Spotify royalty wars stunting industry progress

October has been full of criticism for the music streaming service Spotify. A number of artists have spoken out against Spotify’s royalty rates, including Jimmy Buffett, who asked at the inaugural Vanity Fair New Establishment Summit Oct. 8 if Spotify would ever increase its royalties so artists could earn more revenue.

The issue was compounded when the company’s recently introduced #thatsongwhen social media campaign—meant to promote the service through sharing memorable stories that listeners relate to specific songs—backfired as artists and fans abused the hashtag to protest the company.

Spotify, founded by CEO Daniel Ek in 2006, provides its users with an extensive library of music that can be streamed on computers, tablets and smartphones. The free service allows users to stream entire catalogs with periodic commercials between songs, or users can stream music commercial-free for a fee of only $9.99 per month.

The problem is many artists think Spotify is not paying them enough in royalties for the streaming of their songs, and that the low compensation they are receiving is devaluing the music they put out. The royalties received from having songs streamed on Spotify is significantly less than those an artist would receive from selling a song on iTunes. However, what artists need to realize is that streaming services are a very different platform from digital music sellers such as iTunes, which targets a different type of music consumer, so it is unrealistic to expect the same kind of revenue from streaming they would receive from sales.

Spotify does not need to increase its royalty payments. The streaming service’s royalty rates are already much higher than competing services such as YouTube and Pandora, and artists’ resistance to comply with Spotify’s royalty rates is indicative of a larger problem in the music industry: Artists are stuck in the past and cannot accept the evolution of the music industry further into the digital age.

CD sales have continued to plummet, and paid download sales are plateauing. Today is a digital age of convenience in which consumers are accustomed to finding whatever they want, whenever they want—for free. It is as easy as a Google search. It just does not make sense for people to keep purchasing all their music when there is a much cheaper and more convenient alternative: music streaming. Streaming is the future of the industry—a reality many are struggling to come to terms with.

It is true that artists cannot earn as much money by streaming their music on Spotify as they would by selling physical or digital copies of their music. However, they should recognize that another alternative to purchasing music still exists: illegal downloads. Rather than whining about Spotify not making artists as much cash as they would like, musicians should be celebrating Spotify for providing essentially free music while still making some sort of income.

Artists are viewing Spotify as a threat to their ability to profit as musicians, but they should view it as an opportunity instead. Spotify is helping to save the music industry in an age when illegal downloads reign supreme.

Perhaps the biggest criticism of Spotify is that its payout to rights holders per individual stream is less than a penny, ranging from .6 cents to .84 cents, according to the Spotify Artists website. That is significantly less than the royalties that would be earned from selling a song on iTunes, where roughly 90 cents is left to be distributed among rights holders for the sale of a $1.29 single.

However, artists are not distinguishing between streaming profits and digital sales when making these judgments of royalty rates. They see that a song with a million streams yields a few thousand dollars and compare that to the millions of dollars they think they would make if they sold a million downloads and get disappointed at the difference. But the fact is that streams do not translate directly into downloads and because someone streamed a song does not mean that someone would have purchased it had it not been available on Spotify.

According to the Spotify Artists website, roughly 70 percent of Spotify’s total monthly revenue is split among rights holders, which refers to the owners of the music on Spotify. The 70 percent is then split among the copyright holders in accordance with how many of Spotify’s total streams that month came from their song. For example, if a song accounted for half of Spotify’s total streams in a month, the artist they would receive half of the 70 percent of Spotify’s total revenue for that month.

In other words, the more users Spotify has, the more streams Spotify will have, increasing the total revenue to be split among rights holders.

If artists truly are not satisfied with Spotify’s royalty rates, then they should try to work with the company to increase its user base and encourage their fans to stream their music through the app. Expanding Spotify’s user base will lead to more streams, which in turn leads to more royalty payments to the artists.

The bottom line is that on-demand streaming services like Spotify are just about as revolutionary to the recording industry as digital retailers like iTunes once were. Rather than continuing to resist Spotify, artists should be working with the company to allow the music industry to grow during a time in which both physical and digital sales are declining.