Spotify: the Economics of Streaming

Music platforms are evolving at breakneck speed, but is the increasing consumer utility destroying artist profit? CDs replaced records, digital downloads replaced CDs, and now streaming services like Spotify and Apple Music thrust the purchased digital copies of iTunes onto the edge of obsolescence. Spotify’s 2011 debut in America offered music fans a new way to listen to their favorite artists. Instead of purchasing individual songs or albums, users can stream music from a phone or laptop.

Spotify offers multiple options: a free version where music is interrupted by advertisements and a premium version where users pay a monthly subscription rate but listen ad-free. The streaming platform additionally incentivizes users to upgrade to Premium due to the limited features on the mobile free version. The Premium subscription fees plus the advertisements comprise Spotify’s revenue. Consumers have the choice to pay monetarily (through subscription) or with their time (by listening to ads). The company is able to generate revenue from both models by being paid directly by both consumers or advertisers. Spotify’s artists profit because the company pays them royalties per stream of their music.

Recently a friend asked me why I continued to purchase individual songs from iTunes on my phone even though I used Spotify on my laptop. On average I buy two to five songs a month, which totals in between $2.58 and $6.45 on iTunes. I save more songs and albums on Spotify, but since I use the free version I can only access them with internet service. I continue to purchase off iTunes because I like the assurance that I will not lose my music if I unsubscribe to a service. Now, as music streaming becomes more competitive, a Spotify subscription becomes more viable as prices are driven down.

Streaming sites increasingly make subscriptions increasingly more affordable beyond discounted trial periods, especially for students. Spotify Premium starts at $9.99 per month, $4.99 for students, and $14.99 for a family. Songs on iTunes sell from $0.69 to $1.29 individually, so if someone purchases a high quantity of music it would be more effective to switch to a streaming site.

As streaming sites such as Netflix, Hulu, Apple Music, and Spotify gain prevalence and popularity, subscribers save money but artists on the sites have varying success. According to CNBC, in Spotify’s case, legal holders of music may receive as little as $0.006 to $0.008 per stream. These royalties are divided up between labels, producers, and the artists themselves.

As platforms attempt to find a balance between user benefit and artist profit, the economic benefits of streaming over purchasing will fluctuate. At the moment as the streaming industry continues to grow, more of both artists and consumers switch to a subscription-based platform. The rising popularity brings promising benefits for subscribers, and as sites gain traction a hopeful rise in artist royalties will follow.

About Rachel Kadoshima

Rachel is a senior economics and French language student

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