Spotify: Music Miracle or Destroyer of New Music?
Streaming has been enjoying boom times: streaming revenues increased by 18.5% in 2020. There were 443 million users of paid subscription accounts at the end of 2020 and total streaming reached $13.4 billion, or 62.1% of total global recorded music revenues. This has offset the fall in covid related decline in revenue from performance rights.
The purple bars in the graphic below demonstrate the striking rise of streaming (and the striking fall in physical music, which predates the rise of streaming).
“Streaming is a bit of a miracle: the fact we have access to every piece of music in our back pocket for £10 a month is almost a miracle” says Guy Garvey, singer and songwriter for Elbow and a BBC6 Music presenter.
So why are some concerned about the revenues … wages… earned by the music artist themselves? In July 2021, a parliamentary select committee published a report on the economics of the music industry. There are a lot of people who actually believe that, whilst streaming has saved the industry from piracy, it has also ruined the industry for artists. A poll by The Ivors Academy and Musicians’ Union found that eight out of ten music creators earn less than £200 a year from streaming. According to one report, artists earn on average only £0.009 per stream. Nadine Shah told MPs that she earned so little from streaming that she could not pay the rent.
How can this be? How can such a successful industry pay their artists — the content creators — so little?
And how is it possible for us as consumers to have all this music at the click of a screen, at a seemingly low price?
In economics, Spotify, which is the world’s largest music streaming service with over 365 million monthly active users, including 165 million paying subscribers, as of June 2021, is known as a monopsony.
A monopsony is a situation where there is one buyer in a market. Now as the data above shows, Spotify is not the only buyer but it is the dominant buyer in this market. Economic analysis shows us that this dominant position gives Spotify undue market power which it is able to use to suppress the price that it pays to the artists for their music. Because there are few other buyers of their music, artists (of which there are very many, competing against each other) have little bargaining power. They must sell to Spotify at almost any price, or not sell at all.
We assume that the industry supply curve of labour is upward sloping: that is to say, that as the wage rate/money earned by artists increases, there will be an increase in the supply of artist hours.
In the following diagram, the monopsonist faces an upwards sloping labour supply curve. This refers to the supply of artist hours. If Spotify wants more new music to stream it must pay more for it. The monopsonist faces a marginal cost of labour curve that slopes upwards at a higher gradient than the supply curve. This is because when raising the payment to bring forth more new music it must raise the payment to existing music already being streamed. Hence the marginal cost to Spotify of an extra piece of music will be much higher than the amount necessary to bring forth a given amount of new music as shown by the supply (AC) line.
The profit maximising firm employs artists to the point where the marginal cost of doing so is equal to the marginal revenue it receives from selling the music. This is Q2. However, it is able to pay W2 for the artists’ service.
Is this bad? Well the wage W2 is lower than the value of the work produced by the artist (the value is the Marginal Revenue Product, MRP). In addition, if this were a competitive labour market, the wage earned would be W1 and more music would be available, at Q1. W2 reflects the struggle that artists have in getting paid “fairly” for their work.
But there are some further complications or questions here: most artists do not go to Spotify direct, but rather via their record labels. Even here, though, there is evidence of some dominant players who, just like the analysis above, are able to suppress the monies paid to their artists.
Established, well known artists such as Elton John or the Rolling Stones are mostly listened to for their back catalogues. There are no costs incurred by them — anything they earn now, from their back catalogue, is pure surplus. In light of that, W2 is only an issue, perhaps, for new artists who need the income to cover the costs in terms of time, effort, and studio fees of actually making new music.
Furthermore, “the big music companies have been able to use their muscle to strike increasingly advantageous deals on royalties from streaming with leading platforms such as Spotify. The basis of that negotiating power was highlighted in a report from the Intellectual Property Office, which showed that the top 1% of artists account for 80% of all streams, and that 10% account for 98% of all listening by fans”. (The Guardian). This is a case of Bilateral Monopoly: the might of Spotify is met with the might of Sony Music, EMI and Universal Music. They are able to counterbalance the power of Spotify and strike a better deal for themselves, and their artists.
But that still leaves the new or unknown artist at the behest of these huge firms. Does this matter? Well if we are to have new music, new artists, new ideas, then yes: it matters. Paying them little is unlikely to encourage the creativity we all benefit from.
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