Dear Daniel Ek,
I am writing to express my concern about Spotify’s proposal to ‘demonetise’ tracks that would otherwise account for the lowest 0.5% of royalty payments.
I write in my dual capacity as a competition policy expert, who has been heavily involved in the development of digital platform regulation in the UK and EU, and also as a long-time creator and champion of independent and DIY music and co-founder of a small indie label.
Spotify claims that it “exists to connect creators with fans, and empower creators to live off of their art.” It is also a champion of fair competition, including through its “Time To Play Fair” campaign.
Spotify’s current proposal is at odds with these worthy corporate statements. Not only is it intrinsically unfair, but it is also anticompetitive and seriously risks constituting an abuse of dominance under UK and EU competition law.
First, Spotify seems highly likely to have a dominant position in the provision of streaming services to music creators. Most consumers of streaming services are ‘single-homing’ (i.e. use only one service) and Spotify has a strong position in that market (with over 50% share in many European countries). Spotify is thus a critical ‘bottleneck’ or ‘gatekeeper’ for music creators seeking to reach streaming consumers. This is important because music streaming now accounts for over 75% of all revenues from recorded music.
Second, while the proposed demonetisation might seem like a small change to Spotify’s policies, I would argue that it is akin to Amazon simply deciding not to pay the many small traders that account for the last 0.5% of its revenues. It is not only discriminatory and exploitative of music creators, but also creates an unlevel playing field in the market for music creation.
In music streaming – as in many markets – there is a huge skew in the streams of tracks, with a relatively small number of tracks by the biggest artists accounting for a very large share of all streams. It is not currently clear what this 0.5% cut-off means in terms of minimum required streams, but it will no doubt affect an extensive ‘long tail’ of smaller artists and independent labels.
And of course, if a precedent is established here, there is nothing to stop the 0.5% cut-off point increasing over time.
The major label Universal Music Group supports Spotify’s new scheme on the basis that it will “reward real artists with real fanbases for the platform engagement they drive.” This is bordering on offensive.
It fails to recognise that this ‘long tail’ includes a huge number of ‘real’ emerging artists, emerging genres and emerging small labels, as well as artists and labels who are culturally important in smaller geographic territories, ethnic groups or genres. It includes many musical seeds that have huge potential to grow into exciting new musical forces and change the future of music and culture. Demonetising these smaller ‘grass roots’ artists is clearly discriminatory.
There is also a risk of discrimination between two different sets of rights holders. It seems likely that any demonetisation of songwriting rights would be illegal under copyright law. If so, this proposal may involve Spotify demonetising only the recording artists and labels releasing the affected tracks, while continuing to pay royalties to their songwriters and publishers.
Spotify’s ability to demonetise this tranche of music is also exploitative and reflects the huge discrepancy in bargaining power between Spotify and these smaller business users. The vast majority of these artists and labels really have no other option than to stream through Spotify, given its huge footprint with single-homing listeners, since this is a critical way to establish themselves.
Many will continue to do so even if they receive zero compensation for the economic value they generate. Spotify can feel relaxed that its offering to consumers will therefore not be harmed significantly over the short term.
However, in creating an unlevel playing field, this change will harm the longer-term development of music creation, to the detriment of both consumers and wider culture. By reducing the revenues of smaller creators, genres and labels, it will effectively and artificially increase their barriers to entry and expansion, limiting the potential for new and innovative music to emerge outside of the established mainstream.
Spotify has provided a number of weak rationales for the proposed change in its royalty model. It is far from clear that these are the true drivers. At the same time, Spotify is currently seeking to expand into the audiobooks market. There is clearly a risk that an increased share of the revenue ‘pie’ for audiobooks will reduce the royalties available for music. In this context, the demonetisation of the final 0.5% of streams seems more likely to be a sop to the major labels, helping to shore up their own revenues as audiobooks grow.
If Spotify were serious about wanting to “reward real artists with real fanbases for the platform engagement they drive”, it could simply adopt a user-centric payment system. Under this system, each user’s subscription revenue is split proportionally between the tracks they themselves listen to. This would provide a simple solution to that apparent objective. It would also reduce the potential for streaming fraud. The fact that this option has been repeatedly rejected suggests this is not the true rationale for the proposed change.
I very much hope Spotify will take these concerns seriously and reconsider its proposal.