Back in the days when vinyl was a musician's best friend ... Photographer: Freya Ingrid Morales/Bloomberg
Back in the days when vinyl was a musician's best friend ... Photographer: Freya Ingrid Morales/Bloomberg

Last week, we finally learned how Spotify Ltd. pays its artists. The math is not too happy, if you’re in the music business:

Spotify Ltd. on Tuesday disclosed, among other things, that each time a user listens to a song, rights holders are paid between 0.6 cent and 0.84 cent. Over the course of 2013, the company said, it will have paid $500 million in royalties, representing half of the $1 billion Spotify sent to rights holders since setting up shop in 2008.

The stats were unveiled as part of a new Spotify Artists Web page, a site where rights holders can access analytics tools to track their performance on the streaming-music platform.
To see why this is such bad news, let’s think back to the dark ages, when I used to buy CDs. If I liked an album, I might listen to it several times a day for a month or so -- call it 60 plays. Over the course of a year, I might play a record 70 to 100 times in the first year, with rapidly diminishing plays thereafter.

For this, I would pay them maybe $12 -- in 1990 dollars. The Bureau of Labor Statistics says that this is equivalent to about $20 today.

For the same amount of play on Spotify, the owner of the rights to a 12-song album can expect to get about $12 -- in today’s dollars. But, of course, sometimes I bought albums for one or two songs I liked, or the album did not reward repeat plays. In the old days, they still got my money. Today, they’d get a couple of cents.

In the old days, an avid music fan could easily spend $50 to $100 a month on new music, creating revenue of $600 to $1,200. Today, someone who listened to music 16 hours a day, every day, 365 days a year, could conceivably generate as much as $800 in Spotify revenue for rights holders. But, of course, no one listens to music that intensely; occasionally we have to eat, bathe, sleep, attend parties and so forth. More realistically, a dedicated music maven with a forgiving job might manage 35 hours a week. That’s about $150 worth of revenue to the rights holders -- a tiny fraction of what that same music maven would have spent buying albums when I was in school.

Of course, some of the costs have fallen, too: You don’t need to make a physical product, with album covers and liner notes, or pay for a big store to put it in and employees to make sure someone doesn’t steal it. But the amount of revenue available from formats like Spotify has dropped by more than the cost of running Tower Records.

And yet, Spotify is not raking it in, and neither are the other music-streaming services. After all, our hypothetical music maven only pays Spotify $9.99 a month, or $120 a year. Someone listening to music even 35 hours a week is probably costing Spotify more in rights payments than they make in fees -- and that doesn’t even count the cost of servers, bandwidths and marketing people to send out e-mails asking you to sign up for Spotify.

In theory, Spotify could charge more money, enough to cover their costs. In practice, Spotify is constrained by even cheaper alternatives. In 1995, I can totally imagine someone having created a streaming service that charged $50 a month for unlimited listening … if the technology had been available. Music fans would have hustled to get in on such an unbelievably good deal. But in 2010, such a service is competing with “free.” Which means that they cannot charge more than a negligible amount.

In other words, while the cost side has improved, the revenue side has gotten worse even faster. People simply aren’t willing to pay very much for recorded music anymore. If you’re an artist, and especially if you’re a record label, that’s very bad news. Naturally, some artists want to shoot the messenger, blaming Spotify for their paltry payments. But Spotify is not the problem. The market is the problem. Spotify is just the messenger telling them what the market is now willing to pay for their songs.