Spotify and the impacts of streaming music for ‘free’

This article conducts a critical analysis of one of the most transformative platforms in the digital music world.

Image: Minel Kaseer, Flickr, All rights reserved

Spotify has both simultaneously destroyed and saved the music industry, depending on who you talk to – but the unprecedented growth of the company is a clear reflection of its economic and cultural relevance in the modern media environment. The music streaming platform has capitalised on the shifting landscape – both corporate and cultural – engendered by the inception of the internet, positioning itself in the center of a growing relationship between the music industry and technological development.

Despite the controversies besieging Spotify, there is little doubt that the business model it embodies – streaming – depicts an accurate reflection of the future of music and indeed, media in general. By employing the internet as a decentralizing force, Spotify has been able to flip a multi-million dollar industry on its head, forever changing the way consumers will interact with music.

Fun fact: Between 2007 and 2013, more than 180 companies added the suffix –ify to their brand, resulting in names such as Backupify or Enthusify (Schwarz 2013)

What is Spotify

Launched in 2008 by current CEO Daniel Ek, Spotify is a music streaming platform that provides users with access to millions of songs from artists all around the world (Spotify 2018). The platform operates with a dual-tiered ‘freemium’ model; the free version supported by advertisements, while paying consumers see no ads and gain access to premium features such as, ‘offline listening’. Criticisms of Spotify focus mainly on the potentially unsustainable and somewhat unethical nature of the free tier – a feature which is key to its ‘success’ (it should be noted here that Spotify does not currently turn a profit) but is associated with lower revenues and payouts.

A brief history of digital music

Spotify reflects the third wave in the revolution of digital music and the shift toward a more accessible market. 1999 saw the emergence of file sharing technology through Napster, a service which catalyzed a global decline in revenue streams within the music industry – sucking almost half of all revenue out of the industry in the following decade. The impact of the piracy that was unleashed onto the industry forced record companies into a panic, alienating consumers further with threatened legal action of illegal downloaders, before 2003 saw the emergence of iTunes.

 

deargdoom57, Flickr, Some rights reserved

 

Together with the music industry, Apple’s iTunes sought to reflect the digital alternative to conventional record stores, offering ease and relative affordability. However, the downward trajectory catalysed by Napster could only be slowed by the new service – how can you compete with free? This volatile environment caused major concern for the music industry – lamenting the days of financial stability in years prior, until Spotify offered a potential solution.

Universal music executive, Pete Lidell, stated that, ‘by 2008 we were an inch away from being buried, and Spotify single-handedly turned that around (Seabrook, 2014). Now operating in 65 regions with over 150 million active users – at first glance Spotify sounds like the perfect solution, but that is far from the truth.

Business model

Formerly one of the biggest peer to peer networks on the internet, Spotify was borne from notions of the ‘sharing economy’ – a relatively ambiguous term associated with industry disruption as it gives consumers access to products without technically owning them – essentially emphasizing the intangibility of assets. As Russell Belk (2014) summarizes, ‘the internet allows us to express our identity without ownership,’ and Spotify’s business model seeks to do just that.

 

chibicode, Flickr, Some rights reserved

 

Spotify operates through a dual sided market structure; the platform brings two groups (advertisers and users) together, profiting through the interaction between the pair. It takes credit for positively impacting both supply and demand through allowing more consumers access to more music. Their business model could fit under the umbrella of ‘collaborative consumption’ in this way – reflecting an ‘economic model based on sharing, swapping, trading or renting products or services, enabling access over ownership’ (Botsman 2011). Spotify emulates a business-to-consumer (B2C) model where they facilitate consumer access, ‘for a fee or other compensation’ (Belk 2014).

A significant factor in the success of their ‘freemium’ business model is the role of advertising – not purely as a form of revenue – but as a reflection of the internet’s utopian role of providing ‘free’ access to culture. The expression, ‘Information wants to be free’ was borne out of hacker ideology in the 1980s, but within a decade had become a commonly accepted market proposal reflective of the agreement between users and advertisers (McStay 2016; Turow 2011). Personalised ad targeting was seen to have great potential and ‘ad-supported access,’ was recognised as a crucial component of the developing internet. Such a transformation from ownership to access is rooted in theories of economies of scale, and the technological advancements of Web 2.0 enabled ‘endless’ scalability (Vonderau 2017).

 

‘Spotify created a platform that has allowed sharing to be monetized’ (Ken Parks – Spotify)

 

Internet Ecology

An internet ecology embodies the concept of a structured group of intermediaries or businesses that work together through information technologies to grow and diversify their own operations (Looi 2001). Spotify, by its very nature as a revolutionary player in the industry, has many relationships and links to differing sectors in the media environment.

Spotify’s key market differential is its free tier – something that no other streaming service supports on their respective platforms. Apple music – built upon the already successful iTunes store, reflects one of Spotify’s main competitors. Although it was relatively late to the market, it had the advantage of, ‘replacing the default music player on the world’s most popular smartphone’ (Segan 2015). After a three month free trial period, users are prompted to pay a monthly fee – or stop using the service (the app still remains on the phone) – a move which is praised by artists.

