AUSTIN, TEXAS – Like many of the hot spots at this week’s South by Southwest Music Conference, the Spotify House had hipster fans lined up outside the entrance Thursday afternoon.
What’s different is that these music lovers weren’t there for any band — there wasn’t even one playing — but for a brand.
The next big thing in music isn’t any rapper or rock groups. It’s streaming services such as Spotify, Pandora and Rdio, which offer vast music catalogs to listeners through subscriptions, either paid or free with advertising. This burgeoning new form of music consumption is being driven by consumers’ rapid shift to iPhones and other mobile devices for their music listening.
“It wasn’t a gradual move to mobile,” said Pandora official Chris Harrison. “It was a giant rush, really just over the last eight months.”
With elaborate party sites, all three services sought to take center stage at South by Southwest — the music biz’s biggest annual mashup of new talent and marketing opportunities — in hopes of gaining a foothold before Apple unveils its own streaming-service answer to iTunes, which dominates the digital-download market.
Pandora currently claims about 67 million subscribers worldwide and about 70 percent of the U.S. streaming-subscription market. Spotify has been quick to rise, too, since entering the U.S. market in 2011. A Swedish company founded in 2008, it now claims about 24 million subscribers worldwide, 6 million of them paying customers.
This sea change has some singing the blues, however. Music-streaming companies only pay pennies in royalty fees to artists, a hot-button issue for musicians and record labels.
“At this point, I’m not sure if I’d be able to buy a single copy of my own record with the money I’ve earned from streaming services,” said Twin Cities hip-hop star Dessa, one of dozens of Minnesota acts who made the trek to perform at SXSW.
Still, Dessa joined the chorus that everyone seems to agree on regarding these services: “They are powerful discovery tools,” she said.
Like a personal radio station
For a fee of $3.99 monthly or $36 annually, Pandora subscribers can have access to millions of songs, much like a personally programmed radio station.
Spotify’s monthly rate is $9.99. Unpaid subscribers can get similar access, but with commercials played between tunes. These songs are only streamed via the Web, not downloaded or owned like an iTunes purchase.
Several of the conference’s industry panels at the Austin convention center focused on the growing influence and infighting of these companies.
In one panel titled “The Fight for Fair Fees in the Music Industry,” a Pandora executive defended his company’s efforts to pay even less in royalties. The 12 cents that Pandora now pays per play — as dictated by a federal royalty board based on subscription rates — is still more than what satellite radio outlets such as XM and Sirius dole out to artists. FM radio stations, meanwhile, pay nothing.
“If it were such a great business to be in, why aren’t more companies jumping in?” said Harrison, Pandora’s assistant general counsel in charge of licensing issues. He noted Apple’s reluctance to start its streaming service until royalty rates could be lowered even more, to around 6 cents per play.
Spotify’s founder, Daniel Ek, was one of the featured guests in SXSW’s public interview series this week alongside such rock stars as Stevie Nicks and Depeche Mode. He portrayed himself as a hero in the fight against illegal music downloading.
“My goal is to not just convert the 24 million into buying [a subscription],” Ek said. “My goal is to get 1 billion using streaming services rather than a piracy service.”
A conundrum for record labels
That’s certainly good news for record companies such as Universal and RCA, for whom these streaming services present a conundrum: They help artists gain exposure, but they can be counterintuitive to the long-dwindling business of selling records. Most record companies have warmed up to Pandora and Spotify, but not necessarily by choice.
“There isn’t anybody who works at a record label that thinks CDs are coming back,” said Julia Betley, associate director of licensing at RCA Records. Still, she called for Pandora and Spotify to pay more in royalties. “We believe in working with artists we’re 100 percent behind, and getting them fairly compensated for the content they’re providing these companies.”
Singer/guitarist Gabriel Douglas of Minneapolis rock band 4onthefloor conceded that these streaming services are about as fair as the music industry gets in the digital age.
“At least they pay something,” said Douglas, who grew up in northwestern Minnesota, far from any cool record stores, and relied on the piracy-based downloading site Napster for his music cravings.
“As long as people are using these sites to discover new music and not just ripping albums [illegally] like I did, then I’m cool with that.”