The Real Reason Why Pandora and Spotify Aren’t Making Profits

Hint: it’s not because there isn’t money in music

Recent complaints from artists have revealed that pay outs from streaming services resemble more of a babbling brook than a gushing river. Normally when musicians dream of making it big and having their music heard around the world, there are a lot of zeroes on the imaginary checks their minds are cashing.

From streaming services, there are a lot of zeroes on those checks, but they come between the decimal point and the fraction of a fraction of a cent that gets paid out per stream. Artists cry: “I make more money from one T-shirt than a million streams on Pandora.”

The world has not been kind to musicians. First, in the 1940's when the first record companies came on the scene, musicians went on strike, not once, but twice, to protest recorded music. Before recorded music, if you wanted to listen to music, you needed musicians to play it: in person, or live over the radio. In the era of recorded music, musicians were needed only once — to cut the record. Then the record could be played over and over again. The pay out to the musicians that performed became a fraction of what they used to get paid.

Then, in 1999, Napster made it nearly effortless to steal all the music you wanted. “Fans” downloaded in droves, and piracy quickly crippled the music business. Musicians got screwed again.

But now, streaming services herald a new dawn. Providing access to gigantic catalogues, in free, ad-supported environments that effectively eliminate piracy in the places where they claim a strong market share. Yet artists have been quick to point out that the economic model is not viable: there is no way they can live from streaming payouts.

We cannot forget that each artist has their own contracts with labels, so there is no general rule that applies. Each artist, in the course of their career, makes decisions and deals with people, from managers, promoters, engineers, other musicians, songwriters, and finally a record label. All of these deals have the potential to water down the final check. But on the whole artists agree they should be compensated more.

The other side of the argument

Economically speaking, both Pandora and Spotify are in a position to make profits today.

Pandora could increase ad frequency. Right now there are so few ads on Pandora that it’s possible to listen for up to an hour without interruption. Compare this with traditional FM radio, with up to 20 minutes of advertisements per hour, and Pandora seems like it’s not really trying to make money. Hold that thought.

Sure, the user experience is important. Pandora didn’t get to +70 million listeners by creating a product that people didn’t want. They are wary that increasing ad frequency could turn off some users. But you can’t run a business by appealing to people who want free music with no ads. There is another reason why they are holding off, even while the stock market experts bash them and everyone holds their breath for whatever move Apple makes next. Pandora knows something important…

In exactly the same vein, Spotify could stop spending so much on aggressive expansion. If Spotify stopped marketing and stayed in the countries where it was present, it would be making a profit this very day. While they are not the market leader in terms of numbers, they are absolutely the go-to reference and poster child of the streaming era. They, like every other ambitious tech company, want world domination. But people waste a lot of time talking about if Spotify will ever be profitable. They are already profitable, they just know something important…

The second that any streaming music service reports a profit, there will be a monumental amount of artist backlash.

You can hear the artists now: “You mean that a few tech entrepreneurs are making millions off of my music while all I get is $0.0012 per stream?”

You can read the headlines now: “Tech companies profit when artists struggle to eat”

You can hear lightbulbs illuminating everywhere: “Why aren’t those profits going to the artists?”

That’s the question that will move the record labels and artists to renegotiate for higher royalty payments, which, if the present is any indication, will involve a lot of posturing, threatening, smear campaigns, pulling of content, blocking, and probably Justice Department intervention (where all of this is already being discussed). In other words, the debate that rages will inflame even higher.

But this is the best thing that artists can realistically hope for: The big streaming companies turn a profit, continue to expand, and then re-negotiate the rights so that the payouts are higher for artists, but the royalties don’t throttle adoption to the new system. Maybe the low payments are only temporary, and once the world music market is converted to streaming, artists will be able to live comfortably off of this new model of consumption, coupled with things like live-stream concerts and brand partnerships, with fair royalty payments and a good experience for the listener.

We can hope.

What do you think would happen if the major streaming services post a profit? Let’s discuss it on Twitter: @TonyHymes

Oh yeah, could you hit that recommend button if you agree? Thanks!