Memo

To: The Board of Directors

From: The Ethics Decision Board

Date: December 4, 2015

Re: Spotify’s Ethical Dilemma

Introduction Spotify is one of the world’s leading applications that provides online music streaming to desktops and mobile apps. It was founded in 2006 and has been growing every year since. With this massive growth, however, Spotify has faced many ethical issues. Spotify’s vision is to make music available to everyone, and ensure a fair digital deal to artists. Throughout history, the music business has always faced issues concerning how artists and songwriters are compensated, and now, in a new era of music distribution, Spotify is the next big target of criticism as a result of the issues raised by streaming technology. There has been debate since Spotify’s founding whether or not the company compensates artists and songwriters fairly. The question at hand is whether or not Spotify is operating completely ethically, and what kinds of things can be changed in order to resolve these ethical dilemmas.

Industry Details

The music industry is inherently very complex and requires numerous rules and regulations in order to avoid ethical dilemmas. As it stands, there is hardly any industry regulation in the streaming market; Spotify’s stakeholders have been led to question many issues having to do with artist compensation and company transparency. Spotify has used the same business model that iTunes created in 2003 with the opening of the iTunes store, mimicking the first model built to monetize digital music. Now, Spotify and iTunes operate very differently from each other, which has caused a rift in the music business community: Spotify pays out 70% of its total revenues in royalties, and keeps 30% to cover operations. This 70% is divided up across the whole industry, trickling down to record companies, performing rights organizations, artists, songwriters and other third party components. Although Spotify operates on what appears to be an ethical basis, the company needs to address a few dilemmas that have emerged.

Further Breakdown

To further breakdown how Spotify works, one must understand a few key facts about the company’s business model and how it relates to the music industry as a whole. The 70% of revenues that Spotify

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pays out in royalties is not evenly divided between artists and songwriters. 60% of this money goes to record companies and artists, while 10% of it goes to songwriters and publishers. Of the 60% that labels receive, the record companies usually take 50-85% of these before they distribute the remains to the artists. The remaining 10% is split between the performing rights organizations and publishers, who in turn pay both pay songwriters after taking their cut. This is one of the most confusing concepts for artists to understand surrounding the origin of their payments from Spotify.

The next key concept to understand is how an artist’s streaming-per-month is monetized; unlike sales of individual songs, there is no definitive way to price the value of an individual stream. The graphic listed below describes exactly how Spotify creates a ratio to determine how each artist is paid.

Ethical Dilemma Although Spotify follows the few rules created by the industry, many ethical issues still arise. One of the most crucial issues that it faces is that of ethical lag. Napster was created in 1999 and was one of the first applications available online for pirating music. Although iTunes was not far behind Napster, a lag in digital music had been created: digital music was available for free everywhere. Spotify still faces public backlash for charging money for use of their model—there are people in the

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world that still see digital music as something that should be cheap, or even free. The issue of Spotify charging $9.99 a month for streaming is still viewed by many as unethical.

A second and more pertinent issue that Spotify faces is the accusation that the company is not paying artists enough money. There are artists out there having their music streamed millions of times a month and may see less than $1,000 at the end of the day. Many artists themselves have spoken out against Spotify and their fair pay. Dan Auerbach the Black Keys was quoted as saying, “You get paid [for streaming], but it’s so minuscule it’s laughable. Anyone on the Internet who makes us look stupid for not being on Spotify usually has some sort of stake in the company. Publications like Pitchfork are teaming up with Spotify, and it’s kind of ridiculous. It’s a cool thing to have if you’re in a new band and you want to be heard. But if you are a bigger band that’s already known and you rely on record sales for a living, then it’s really no place to be.” This perception needs to be addressed; whether or not Spotify can do that single-handedly is a critical question, and the ethical dilemmas that arise from accusations against the transparency of Spotify’s payouts must be fixed if the firm wishes to see growth in the next 5 years.

Along with contending with the public’s perception that artists are not being fairly compensated, Spotify must recognize the transparency concerns with its customers in addition to its clients. Currently, Spotify is privately owned company, meaning they are not legally obligated to release their financial statements and internal operations, but ethically, these are both things that Spotify needs to make publically available in order to move away from solely operating within legal and economic parameters; the goal is to bring Spotify’s business initiative into the ethical realm of information transparency as seen by the public eye. Bono, the lead singer for the band U2, released this statement about Spotify’s transparency: “That hasn’t been the demand: that will be the demand... That’s the thing to look for: transparency or opacity. For this new model to be successful and to take root, there has to be some kind of fairness... fair models of distribution. And I think when that happens, the music business will be a rising tide that lifts all boats.” Recommendations Speaking as Spotify’s Ethical Recommendation Board, we see a few key alternatives that Spotify can take in order to address these specific ethical issues. The ethical lag within the marketplace is the first problem that we must address. The music industry is a very complex, and there must be better ways to explain how this market functions to the layman. We as a board see a viable strategic alternative in which Spotify starts a campaign to create simpler graphics detailing not only what we do, but about how the market operates as a whole. It is difficult for the average Joe to get a comprehensive view of the inner-workings of the music industry independent of specialized study or experience, including where his money is going when he pays for music. If Spotify were to create very simple graphics explaining the cash flow of consumer payments en route to the artist in an effort to educate the

