Music Diary Notes: Spotify Signs With Sony; the Economics of ‘Music Monetization’ and Their Likely US Move

I recently wrote about my hands-on time with music streaming service Spotify, and had previously written about the contract wrangling that has so far kept the service EU-only. Now we have some news that points to the possibility of a US launch sooner than later … and also some sobering reality about the financial aspects of streaming media in general.

Spotify Edging Closer to US Launch

On the ‘good news’ side, Spotify has just signed a deal with Sony to allow Spotify to work in the US. How big a deal is this? Well, all you have to do is look at what labels are owned by Sony, which includes classic giants like Columbia, Epic, Legacy, RCA … each of which owns several well-known labels!

As noted in the article, while getting Sony is certainly ‘landing a big fish’, the ‘whale’ is Universal Music Group. And Spotify needs to get two more ‘majors’. Basically, more than 70% of the world music market and more than 80% of the US music market is controlled by four companies – Sony, EMI, Warner and Universal. EMI is by far the smallest – Warner is the third largest and 2010 revenues were 3X the size of EMI!

So to have a serious presence, Spotify needs Universal and Sony (2nd largest) as well as either Warner or EMI … and of course as many ‘indies’ as they can scrape together. There are rumors another deal with a ‘major’ is close at hand, but those rumors have been floating around forever!

According to some reports, the deal with Sony will allow Spotify to launch in the US with a similar set of plans as in the EU – a free plan with a limited number of hours per month, the ability to pay a fee for an ad-free version, and finally a ‘premium’ version that you can also listen to on your iOS or Android phone.

Money and Streaming Media

One interesting tidbit shows that Spotify paid out ~$61 million in royalties to record labels in 2010. During 2010, they grew from 250,000 to 750,000 ‘paying’ subscribers. Of course, ‘paying’ describes both the ‘ad free’ and ‘premium’ levels, which are approximately $4.99 and $9.99 respectively. So, no matter how optimistically you do the math Spotify cannot have taken in more than $7.5 million in subscriber fees. That leaves a ~$55 million shortfall, and I am hard pressed to see ad revenue making up that amount – though I could certainly be wrong!

That presents Spotify with a serious issue, which I am sure has figured into the negotiations. Assuming that subscriptions in the US equal those in Europe (which is certainly an underestimate), Spotify would have < $15 million in subscriber revenues and >$120 million in royalties! We can assume that the ad-supported version would be equally dominant here as in the EU, though personally I will miss the British ‘flavor’ of the adverts during my time with Spotify!

A survey article at Digital Music News looked at the ‘state of music monetization’, and cited a source saying that the current paying music subscriber base is ~1.5 million. There have been plenty of reports that while Rhapsody has the largest user base, there is no clear winner yet and plenty of room for someone to come in and grab the market.

I think Spotify has a clear opportunity to do just that. While some people are happy to use Slacker and just set it to a ‘genre’ channel and listen away similar to Sirius XM, many folks would much prefer to put in a request and actually hear THAT music! So if Spotify can get enough major and minor labels, they should have great success.

Then they just need to figure out that whole ‘money’ thing.