Spotify is Making Money for Record Labels

Telegraph UK

Revealing for the first time today how the commercial relationship works between the streaming service and the record labels, Rob Wells, the senior vice-president Digital for Universal Music Group International, declared Spotify a very sustainable financial model which was paying out well to the record labels which it has entered into licensing deals with.

Mr Wells disclosed that Spotify is paying Universal Music Group a royalty per stream in only two of its territories: the UK and Spain.

In its other four territories: Sweden, Norway, Finland and France, Spotify pays the record labels from the money generated by subscriptions and advertising and not on a per stream basis.

“In all its territories bar two, Spotify pays the labels from a mixture of the money it generates from advertising revenues and subscriptions. That to me equates to a sustainable business model,” he said.

According to Mr Wells Spotify only needs to convert approximately 10 to 12 per cent of its user base in any one territory into having subscriptions in order to make enough money to pay the record labels in this way.

Mr Wells said it was “lagging behind” in the UK and Spain because of the extremely high quantity of people using the service for free – meaning it was a more difficult task to convert 10 per cent of a much larger number into subscribers. Spotify has recently re-turned on the ‘invite only’ mechanism in the UK to limit the amount of users on the site.

No official figures have been released to show how many people pay £9.99 a month to subscribe to Spotify’s premium service in the UK, which offers an advert free experience. However, it is still thought to be a low number.

Mr Wells also divulged that Spotify was Universal Music Group International’s (which covers all territories bar America, Canada and Mexico) fourth largest digital partner last year in terms of the amount of revenue it generated for the company. He would not make it known which companies were the top three highest earning digital partners but according to several music industry sources, Apple’s iTunes and Google’s YouTube are thought to feature in the top two.

Up until now, there has only been speculation as to how the financial arrangements work between Spotify and the labels. It was a badly kept secret since the music service launched that not only do the major music labels have equity in Spotify, but so do the major independent labels. However, there are still no details as to how those equity deals were reached – whether the labels invested money or agreed to waive certain royalty fees until the company were in a position to pay out revenues from subscription and advertising.

It has been predicted by senior figures in the music industry that if Spotify continues to keep growing at its same pace, it will be a really significant new revenue stream for the music industry by February 2010, as disclosed by The Telegraph last August.

Currently the largest digital income record labels receive in the UK is from the sale of tracks and albums via iTunes. However, Spotify has already taken over iTunes, in terms of revenue levels, in its native Sweden. Per Sundin, head of Universal Music Group in Sweden, told The Swedish Wire last year: “In five months from the launch Spotify became our largest digital source of income and so passed by iTunes.”

The service is expected to make its US debut in the first half of this year.

Spotify was unavailable for comment.

Digital Music Gains Cannot Offset Declining CD Sales

NY Times

PARIS — Sales of digital music rose 12 percent worldwide last year, but that growth was insufficient to compensate for plunging revenue from compact discs, the music industry’s international trade organization said Thursday.

The group, the International Federation of the Phonographic Industry, used the publication of the figures as an opportunity to renew its calls for a tougher crackdown on digital piracy, which it blames for a 30 percent decline in global music sales from 2004 to 2009.

“We’re all fed up talking about piracy, it’s boring talking about piracy, but it is the problem and we can’t avoid it,” said John Kennedy, chief executive of the trade group.

Critics say music companies have been too slow to embrace new online business models that are attractive enough to lure music fans away from pirate sites.

Over the past year, however, digital streaming services like Spotify, which offer free listening, supported by advertising or subscriptions, have gained a growing following. Revenue from streaming is accelerating, as growth in sales of digital downloads from services like Apple’s iTunes slows.

Over all, sales via the Internet, mobile phones and other digital methods totaled $4.2 billion in 2009 and accounted for 27 percent of music industry revenue, up from 21 percent a year earlier, the trade group said.

But with sales of CDs declining by double-digit percentages, Mr. Kennedy said the record companies’ overall global revenue for 2009 would fall 8 percent or 9 percent from 2008.

Mr. Kennedy said the decline in sales, which has persisted for nearly a decade since a 2001 peak in revenue, was hurting the development of local artists in a number of markets hit hard by piracy. In France, for example, signings of new artists by record labels fell by more than 60 percent from 2002 to 2008.

“Sadly, today we are not at the turning point in the music industry,” Mr. Kennedy said. “I still hope that in a few years’ time, that point will come.”