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general public, it may help society migrate away from the Napster era of “free music for everyone.” This can be a relatively cheap option, and moves Spotify toward a more ethical arena, but there is not much economic benefit from this option.

Another cheap and ethical alternative Spotify should consider approaching is a culture of transparency with its clients. This would include a few specific things: quarterly financial reports, forced disclosure between Spotify and record labels relative to artist pay, future royalty calculation techniques, and the implementation of an artist analytics pages. Because Spotify is a privately owned company, it is not obligated to release financial reports. We as the ethics board see it as a huge step for Spotify to begin to release reports like these in order to be completely transparent with the public regarding how money is spent within the company. This is a cheap and very rewarding alternative if it shows the public that Spotify is honest with all company stakeholders. Disclosure clauses in label negotiations with Spotify would be very strategic as well; stating that all labels that do business with Spotify must report exactly how much royalties were distributed each month so artists are able to see that both Spotify and their label have paid out the correct amount of money would present an attractive solution to the transparency problem. However, this creates a second issue: how do the artists know how much Spotify is supposed to pay out? A combination of an analytics page and a ratio for calculating future royalties would provide artists with enough information to look into their activity on Spotify each month and see how much they should be getting paid. All of these alternatives alone are ways in which Spotify can begin to take a step out of the shadows and create a culture of artist transparency.

Once Spotify is able to maintain a culture of transparency with its clients, one alternative is to move forward and push for further transparency with the consumers. Every month, people pay $9.99 for the Spotify streaming service. Subscribers are told time and time again by high-grossing opposing musicians that Spotify is not paying out enough. The public rarely sees statements released by Spotify addressing these issues. Therefore, Spotify should create public releases where they address all public issues that pop up, thus creating a better relationship with the customer stakeholder. In doing so, Spotify as a company creates internal ethics standards and a culture of honesty in all workings of the company. With these two things, the public will begin to see that Spotify is transparent with not only its artists, but with the consumers too. The last alternative Spotify can take is a big and expensive step, but it may just be what the industry needs in order to fully adapt to the new culture of music streaming. Spotify needs to be the industry leader that pushes for an overall change in how the industry works. The royalty methods used by labels and the royalty distribution of online sites are both very outdated. Spotify should begin looking into new ways to construct the business model in order to adapt to key industry changes in a way that is profitable, legal, and ethical. This is the most expensive and time consuming alternative, but it might just be the solution that pushes Spotify to become one of the most influential companies in music history.

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Implementation The final implementation of the alternatives presented above should be a combination of all subjects addressed. The first step of this should be the public financial reports. This is cheap, already existing, and easy to implement. Step two should focus on the transparency of artists with an analytics page. This may be expensive to implement, but it will be the first of its kind on any streaming site and push for all artists worldwide to put their music on Spotify. Step three should be a push for change in the 360 deal. The cheap way to do this is just to encourage artists to move away from these, but a more expensive way to do this would be for Spotify to create a record label and release original music on Spotify, just like Netflix releases “Netflix Originals.” This will be expensive but be one of the biggest changes in the industry the music world has seen in the last 15 years. I implore you to take heed in what we say as an ethics board and further look in to implementing the things we have presented to you today.

Sources: http://www.spotifyartists.com/spotify-explained/

http://www.theguardian.com/technology/2013/jul/29/spotify-vs-musicians-streaming-royalties

http://www.theguardian.com/technology/2014/nov/06/bono-spotify-transparency-record-labels \

http://www.billboard.com/articles/business/6327762/spotify-2013-financial-report-what-you-need-to-know

http://www.fastcodesign.com/3048607/what-major-music-streaming-services-pay-artists-visualized

https://docs.google.com/spreadsheets/d/10GaK_83jGXxEwTQsI-q4BK9t70XcTNilyzsyfwYLahw/edit#gid=1344397561

https://www.slantnews.com/story/2015-09-16-is-spotify-apple-or-tidal-winning-musics-stream-wars

http://www.digitalmusicnews.com/2014/07/16/spotify-mission-ensure-fair-digital-deal-artists/

http://flavorwire.com/471802/musicians-drinking-the-spotify-haterade-the-collected-complaints