By now it’s an old argument from media companies: The public’s preference for free content is killing business. However, free consumption does necessarily mean a lack of revenue for content creators or distributors. Latest news says that Spotify is the second largest source of revenue for music labels (after iTunes). Yes, that Spotify, the on-demand music service and recent entrant into the American music scene. Recent figures showed that Spotify made 83 percent of its revenue from subscriptions and most of that (approximately 70 percent) went toward royalty payments for music companies. Spotify negotiates royalty rates with music companies and offers both paid subscriptions and limited free content. Reports indicate that Spotify has four million customers who pay between $5 and $10 per month for the service, so technically it’s not completely free to users. However, it is cheaper then purchasing songs individually. Advertising accounts for a smaller share of Spotify’s revenue.
Of course anyone who is paying attention knows that Spotify isn’t alone out in the free streaming music world. There is Pandora. Unlike Spotify, Pandora does not negotiate with music labels. It uses songs and sets its royalty rate according to federal laws. It is said that Pandora is still waiting to have a profitable year, losing $57 million on $236 million worth of revenue last year – $154 million of that went toward royalties. Most of Pandora’s revenue (70 percent) comes from mobile advertising. Just a few years ago Pandora alarmed users, warning that it might shut down due to high royalty fees that prevented it from making a profit. Obviously that hasn’t happened – yet. The dilemma for Pandora is that the more that people listen the higher its royalty payments so it needs to sell more ads to generate enough revenue to cover royalties. It clocked around 1.8 billion listener hours last year. It should be noted that free listening isn’t the same as downloading and sharing, which is still a crime.