Is Spotify hurting record sales? Not exactly

By Erin Griffith , written on January 18, 2013

From The News Desk

It's long been the accusation lobbed at Spotify, Rdio, Mog and the streaming services: Users have no reason to buy music, thanks to 24/7 access to all-you-can-eat streaming of their 10 to 20 million-song catalogues. Oh, and artists don't get paid enough either.

Never mind that access, not ownership is the way media consumption has been moving for the last 5 years. (Thanks, Netflix, for pioneering that.)

Never mind that its still unclear whether these services can even turn a profit after royalties. (Pandora has been profitable by a hair for maybe one quarter since it went public mid-2011; Spotify's margins are a measly two percent.)

The act of "windowing," or excluding big releases from the services' catalogs, is based on fear from record labels. As New York magazine outlined last year, even the most successful bands aren't exactly living like rock stars. They make the vast majority of their money touring, not on record sales. As a result of this fear, several major releases were notably absent from Spotify and the streaming services this year. Adele's "21," The Black Keys' "El Camino," Taylor Swift's "Red," and Rihanna's "Unapologetic" were all withheld from Spotify ("21," which was actually released in January 2011, is available now).

This is a problem for the streaming services -- as David Pakman outlined in this post, Spotify will never have real leverage over the record labels to the point where it can negotiate to lower its royalty rates, even if it hits a critical mass of users. That's because the supply of music is concentrated in three major labels that control around 70 percent of the world's music catalogs, including all of the biggest stars. If one decides to pull their music, the company will lose a big chunk of its catalog, the playlists would all break and many of the major hits would disappear. Pakman nails it:

Paying consumers would never stand for it and the service would crumble. The labels know this. They know they have fully concentrated power. In fact, I would bet that if Spotify ever reaches that scale, the majors will demand even higher rates, and they may be able to get them. Highly concentrated popular content allows owners to extract unprofitable rights deals.
I have no idea how the labels feel about their deals with Spotify. Given that several of the biggest hitmakers have pulled their releases from the service, I'd say the feelings are mixed at best. There are bright spots -- Metallica, longtime enemy of digital music, has recently listed its catalog on the service. Still, I imagine more Spotify users noticed the lack of Rihanna than welcomed the addition of Metallica. It was more valuable as a symbolic move than for the actual music (no offense to Metallica's body of work).

This week, NARM, a music business trade association, presented some proof that Spotify and its ilk didn't exactly hurt Billboard chart positioning last year. Only two of the 28 albums which debuted at number one last year were not on Spotify. Only two of Billboard's 12 number one songs were not available on streaming (and one of those two became available on some services partway through the year). Lastly, (and this doesn't really support or detract from my point), four big albums -- The Black Keys, Deadmau5, Van Morrison, and Of Montreal (big-ish, I guess), which all said "no" to Spotify, had varying performances, debuting at number two, six, ten and 121, respectively.

Couple that with the fact that overall music sales grew last year, up 3.1 percent over 2011. Digital albums grew 14 percent and digital tracks 5 percent.

It's hard to imagine a world where the biggest fans wouldn't buy the record anyways, because they want to own the songs. It's even harder to imagine a world where artists would not want the incremental money coming in from listening -- which, by the way, they get nothing from traditional radio stations when their songs are played there. Sadly (and perhaps worst of all), it's almost impossible to imagine a world where the music industry makes sense for fans, artists, new distribution channels and labels.