It may take 35,000,000 active users in the USA for the yearly royalties paid by Spotify to equal those paid by iTunes?

Recently at SXSW, Sean Parker apparently predicted that Spotify will overtake iTunes within the next two years—given the former’s present growth rate.  I am going to assume the active measure for comparison here is royalties paid during a year period, or revenue earned, not total number of active users or user accounts.

Let’s check the math, using some of the inputs from Glenn Peoples over at Billboard. For the moment, we will limit this little discussion to the US only. And we will hold iTunes growth at nil, essentially seeing how big Spotify would need to get to equal iTunes music revenue/royalties in 2011.  To account for growth towards 2013, just add your own growth factor to the answers I get.

I will also make two key assumptions:

(1) That 70% of the Spotify subscription price is what goes into the pool for royalties, just as 70% of the iTunes sale (in general) goes into the pool for royalties).  For example, at the $9.99 premium price, roughly $6.99 becomes the royalty pool.  This assumption is not only being made in order to make life simple, but also because this 70% payout appears to be the case (at least according to Glenn@Billboard).  Your mileage may vary.

NOTE: I know I am being a little sloppy here given it would be better to include a more appropriate accounting of mechanical royalties.  However, given that in the US these royalties can flow through the sound recording owners (my emphasis and potential sarcasm added), I am just bundling the whole problem within the 70% for simplicity.

(2) That the “effective” obligation per active FREE user is $1.99 per month, 70% of which is paid as royalties.  Just to be interesting, I will also work with $2.99 and $0.99 as the FREE user value.  In essence, I am treating FREE users as a cost to Spotify on a per subscriber basis (regardless of whether enough ad revenue is earned) and a resulting royalty payment for rightsholders.  Not a perfect treatment, but this technique will permit us to account for the fact that these users do lead to royalties—while free to the user, free users are not free for Spotify.

Glenn stated, over at Business Matters in Billboard:

Billboard estimates there was roughly $2.4 billion of consumer spending on music downloads in the U.S. in 2011, based on Nielsen SoundScan sales figures and rough estimates of per-unit prices. iTunes was assigned a 70% share of the download market, giving it estimated sales of $1.7 billion.

And so we are looking for a kitty about equal to $1.7 billion in the United State for comparison.

Now, Spotify presently claims roughly 10 million active users, 3 million of which pay for the service in some way.  Therefore, at least for the moment, let’s work with 30% of the “active user base” converting to paid users.

The firm has previously stated that about 85% of paying subscribers are at the $9.99 tier, while 15% are at the $4.99 tier. Lets move forward as if this ratio between high/low tier subscribers remains the same.

I could write out some fancy equation right now, but I won’t. Suffice it to say we are looking to find out how many Active users it will take to result in $1.7 billion in pre-royalty revenue (or ~$1.2 billion in post-royalty), given that (a) of these Active Users, 30% will pay for a subscription and (b) 85% of those who pay will pay at the High tier ($9.99) while 15% will pay at the Low tier ($4.99).

Whew.

Alternate Answer #1: 30,000,000 Active Users if Free users are effectively worth/cost $2.99 each month.

A top-line number that would lead to:

30,000,000 Free users -> $753,480,000 in yearly “revenue” pre-royalty
9,000,000   Paid users -> $997,920,000 in yearly revenue pre-royalty

if Free users are effectively worth/cost $2.99 each month.

Alternate answer #2: 35,000,000 Active Users if Free users are effectively worth/cost $1.99 each month.

A top-line number that would lead to:

24,500,000 Free users -> $558,600,000 in yearly “revenue” pre-royalty
10,500,000 Paid users -> $1,164,240,000 in yearly revenue pre-royalty

Alternate answer #3: 42,000,000 Active Users if Free users are effectively worth/cost $0.99 each month.

A top-line number that would lead to:
(number below are corrected from earlier post)

29,400,000 Free users -> $349,272,000 in yearly “revenue” pre-royalty
12,600,000 Paid users -> $1,397,088,000 in yearly revenue pre-royalty

Is overall “user engagement” falling for services such as Spotify? Or are the free users simply falling away?

A few independent artists have been releasing data that relate to payments from subscription music services such as Spotify.  Looking at these various reports, and the apparent increase in “per stream” payouts, I am left to wonder:

Is the number of tracks to which any user listens during any month actually falling for services such as Spotify?  In other words, is average “user engagement” (if measured as tracks streamed per month) falling?

Or, are free users simply falling away?

Since privately shared data is, well, private, I can only discuss recent payout data reported publicly by bands such as Uniform Motion.  This group recently reported that their payouts from both Spotify and Deezer increased (in the EU, no doubt).

From Spotify, the payouts increased between 2010 and 2011 from an effective €0.0033 per stream to an effective €0.0047 per stream.  From Deezer, the payouts increased as well, from somewhere in the ballpark of  €0.006 per stream to a somewhat astounding  €0.0127.  Converted to dollars that means the band is receiving greater than $0.60 $0.0074  per stream from Spotify and and astounding $0.0165 from Deezer.

Now, since most of these deals are likely structured on a percentage of per user revenue basis and few users are causing any per stream minima to trigger payments greater than the user subscription fee, I have to wonder how the effective payment per stream is rising.

As Spotify and other services like Deezer incorporated restrictions upon the length of term over which users were provided free access to the services, the number of active monthly users seems to have stalled a bit.  These services are still growing, but at a slower rate.

Furthermore, if you peek at Daily Active Users, as compared to Monthly Active Users of the Spotify Facebook app (thanks to AppData), it seems that daily active users have been rather stable (i.e., no growth) as monthly active users increase.

As the number of free users peeled away, we would expect the effective per stream payout to increase.  Furthermore, since the total number of users is not increasing drastically (any growth being culled by extant free users falling out) it would seem that ad revenues are not on a major upswing.

And so, is this increase in effective payouts a simply function of free user fallout?  Or, are paid users losing interest in the services such that their monthly payments are being divided among a smaller number of monthly plays?

Girl Walk // All Day: Creative expression, community funding, and copyright conundrum

A new “feature-length dance music video” is hitting the screens at SXSW, Girl Walk // All Day.  Wired has an article describing the film in greater detail.  This film hits three important buttons in this new medium:

(1) Creative expression

‘Nuff said.

(2) Community funding

The project was funded via Kickstarter, and the funders are listed as Senior Producers, Producers, Associate Producers, or Additional Supporters according to the amount of funding they provided.

(3) Copyright conundrum

The Girl Walk // All Day film is synced to large portions of Girl Talk’s latest album, All Day.  In other words, the walking sampling dilemma that is Girl Talk is now synced with a film, introducing a new layer in the licensing paradox.

There is significant debate over just how and at what cost GirlTalk would license all of the umpteen samples that are involved in his work.

Now there would be another stage of the debate, in terms of whether and how his collection of samples and the samples therein might be licensed for “sync” with the film.