable distribution will ever be seriously profitable. Netflix is figuring this out right now: pipe owners (e.g. Comcast] make money and people-who-fund-and-front-for-content make money [e.g. NBC]. People who sit in the middle of the pipe and the distributor get squeezed. Even friends of the distributors [see: Hulu] can have a hard time.<p>And by "un-disintermediatable distribution", I mean: distribution without viable substitutes. If Spotify were so awesome that I'd never switch, then they'd be in the money. But I also use GrooveShark and Pandora, so Spotify is in for pain.<p>Sure, you can make nice money for a short time [again, see: Netflix], but the folks that own the content will raise prices as the market becomes attractive.

A brilliant comment from the article, posted by KenG:<p>I’m guessing a lot of hot dogs would get stolen, and then the hot dog supplier would lobby the government to hire guards for hot dogs. If a guard saw a person eating anything that looked like it might be a hot dog, the guard could confiscate all of that person’s food, without any kind of evidence.<p>Also, since backpacks were often used to hide stolen hot dogs, the government would be asked to charge an annual fee to everyone who used a backpack, so that the money could be given to the hot dog supplier to cover the cost of stolen hot dogs. Even vegetarians, who never eat hot dogs, would have to pay the annual fee.

Making money in music today's music industry is absurd. In fact, I wouldn't be surprised if major record labels vanished in the next 100 years.<p>You'd imagine a band that's put out a record on a successful label and toured the world multiple times would be covered in wealth. That's not the case at all. In fact, most touring bands don't even make enough money to be in the black. At the end of the day, past the flights, cost of gas, and cheap meals lies an elastic state of negative to mediocre profit.<p>Why then do small acts still tour? Well, it's fun and it's probably been a dream of theirs for some time now. I for one am extremely thankful that bands continue to put out amazing music with only enough money to barely support themselves.<p>Here's the thing: bands don't need major labels anymore. That's because it's basically level playing field now: you can make an amazing album on your laptop in a barn in rural Massachusetts and still have the ability to compete with the major labels. No longer are people sucked into the radio aggregate of the 90's when all you could discover were boy bands. Now we have these amazing things like Bandcamp and Spotify that allow you to stream virtually anything! That's pretty amazing, but what's the use if everyone is listening to the demands of a major label?<p>So with that being the case, couldn't this problem be solved? All it will take is a push for bands to stay away from huge labels and for listeners to find that music. That's where Spotify should come in.<p>What's interesting about this entire thing is that a long tail company like Spotify is potentially able to shift the power from the shit that most major labels produce to better and more meaningful music. If Spotify can find a way to direct people's tastes away from most major label garbage, they might be able to solve this issue.<p>Maybe Spotify will push for more independent artists and incorporate musicians on Bandcamp into their catalog.<p>Although I'm pretty sure that musicians who put their music directly on Spotify only receive a pretty small cut, Spotify should be able to overcome their major label woes by putting a focus on smaller more niche based music.<p>It is my hope that musicians stay away from large labels. And no, I am not some indie purist, I just think that major labels are diluting the quality and diversity of music and that we have the power to change that.

Yesterday HN rallied a post on Louis C.K. to the front page - a post which celebrated his deference to the inevitable reproduction of his work, a post which celebrated Louis as a hero for his ignoring this reproduction, for nobly enduring it like the good little artist he is and merely asking for a donation for his work.<p>I now see why it is popular here on HN for artists to give away their work when we as 'entrepreneurs' would never dream of giving away ours: the artist is labor, and we want to minimize that cost.

I know the Internet has seriously damaged the music label's revenue stream but why hasn't it done even more damage? It is 2011,the labels should not still have this much power, should they?

I believe it is immoral to in anyway pay money for anything that even indirectly benefits the members of the RIAA or MPAA. These companies have been subverting our democracy and undermining our civil liberties for decades. They are evil, do not give them money.

I don't understand why copyright exists.<p>Are there studies showing that copyright brought an increase in creativity or art excellence?

