Spotify Defends Against New Music Backlash, Says It Will Pay Out $1B To Rightsholders By End Of 2013

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Spotify, the music service with 24 million active users, says that it is on track to pay out $1 billion to artists that stream music on its platform by the end of 2013, and that it has already paid out $500 million so far as the “artist-friendly” streaming service. This speaks to how the company continues to push as the pacesetter in the world of streaming music, but also comes at a time when the company is coming under fire from small-but-influential acts who are pulling their music from the platform and claiming Spotify doesn’t pay well enough to be worth their while.

As Spotify becomes more mainstream, it is also bringing on more major musicians. In recent months, Metallica, Pink Floyd and the Eagles have all signed important deals to bring their back catalogues to the platform. But at the same time, smaller players are getting increasingly vocal about dissatisfaction with the Swedish-based startup.

There have been bands before who have chosen not to put their music on Spotify complaining of poor returns, but the exodus took a slightly more high-profile turn this weekend, when Nigel Godrich from the band-of-bands Atoms for Peace announced on Twitter that the band was pulling its titles from Spotify.  (Other members of Atoms for Peace include Flea from the Red Hot Chilli Peppers and Thom Yorke from Radiohead; Godrich is also a producer who has been called Radiohead’s sixth member.)

Calling their move a “small meaningless rebellion” — likely in reference to the band’s audience size and catalog size in relation to that of Spotify overall, not their own profile, judging by the online reaction to the move — Godrich explained that “new artists get paid fuck all with this model.. It’s an equation that just doesn’t work.”

Pandora, which has also come under fire for how it pays out royalties, has attempted to point out that it returns significantly more than radio broadcasters do, the argument is not that it pays worse than radio, but that it pays worse than albums ever did.

“If people had been listening to Spotify instead of buying records in 1973… I doubt very much if [Dark Side of the Moon] would have been made,” Godrich says.

Spotify, in its defense, notes that it’s still “in the early stages of a long-term project” and that it is committed to being “artist friendly”:

“Spotify’s goal is to grow a service which people love, ultimately want to pay for, and which will provide the financial support to the music industry necessary to invest in new talent and music. We want to help artists connect with their fans, find new audiences, grow their fan base and make a living from the music we all love,” said a spokesperson in a statement provided to TechCrunch today. “Right now we’re still in the early stages of a long-term project that’s already having a hugely positive effect on artists and new music. We’ve already paid $500 million to rightsholders so far and by the end of 2013 this number will reach $1 billion. Much of this money is being invested in nurturing new talent and producing great new music.

“We’re 100% committed to making Spotify the most artist-friendly music service possible, and are constantly talking to artists and managers about how Spotify can help build their careers.”

So far, it doesn’t look like Atoms for Peace is taking its rebellion to all digital music platforms: it’s still on YouTube, for example, although it appears to have gone from Rdio. And this may not be the end of it. Yorke’s Radiohead has a history of striking out on its own in an attempt to find a better way forward with digital music, specifically when it chose to release In Rainbows online in 2008.

“For me In Rainbows was a statement of trust,” Yorke noted today, as he also got behind the move pulling additional material from the platform. “People still value new music ..That’s all we’d like from Spotify. Don’t make us the target.”

What will be worth seeing now is whether more bands follow in the wake, whether other streaming platforms come out with promises of better deals, and whether Spotify chooses to negotiate better deals with the long tail of musicians on its platform.

Spotify has never confirmed officially how the full economics of its platform works. Although there have been plenty of guesstimates, it’s hard to say whether they are being greedy or just trying not to lose as much money as they might otherwise.

What Spotify has said is that it pays “approaching” 70% of all its revenues back to rightsholders — labels and musicians and the rest. The cut that musicians get from that depends on the deal they have with labels and other distributors. There is a but more nuance behind this:

“In general…Spotify pays royalties in relation to an artist’s popularity on the service. For example, we will pay out approximately 2% of our gross royalties for an artist whose music represents approximately 2% of what our users stream. A popular song or album can generate far more revenue for an artist over time than it historically would have from upfront unit sales,” the company notes.

There is also the issue of external agreements with how all streaming sites pay out royalties. As the Future of Music describes it, “interactive audio-only webcasters and subscription services will pay 10.5% of their revenue to songwriters and publishers, minus any performance royalties already being paid to labels…A percentage rate provides a much more flexible system that allows for some pricing experiments, and an easier calculation for the music services to make.” These statutory rates are followed by Spotify, as pointed out in this HypeBot interview with Spotify “artist in residence” D.A. Wallach.

Ultimately, though, for smaller artists, this doesn’t seem to work out all that well, with the latest complaints one of the more recent examples.

For the 24 million active users, Spotify currently says it has 6 million paying subscribers, although those numbers were from March 2013 and are likely higher now.

In any case, it’s a model built on being big and getting bigger, so I suspect that we will only see a change if you started to see a significant part of artists behind the company’s 20-million-strong catalogue, or its users, demand it, or else do like Atoms let their fingers do the walking.