How much are you willing to pay for unlimited music?
For $9.99, subscribers of Spotify's premium service gain unlimited access to streaming music. It's a hugely attractive offer for consumers, who've signed up in droves since the Swedish startup launched three years ago and signed on major record labels—as of November, the company boasted roughly 2.5 million subscribers.
But the value proposition appears to be too good for some. In recent weeks, we've seen reports questioning whether Spotify can ever be profitable; we've seen complaints from labels concerned with low payouts; and we've seen artists call the streaming royalties unsustainable—the Black Keys said Tuesday their new album won't be available to stream. That in turn hurts consumers, who, in addition to the Black Keys, won't have access to new music from Jay-Z, Coldplay, and Adele on Spotify.
Why can't streaming services just jack up their prices? Spotify, MOG, Rhapsody, Rdio—the magic number to subscribe is $9.99 across the board. But if this price point isn't satisfying artists and labels, why not raise it?
"It's not something we've thought about," Ken Parks, Spotify's chief content officer, told Fast Company recently. "We want to make this product attractive from a features and functionality standpoint, but also from a pricing standpoint. So we have no plan to do anything around pricing. We'd obviously like to offer it at a very attractive price. The lion's share of money that we take in goes back to rights holders—the vast bulk of it does. Like any business, we're constantly trying to drive that wholesale cost down. We'd like to pass on a more attractive product to our end users if we could. Having said that, it's all of the music in the world, anywhere you want to listen to it, for $10—[the price of] a couple of beers."
Of course, that doesn't mean Spotify couldn't raise its prices, even if Parks said the company has no plans to. Why? Because as investor Sean Parker recently said they've "got you by the balls." Spotify works because it's an all-you-can-eat buffet that becomes more addictive the more you use it. The more playlists you create, the more music you cache, the more months you subscribe, the more Spotify has you "by the balls." Stretch that vector out, and there's really no stopping once you start: If you're on the service, say, for 10 years, that's $1,200 you've spent renting (and not purchasing) music, building a library filled with a decade's worth of songs. Turn Spotify off, and that's $1,200 out the door if you go back to paying for music the traditional way—and far more than $1,200 you'd likely have to spend to rebuild that library on an iTunes-like service.
I personally felt this strain during the short period I subscribed to Spotify. When my subscription ended, suddenly all these songs I'd become addicted to listening to on my iPhone were no longer available. I bought a few of them on iTunes, but I realize now, I'm probably going to have to re-subscribe to Spotify. "Once you have a subscription, the value of buying music on iTunes is massively diminished, especially if you're paying for the $10 subscription," David Hyman, CEO of Spotify rival MOG, told me recently.
That's exactly why MOG, Spotify, and others could someday raise their prices, and not face the same subscriber exodus as Netflix did when it raised its rates—even though the emotional backlash is likely to be much more severe. On Netflix, subscribers never had access to unlimited movies and TV shows, nor were they ever able to build their own personal libraries of media. Access to content on Netflix is limited, typically temporary (e.g. Starz will soon pull all its offerings), and out of the user's control. It's also not an end-all replacement for media consumption—that is, many Netflix subscribers still watch television, subscribe to pay TV channels, see films in theaters, use set-top boxes, watch DVDs (either by mail or in store), or purchase movies on on-demand VOD services. It's not uncommon for Netflix subscribers to even have subscriptions to competing providers such as Amazon, HBO Go, or Hulu Plus. After all, these competitors offer different, essentially random libraries of content—unlike Spotify and its competitors, which provide basically uniform music catalogs filled with songs from the four major record labels.
So when Netflix raised its prices, the subsequent outcry led to an actual loss of 800,000 subscribers in one quarter. But if Spotify ever were to raise its prices, consumers would have a lot more trouble canceling the service. With movies and TV shows, users could cut out Netflix because they consumed content in so many different ways—Netflix was incremental consumption. But music consumption is much more black and white: Digital (and law-abiding) converts either purchase music through iTunes or stream it via an on-demand subscription service like Spotify. As MOG's David Hyman says, "I can't imagine people being redundant."
And once you start on Spotify—and the longer you're on it—the more difficult it'll become to simply quit, especially if Spotify raises its prices. Why? Again, because they'll have you "by the balls." Sure, an argument could be made that if Spotify were to ramp up its prices, users could jump to a less expensive competitor, assuming that MOG or Rdio or Rhapsody doesn't raise its prices, too. But given that all these services share similar contracts with labels—which is why they all offer $9.99 premium plans—it's doubtful pricing structures will become too differentiated in the future, meaning jumping to another subscription service won't make too much of a difference. The real point here is, there's no going back to iTunes after you're on a subscription service long enough—unless you don't mind throwing what you've already invested in Spotify down the drain.
Ultimately, this shouldn't be something consumers complain about, if prices ever were to increase. Many have read the shock stories about how low artist payments are for everyone from small indie acts to Lady Gaga, who reportedly received just $167 for a million streams of one of her singles. (This horror story has since been debunked.) Consumers, technically, have no one to blame but themselves. Spotify and others are giving the vast majority of what they're making to the labels and artists.
Say what you will about how the labels operate—the true stingy party involved here is the consumer, who is likely to howl and howl if ever prices were to go up—even if it could benefit the artists they love, support new-age platforms and business models from companies like Spoitfy, and attract more big-name and indie artists such as the Black Keys and Coldplay to put new releases up for streaming. In the future, if Spotify were to raise its prices—and they could without your consent, mind you—how much more would you be willing to pay?
After all, as Parks said, it's unlimited music, from anywhere, for the price of just a couple of beers. Isn't your music worth more than that?