The Economics of Spotify

Zoe Henkes

AP Economics B4

Mrs. Straub

17 March 2015

The Economics of Spotify

Music is a quintessential aspect of culture and even of life itself. There is music for every mood, emotion, and feeling, from the very best moments of life, to the toughest. From the very first vinyl records, to cassette tapes, to CD’s, to iPods and MP3’s, we have made ways to be able to replay our favorite songs as many times as we like at home or on the go, as opposed to listening to the radio or the artist live. Now, online streaming sites such as Spotify present a whole new way to listen to music.

Spotify was launched in 2008 by Swedish entrepreneurial, Daniel Ek, and has multiplied in popularity to nearly fifty million users in 58 countries (Seabrook). Spotify allows users to choose through its billions of songs—and growing each day—to make their own playlists, or to browse public playlists made by others. With its easy access to music and the fact that users can choose which individual songs they like, Spotify provides greater efficiency in listening to music, and in turn, yields greater utility, as well.

Spotify is available on both the computer desktop and in app form for mobile devices, with which there is a free and premium paid version of the service. With the free version, users can listen unlimitedly on desktop and the app with adds every five or so songs and solely on shuffle mode on the app provided they are connected to the internet somehow. With the paid version, users can listen ad-free, offline, and under a higher quality of streaming for $9.99 a month. Ideally, the frequent ads on the free version act will pose as a negative externality to listeners, providing incentive to upgrade to Premium.

The number of Spotify users is growing by the thousands, by the millions. One thing to consider in finding out as why it is so appealing to its customers is the network effect. Because Spotify acts as a sort of social network, as well, as users can connect with other users to see what they are listening to and to follow their playlists, the more people joining the mix, the greater the value to a single user. Additionally, John Seabrook, contributor to The New Yorker, points out that, “on Spotify, music consumption is ‘frictionless’…we’ve gone from a world of scarcity to one of abundance.” With seemingly endless amounts of songs at their fingertips, consumers are no influenced by scarcity—they are free to consume as much or as little as they desire. Consequently, however, as the number of Spotify users grows, the numbers of iTunes sales has decreased, as they are substitute goods. According to Karim R. Lakhani and Marco Iansiti of the Harvard Business Review, “worldwide music sales in Apple’s iTunes Store fell almost 14% in the past year, adding to a 2.1% decline the previous year.” Because on Spotify, listeners can stream unlimited music for a flat rate of $9.99 a month, or even for free with advertisements rather than having to purchase each song individually off of iTunes, the demand for Spotify has increased, and in turn, the demand for iTunes has decreased.

Recently, Spotify and other similar music-streaming networks have faced some kickback by critics and artists themselves. The main reason for the criticism has to do with unfairly low royalties. In other words, people believe that artists are not getting a fair share of the revenue, which is about a fraction of a penny per stream. The biggest and most publicized example of this uproar comes from Taylor Swift, as she decided to not only hold the release of her newest album, 1989, from Spotify, but pull all of her previous albums, as well. In a video from Today, Willie Geist reports that the reason for her decision is that she wrote that “valuable things should be paid for.”

This debate goes both ways, however. On the flip side, Spotify claims to award a more than fair share of its revenues back to the artists compared to other networks, and also has helped to lower piracy in the music industry (click for more on Spotify’s royalty policy ). Even though royalties only pay artists a small fraction of a penny per stream, over a significant amount of time, the revenue gained will exceed that of which is gained from a one-time payment of $0.99 or $1.29-iTunes download (Carey). Additionally, the fact that Spotify only charges a flat rate for Premium and is free for basic usage encourages the exploration of new music. For instance, the marginal benefit of purchasing a song one will only listen to once or twice is far less than its marginal cost, which generally steers customers away from buying it on iTunes. But with Spotify, one can discover new songs virtually free of charge, one reason it is so appealing to many.

In the end, there is no denying that the music industry, as well as media as a whole, is shifting from physical copies to online streaming, and Spotify is just another network to join the mix—easy to use, efficient, and enjoyable.

Works Cited

Carey, Eamonn. "The Economics of Spotify." The Huffington Post UK. Huffington Post UK, 27 Dec. 2011. Web. 15 Mar. 2015. <http://www.huffingtonpost.co.uk/eamonn-carey/the-economics-of-spotify_b_1063116.html>.

Lakhani, Karim R., and Marco Iansiti. "Taylor Swift and the Economics of Music as a Service." Harvard Business Review. Harvard Business Publishing, 06 Nov. 2014. Web. 15 Mar. 2015. <https://hbr.org/2014/11/taylor-swift-and-the-economics-of-music-as-a-service>.

Seabrook, John. "Revenue Streams." The New Yorker. The New Yorker, 24 Nov. 2014. Web. 05 Mar. 2015. <http://www.newyorker.com/magazine/2014/11/24/revenue-streams>.

"Spotify Explained." Spotify for Artists. Spotify, n.d. Web. 12 Mar. 2015. <http://www.spotifyartists.com/spotify-explained/>.

Wagstaff, Keith. "Can Taylor Swift Defeat Spotify and Get People to Pay for Music?" TODAY. Today, 28 Nov. 2014. Web. 15 Mar. 2015. <http://www.today.com/money/can-taylor-swift-defeat-spotify-get-people-pay-music-1D80314536>.