For most people who subscribe to the Spotify mobile app and music streaming service, being able to listen to their favorite artists anytime, on demand and as often as they please, is a very good deal. At less than $120 per year and with a 50 percent discount for students, Spotify is a boon for music lovers. The 30-day free trial typically offered by Spotify has a very high conversion rate because there is no question that paying less than $10 per month for the Premium service is something very attractive to music fans.

 

On the other side of the Spotify app are the artists and the music industry that cashes in on their creative output. In July 2017, a music industry analyst wrote an elucidating article for Forbes magazine about how much, or how little, musicians receive each time their singles and albums are streamed on Spotify and its competitors. The bottom line is that the royalties earned by recording artists on streaming services is not very impressive.

 

Streaming for Less Than Pennies on the Dollar

 

On average, Spotify pays $0.0038 per stream, and this is despite enjoying the patronage of more than 50 million paid subscribers. Apple Music, the streaming service that was formed when the tech giant acquired Beats Music, pays $0.0059 per stream. When hip-hop moguls Jay-Z and Kanye West announced the debut of Tidal, a streaming platform owned by musicians for the benefit of musicians, there were high expectations about revenue sharing, but this service only pays $0.0110 per song on average.

 

Pandora and YouTube pay even less than Spotify, between $0.0006 and $0.0011. Google Play is a slightly better deal at $0.0059, but the most generous platform is clearly Napster, the former file sharing network that was forced to cease operations due to piracy concerns. It so happens that Napster pays $0.0167 per stream, which should make it more attractive for musicians; however, the subscriber base commanded by Spotify makes it more enticing.

 

Streaming and Big Data

 

Selling memberships is not the only revenue option for Spotify and its competitors. These companies conduct Big Data collection and analysis with tools such as Apache Kafka and Spark streaming for the purpose of measuring listener behavior and issuing recommendations. More complex and valuable Big Data analysis is sold to market research firms, but this may not be enough to sustain the overall business model.

 

The Reality of the Streaming Business Model

 

When country and pop music darling Taylor Swift infamously pulled her catalog from Spotify and other streaming services, she ostensibly did so because she felt that she was not getting her fair share. This slight against the streaming industry, which was widely reported by news media outlets, elicited a response from Spotify CEO Daniel Ek, who claimed that Swift could earn more than $5 million in annual streaming revenue.

 

For an artist like Taylor Swift, the prospect of earning more than $5 million per year is not as clear-cut as Daniel Ek claims. Not all of the money generated by streaming singles from the Swift catalog will go to her bank accounts; there are also contractual obligations that she must also fulfill. While it is true that Spotify spends about a billion dollars per year paying out royalties and securing the right to stream catalogs, musicians get the least from these payouts.

 

The reality of the Spotify business model is that it has not been very profitable. Despite its sizable membership and audience, Spotify finds it challenging to generate profits because this is a very expensive business to run. In early 2016, Spotify was forced to seek a $500 million in emergency financing, and this is a situation that the company may have to revisit in the near future.

 

In the end, it remains to be seen whether the streaming model can generate the profits that brick-and-mortar record stores used to enjoy. For the time being, musicians are better off with live performances and selling music on their own when possible.

Author's Bio: 

Jeremy loves writing on all things self-improvement, and avidly strives to learn more about all thing finances, education, and tech.