What Google's Move Against Spotify Could Mean for Music

Hugo Barra, vice president of product management for Android at Google, during a presentation at the Google I/O Annual Developers Conference in San Francisco on May 15 Photograph by David Paul Morris/Bloomberg

Google officially launched its streaming music service at this year’s I/O Conference on Wednesday. The service, called All Access, is an attempt to challenge Spotify, but there are plenty of musicians worried about who stands to lose in a future where people pay subscription fees for access to a music library instead of forking over small sums to download songs.

The music industry has been the canary in the digital coal mine since the waning days of the Discman, and the hand-wringing over streaming mirrors a similar panic over how the shift to MP3s would destroy the music industry. (In retrospect, that panic seems pretty well justified.) By many accounts, it just gets worse from here.

Silicon Valley is betting on streaming largely because it’s about to get squeezed, too. On Tuesday, industry analyst Horace Dediu broke down the ways Apple makes money through iTunes. The revenue per user coming from music downloads is shrinking significantly, both in dollar terms and as a proportion of overall income. Last quarter, music downloads made up 27 percent of iTunes revenue, down from 47 percent in the third quarter of 2009.

This shrinking pie is hardly an incentive to make more music, notes Dediu. “The inevitable result will be a mass migration of talent away from the established content industries. Old media won’t fade due to a loss of users. It will fade due to a loss of talent,” he wrote.

That’s unless the cloud can change things. The pitch for musicians and labels from Spotify (and, presumably, competitors such as Google) is that subscription services will replace the lost revenue from reduced downloads, which of course never quite got around to replacing the revenue lost from plunging record sales. The company claims to have paid out more than $500 million since its launching, with royalties growing dramatically each year.

This has been met with skepticism from many people in the music industry. The Web runneth over with stories from artists discussing just how little they are making from streaming. In one, folk rocker Damon Krukowski examined his own paychecks from album sales and streaming services for Pitchfork. He concluded that a song of his would have to be played 47,680 times on Spotify or 312,000 times on Pandora to earn the profit of a single LP sale.

Of course, the music industry has a long tradition of separating a song’s profit from its creators. Still, wrote Krukowski, “the ways in which musicians are screwed have changed qualitatively, from individualized swindles to systemic ones.”

There are essentially two ways that the entry of companies such as Google, Apple, and Amazon could change this. First, it could make streaming music more popular. If you’re making fractions of a penny each time a song gets played, the songs need to get played a whole lot for you to make a living. In that respect, Google’s enormous base of smartphone users is a pretty enticing prospect for record labels and artists.

Big tech companies could also change the balance of power in the music business. This is a touchy subject: The wrangling over royalties between record companies and Google and Apple has already held up the launch of their services. Still, it’s unlikely that record companies are going to be able to bully these companies into paying more than Spotify does.

More likely, prices will keep falling, because streaming music is not a particularly good business right now. As it grows, Spotify takes incrementally larger losses. The company lost $59 million in 2011, even though its revenue grew by about 250 percent, according to PrivCo, a company that tracks private companies.

Spotify’s rates should really be seen as a kind of teaser price for artists, because the company is willing to lose money to grow for now, says music industry analyst Mark Mulligan. Both Spotify and Pandora have been pushing had to get artists to accept less, he says, because they simply cannot make a profit otherwise. And there’s little evidence that the majority of music listeners will ever pay the $9.99 a month that Spotify asks for its premium service. Google’s All Access service is slated to cost the same, although everyone will get 30 days of free access, and those who sign up before June 30 will only be charged $7.99 monthly.

At such prices, Mulligan is skeptical that streaming services will ever be able to reach the scale that would allow musicians to earn a living. “Ultimately the price needs to be lower,” he says. “$9.99 is not a mass market price point.”