While the major labels are setting restrictive terms on Spotify, Spotify itself is turning around and treating independent labels like chumps: <a href="http://www.projekt.com/newsarticles/projekt-spotify.asp" rel="nofollow">http://www.projekt.com/newsarticles/projekt-spotify.asp</a><p>From the article: "For a stream on Spotfy, on average $0.0013 is paid to Projekt's Digital Distributor." That means an artist would have to get one million airplays to make $1300.<p>I'm finding it hard to sympathize with Spotify if that's the terms they set when they have the position of power.

I think as the distribution channels of music become more prominent through services like Spotify, it will give them a significantly more bargaining power. I think consumer behavior and notable popular services will change the music industries archaic practices. If they want to stay competitive, they'll have to change.<p>I also see this as a boon for indie musicians. They have access to a much more accessible means of distribution through services like Spotify, Pandora, Rdio, etc. and the ability to compete with the big labels.

I don't believe this one second.<p>Item: If record labels state that they invest a ton of money in musicians and nearly all of them do not make money, this means that the foremost goal of any musician must be to become one of the few acts who actually do make money. Hence, they don't really need to sell a lot of records at first, they need people discovering them. Spotify is like radio: it does not make much money, but it advertises musicians. I have discovered more new music on Spotify in a month than on iTunes in half a year.<p>Item: I really really like Spotify. All the friends who have seen it like it. I have given Spotify the same money I have given iTunes before. And Amazon before that. If streaming services will attract a big number of people, they will get better deals.<p>Item: Any time an 'industry veteran' says that 'something can not be profitable' I sense fear. What he is really saying is that he does not <i>want</i> it to be profitable the same way record labels did not want iTunes or Amazon to be profitable.<p>At the end of the day, its people who drive the market. If people want to listen to streamed music, they will. Maybe some companies can dry up some sources, but they never succeed in the long run against their customers.

How can non-disclosure of terms be legally binding? How can the label sue without disclosing the licensing terms?

The hot dog stand will be motivated to keep the store open (i.e., allowing it to make its bills, and generate zero economic profit) to keep the profitable rent behavior viable though. So we can expect Spotify to make just enough to be satisfied continuing along as a viable business, no?

When do they start a service where instead of doing unlimited, they let the user pay "by the stream"?<p>One of the reasons why Spotify cannot make money is because they don't tell the user how much they pay for each song. And I bet prices vary wildly among different labels/albums. Letting the user pay the correct price is the only way.<p>At least if people think it's too expensive, they can only blame that this specific song/artist is too expensive, others aren't.<p>I think it's a fun idea to pay by the stream, you could make it very easy to use, with some capped monthly budget or something. And then after so many listens of one song, it makes you "own" the song (when you reach the iTunes price for example). That would be transparent, less risky and understandable for customers.

The only way Spotify can avoid this problem is by becoming too big to ignore, a la iTunes for digital distribution or Walmart for physical goods. At that point the labels have a hard time saying "we're going to pull our inventory unless we get a better pay rate" because though it may dent Spotify's customer experience, it will also mean a substantial hit to the bottom line of any given label who walks.<p>If you can't get to the point where you're the 800 pound gorilla, however, you are very much still at the mercy of the content owner.

Wonder if there will be an anti-trust investigation over this cartel.

To simplify - Spotify can never be profitable because they do not create or own the product they are selling. Also, the product they are selling is not a commodity so they cannot source alternate suppliers.<p>Why is this a surprise?

are digital music companies compelled to keep secret the amount of plays/downloads that a specific song gets? why not report these play counts directly to the artists and let them calculate the difference between the average asking price and what they are making in revenue?<p>once they see how much is being skimmed off the top, they can easily not renew contracts with major labels and go to straight online distribution directly, bypassing the labels.

All of these reasons could apply to iTunes and Amazon's music store?<p>So why are they posting profits?

Anyone else notice all the about:blank links in the article?

am I the only one that noticed who the author of the article is?

What do you mean? This I'd the reason they can be profitable.<p>There's tons of good bands doing original stuff. Screw the big names, I'm tired of listening to the same dozen on Pandora anyways.<p>The problem is not the keepers of the status quo. It's the people that can't see past it.

amazon may end up solving this problem for us by becoming a good distribution outlet for music