 

Image: Spotify ecosystem interaction

 

Tidal is considered another competitor in the music streaming sphere – however its comparison to Spotify and Apple Music is undeserved. The high profile owners: Jay Z, Beyonce, Rihanna and Coldplay presented an ‘elite’ service in 2015, promising higher royalties for artists and a better consumer experience – however to date its success has been minimal.

Spotify has been the source of a number of relatively high profile court cases in recent years. The historically complex nature of copyright and royalty regulations engender a multitude of issues for the corporation – and rights collection organisations, publishers and performance rights bodies have an important job in the streaming age to secure fair remuneration for artists and songwriters. These organisations work to recover lost revenue for artists and manage copyright infringement. Streaming requires a number of licenses – recording licenses from record labels, performance licenses (for compositions) from performance rights organisations like ASCAP and APRA AMCOS, and mechanical licenses that cover the reproduction of compositions.

 

Spotify ecology

This last one is where Spotify continues to fall short – a recent lawsuit from an independent publisher could yield over $345 million for songwriters on the basis of Spotify failing to pay mechanical royalties. As outlined in the lawsuit, ‘Spotify’s apparent business model from the outset was to commit willful copyright infringement first, ask questions later, and try to settle on the cheap when inevitably sued’ (Flanagan 2017).

Regulatory bodies like these are key in acquiring royalties and fair treatment for artists and songwriters alike – however the problem of unpaid royalties is an issue that is relatively prevalent on most music services. Interestingly, Apple have filed a proposal with the Copyright Royalty Board, requesting increased, fixed rates for mechanical royalties on streaming platforms. While not only helping artists, the proposal would force Spotify to pay more – without the deep pockets that Apple has.

Spotify’s partnership with Facebook is one of its most notable ones – and has enabled the increasingly personalised user experience regarding advertisements and behavioural targeting. However, its integration with Facebook has generated some issues concerning data protection. Digital music is data, and data is the fuel used to target users – there is a reason Facebook love to harvest it. It should come as no surprise then that Spotify’s updated layout and design is reflective of different ‘moods’ and ‘feelings’, presented in curated playlists to consumers. Facebook can also use their own data such as bands that users ‘like’ to improve Spotify suggestions (Germain 2013), as well as behavioural data acquired from user ‘reactions’ and psychological testing.

 

Spotify – a disruptive innovation

‘What is most notable about platforms and ecosystems is how they redefine a whole industry. They are a new form of disruptive innovation, one that prioritizes organization’ (Shaughnessy, 2016).

Daniel Ek describes the consumption of music on Spotify as, ‘frictionless…nothing is for sale because everything is available’. This idea of reduced friction is considered a key component for disruptive innovations by Shaughnessy, describing ‘system designs that radically reduce friction in the marketplace’ (Shaughnessy, 2016). A traditional disruptive innovation can be understood as a cheaper, ‘no-frills’ business model that has the ability to undercut industry leaders – and Spotify clearly fits the mould in both its operations and economic and social impacts.

 

Stephan Ohlsen, Flickr, Some rights reserved

 

One of the more interesting and less well known factors behind the success of Spotify is its distribution setup. A key feature of their technological operations as a start-up was the utilisation of peer-to-peer (P2P) networking. Siva Vaidhyanathan explores p2p ideology in the frame that culture is to be shared (Vaidhyanathan 2004), however such technology was looked down upon by traditional media houses for its association with piracy.

One of the lead engineers and indeed Daniel Ek himself were previously involved with uTorrent, a service that made money enabling users to pirate media content through a file sharing software called BitTorrent. It’s no surprise then that the original structure of Spotify used this technology – one that enabled them to conserve a significant amount of resources and costs.

The technology, long feared by the music industry, works by storing cached files on user’s computers – when a user plays a certain track, the Spotify client can look on the P2P network to stream it. This enables a much lower latency level than streaming directly from Spotify servers (though not as efficient as streaming from a user’s own stored caches). The use of this technology enabled the company to grow very quickly without needing to suddenly invest in servers around the world – however in 2014 Spotify began to phase out the P2P network for servers it has slowly been building.

 

Incase, Flickr, Some rights reserved

 

A disruption is categorized by its ability to redefine an industry – and the economic impacts of Spotify have been far reaching. The ‘free’ model that Spotify operates has been key to its successful growth, but the sustainability of such a business model is under intense criticism. Spotify freemium users outnumber paid subscribers about three to one’ (Passman, 2015) and the impacts have greatly affected the industry’s revenue streams. For many artists, Spotify is in the same group as piracy – Taylor Swift famously refusing to put her work on the platform, citing the unfair royalties.

It appears as if the current business model mostly benefits the consumer, however the industry and artists make the argument that ultimately the consumer will be at a loss. While streaming technology is already deeply embedded in our society, it can be argued that the barriers it has formed will disintegrate the quality of media content created. For example, if the movie industry could solely rely on the 10$ monthly fee for a Netflix subscription, the quality produced within the industry must decline – as individuals flee to other, more lucrative industries. As of today, Spotify is still not turning a profit – and revenue from advertisements on the free version do not cover the costs incurred.

