Is a stream on Spotify (or any music service) really worth less than an iTunes sale?

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On numerous occasions over the past few months we have heard news of labels and artists disappointed with the monies they are receiving from Spotify.

Since Spotify is really just one of the music services alive and kicking on the planet these days (alongside Rhapsody, MOG, Rdio, Deezer, and others), its worth investigating this matter of the value of payments from streaming services versus those received from record sales.  So let’s get a napkin out and flip to the backside for some mathy stuff.

Assertion:

When you purchase a download you are paying in advance for all of your subsequent listens of that track.

When you listen to a track through a streaming music service, you are paying as you go for each and subsequent listens of that track.

First off, its important that we compare apples to apples and not apple to oranges. Comparing the value of a stream to the value of a sale is without question an Apples to Oranges comparison.  And so, let’s convert the sale to an estimate of payment per stream so we can compare apples to apples (or oranges to oranges if you prefer).

Second, let’s make a simple assumption: A single track purchased from iTunes will be listened to 250 times, on average, over the lifetime of the person who acquired the single.  This assumption may not seem that crazy—over twenty five years will you listen to the “average” purchased song in your library about 10 times per year?  Or twenty five times per year over the first ten years?

Dividing the amount paid for a single by the number of times you listen to that single over the lifetime will give us the effective rate you have paid for each listen of the track.  This payment per listen is the closest equivalent to the payment per stream courtesy a music streaming service.

Third, now we can just divide the amount music rightsholders would earn from a sale on iTunes to estimate a “per listen” fee—the effective rate paid over the lifetime of the track’s enjoyment for each listen of the song.

$0.70 -> the amount a label receives for the sale of an iTunes single (US)
250    -> the number of assumed listens to the track over ownership life
——————–
$0.70 / 250 =  $0.0028 per listen

OK.  So some quick math has led us to the conclusion that our “per listen” payment for iTunes singles over the lifetime of our enjoyment of these tracks is just short of 1/3 of a penny.

From the perspective of songwriters and publishers, in the US, some of this $0.70 above should be flowing back to you—about 9.5 cents (give or take for those various alterations like controlled compositions). And so, the per listen portion paid to the songwriter/publisher would be around $0.00038, leaving about $0.00242 for the sound recording owner(s) and performing/featured artist(s).

To repeat, if you convert purchases of downloadable singles to some value “per listen,” we get the following:

$0.00242  -> for the label(s) and performing artist(s)
$0.00038 -> for the songwriter(s) and publisher(s)
——————-
$0.0028   -> total amount paid to rightsholders per listen from a purchased track

Now we can ask, Is $0.0028 greater than or less than what rightsholders are receiving per stream from streaming music services?

Since disclosing the licensed rate at which these music services pay for music per stream would be controversial behavior, let’s just use the going rate as suggested by those who have chosen to disclose (or claimed to disclose) their payments from Spotify.  That rate is apparently about $0.0033 per stream paid to the label, some portion of which may or may not ever make its way back to the artist(s).

$0.0033 -> the amount believed to be paid per stream via Spotify (for SR only)
$0.0028 -> the effective “per listen” payment for a purchased download
——————–

$0.0033 > $0.0028

Could it be true?

Is the per stream rate paid by music services actually greater than the effective per listen rate we pay for a purchased download?

Next up, we will use some not-so-fancy financial tools (NPV) to compare the present value of these two payments schemes: up-front versus over-time.