Fortunately for Ek and Lorentzon, the music industry was in desperate need of a new revenue model. And as Ek has pointed out, the industry’s model had always been inefficient: charging relatively high prices to capture only the top layer of the listening market. Most people got the majority of their music on the radio, which was free.
Spotify was offering a lifeboat — and a fairly luxurious one: 70% of streaming revenues plus an equity stake in the company. The big record labels — Sony, Universal, and Warner — were reportedly each given between 4 and 6% of Spotify’s shares, with a consortium of independent labels getting another 1%. When Spotify went public, in 2018, these stakes would be worth billions. The labels also got to keep drawing down 70% of Spotify’s revenues and distributing it to their artists according to their own royalty formulas.
Spotify’s involvement, or lack thereof, in how artists are compensated, however, has rankled some. The platform plays no role in determining how royalties are distributed to artists. And while the top artists have earned lots of money on the platform, critics argue that Spotify allows record labels to continue exploiting artists and creators.
Ek, for his part, argues that Spotify is “in the process of creating a more fair and equal music industry than it’s ever been in the past.” At the peak of the industry, more than 15 years ago, Ek estimates that only 20,000 to 30,000 artists could make a living through recorded music. Record labels, facing high distribution and marketing costs, only signed small numbers of artists. And listeners were often reluctant to take a financial chance on unknown artists. Spotify, he says, changed all that, increasing the number of artists who can make a living.
“[I]n the world with streaming, what’s really interesting is the alternative cost for you to listen to something new is virtually zero. It’s just your time,” Ek says. “And because of that, you do listen to a lot more music than you did before and you listen to a bigger diversity of artists than you did before, which in turn then grows the music industry.”
The argument Ek is making — that digital distribution should make it easier for lesser-known artists to find listeners and get paid — sounds good in theory. In 2006, the journalist Chris Anderson published an influential book called The Long Tail: Why the Future of Business Is Selling Less of More. Ek, in a 2010 interview, called The Long Tail his favorite book.
But the evidence suggests the long tail concept works better in theory than in practice.
Princeton economist Alan Krueger, who worked in both the Clinton and Obama White Houses, was fascinated by the economics of the music industry. He once gave a speech at the Rock and Roll Hall of Fame comparing the music industry to the modern economy at large. In both cases, he argued, most of the earnings were going to a lucky few at the top of the pyramid. It’s what some people call a tournament model, where the winners get most, if not all, of the profits.
Krueger died recently, at age 58, by suicide. He left behind a book, to be published soon, called Rockonomics. Krueger writes that there are roughly 200,000 professional musicians in the U.S. today, accounting for 0.13% of all U.S. workers. That percent has stayed about the same since 1970. The median annual income for these musicians is $20,000.
Krueger’s findings don’t support the long tail promise. Social media and algorithm-driven recommendations, including Spotify’s own playlists, seem to magnify the bandwagon effect, whereby popular songs become even more popular by virtue of their popularity. In 2018, Spotify’s most-streamed artist was Drake, with 8.2 billion streams. Assuming a typical streaming royalty rate of 0.4 cents per play, that’s nearly $33 million going to Drake’s camp.
But the pyramid is sharp — and things fall off really fast. Krueger cites an industry survey which found that just 28% of artists earned money from streaming in 2018, with the median amount just $100.
If the streaming music revolution is a sort of tournament, let’s think about how the various constituencies are making out. Spotify and Ek are doing very well; so are the company’s original funders, who got a huge return on their investment. The record labels have also been big winners — not only did Spotify reinvigorate their industry but it seems to have substantially improved their overall valuations. The Universal Music Group, for instance, which is currently for sale, has recently been valued at more than $30 billion; in 2013, its valuation was just $8.4 billion. Other winners in the Spotify tournament are customers, who get much more music than they used to, for much less money. The most popular musicians are also winning big.
One constituency that’s not obviously sharing in the winnings: the long tail artists, of whom there are many.