 

Dwi Rahmaputra, Flickr, Some rights reserved

Spotify has also been largely socially transformative – through its integration with Facebook the platform began to experiment with a ‘friends’ tab – whereby users could see what their friends were listening to at any given moment. By integrating elements of social media into otherwise private listening patterns, Spotify turns ordinary users into curators – those that can recommend and help others to discover (Hagen 2016). The sharing of music also promotes a sense of belonging, relating an individual’s perception of self and identity to the wider community of peers (Van Dijck 2007). Prior to Spotify, the sharing of one’s music taste occurred through face to face interaction – or perhaps a homemade mixtape.

Interestingly, Spotify employs a ‘director of social impact’, Kerry Steib whose role is to ‘bring artists and fans together to create social change through music and Spotify’s platform’. One such example was their collaboration with eight artists to encourage students to vote –  the artists sharing stories about important topics like healthcare, student debt and more.

One other interesting theory emerging in recent years is the impact that Spotify and the surrounding digital culture has had on song length. Attributed to the problem of ‘limitless choice,’ the concept of the micro-song is a solution to shortening attention spans. As Havalais (2008) notes, ‘the internet increases our access to information but not our capacity to consume it,’ and Spotify’s seemingly endless library of songs is a perfect example of the attention economy at work.

 

Summary

The transformative impact of Spotify and its revolutionary business model is undeniable. It has utilised the internet and technological advancements to disrupt previous industry models while slowing piracy and enabling consumers access to an unprecedented catalogue of music. It has changed the way artists and the industry understand consumers through its provision of Spotify insights, and overturned an economic model established decades prior. The future seems to involve streaming, but those that are coming off second best will continue to fight.

 

 

 

References:

Schwarz Jonas Andersson. (2013). Online File Sharing: Innovations in Media Consumption. New York: Routledge.

Spotify (2018). About. From https://www.spotify.com/is/about-us/contact/

John Seabrook, The New Yorker (November 24 2014) http://www.newyorker.com/magazine/2014/11/24/revenue-streams

Belk, Russell (2014) You are what you can access: Sharing and collaborative consumption online. York University, Elsevier inc. Retrived via: https://collaborativeeconomy.com/wp/wp-content/uploads/2015/05/Belk-R.2014.-You-are-what-you-can-access-Sharing-and-collaborative-consumption-online.Journal-of-Business-Research.pdf

Botsman, Rachel & Rogers, Roo. (2010). What’s Mine Is Yours: The Rise Of Collaborative Consumption.

Turow Joseph. 2011. The Daily You: How the New Advertising Industry Is Defining Your Identity and Your Worth. New Haven: Yale University Press.

Vonderau, P. (2017). The Spotify Effect: Digital Distribution and Financial Growth. Television & New Media. https://doi.org/10.1177/1527476417741200

Segan, S. (2015) Apple music can win without being great. Available at: http://uk.pcmag.com/services-players-products/42606/opinion/apple-music-can-winwithout-being-great

Flanagan, A. (2017). Spotify sued, yet again, over compositions. Washington: NPR. Retrieved from http://ezproxy.library.usyd.edu.au/login?url=https://search-proquest-com.ezproxy1.library.usyd.edu.au/docview/1933218584?accountid=14757

Germain and J. Chakareski, “Spotify Me: Facebook-assisted automatic playlist generation,” 2013 IEEE 15th International Workshop on Multimedia Signal Processing (MMSP), Pula, 2013, pp. 025-028. doi: 10.1109/MMSP.2013.6659258

Haydn Shaughnessy, (2016) “Harnessing platform-based business models to power disruptive innovation”, Strategy & Leadership, Vol. 44 Issue: 5, pp.6-14, https://doi-org.ezproxy1.library.usyd.edu.au/10.1108/SL-07-2016-0061

Vaihyanathan, Siva (2004) ‘The Ideology of Peer-to-Peer’, The Anarchist in the Library. Basic Books: New York.

Passman, D.S. (2015) All you need to know about the music business: Ninth edition. United States: Simon & Schuster.

Hagen, A. N., & Lüders, M. (2017). Social streaming? Navigating music as personal and social. Convergence23(6), 643–659. https://doi.org/10.1177/1354856516673298

Van Dijck J (2007) Mediated Memories in the Digital Age. Stanford: Stanford University Press.

Havalais, Simon (2008) ‘Search Engine Society: Digital media and the society series’ Polity 2008, Originally from: The University of Michigan

Multimedia references:

Minel Keseer (2017) Flickr. Retrieved from here

Deargdoom57. (2003) Flickr. Retrieved from here

Chibicode (2014) Flickr. Retrieved from here

Stephan Ohlsen (2017) Flickr. Retrieved from here

Incase (2012) Flickr. Retrieved from here

Dwi Rahmaputra (2013) Flickr. Retrieved from here

 

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