Is Spotify cannibalizing the music industry?

Published Thu, May 29 20147:11 PM EDTUpdated Tue, Jun 17 20147:10 PM EDT

Emmanuel Dunand | AFP | Getty Images

Spotify is among a host of subscription music services that have come under fire from artists and labels in recent times over royalty payments.

Radiohead and Atoms for Peace frontman Thom Yorke slammed the Swedish company and dubbed the service "the last desperate fart of a dying corpse", arguing that it pays meager royalties for streaming songs.

But the people behind the online music service, where users don't actually own any music but pay to listen to it on demand, argue that they are key for the future of the industry's survival. Instead of being paid for each song bought, artists and record labels are being paid a much smaller fee each time a song is listened to.

"It is the first change in the music industry for 100 years or so," Mark Williamson, Spotify's director of artist services, told CNBC in a phone interview.

As a result of the accusations from major industry players that streaming platforms are cannibalizing revenues, Spotify launched a charm offensive in December and published its pay-out structure online. It said it makes an average "per stream" payment to rights holders of between $0.006 and $0.0084 -- meaning for every one million listeners of an artist's track, Spotify pays rights holders between $6,000 to $8,400. Although, after labels take their cut, singers could be left with a lot less.

"We understand these are people's livelihoods at stake and it will take some time for people to understand these models. What is really important is to understand Spotify is a new company and our pay outs are growing significantly every year," Williamson said.

Digital revenues rising

The global music industry has faced falling revenues over the past few years as piracy ate in to profits and paid downloads failed to make up for the shortfall. Global music sales dropped last year again, however, digital music revenue saw a 4.3 percent increase hitting $5.9 billion in 2013, according to industry body IFPI.

Piracy has been a tough problem to tackle across the entertainment business, but analysts suggest the new low-cost subscription models could provide a solution.

Spotify charges users a monthly fee of £9.99, $9.99 or 9.99 euros, depending on where the user lives, and Pandora, only available in the U.S. charges $4.99 a month.

Revenues from music subscription services grew by 51.3 percent in 2013, surpassing $1 billion for the first time.

This is at the center of the debate around subscription services. There is no doubt they are helping to boost revenues for music industry, but at what cost to the artist?

Small artists suffering?

"One of the things you see quite often is that you see artist saying their songs are being listened to a million times but they never saw a penny," Richard Broughton, head of broadband at IHS, told CNBC in a phone interview.

"The question is, are those listens eroding purchases? Are they cannibalizing the traditional market and is that a fair comparison to make? Is a million listens to equivalent to a million sales?"

The debate over pay structure from streaming services is complex with companies using different formats. Pandora, the leading internet radio streaming service, says it pays 50 percent royalties to rights-holders, the music labels, with a portion of that going back to artists. Deezer, a music streaming platform from France, says it pays 70 percent of revenues to rights-holders, again the labels, but it is unclear how much trickles down to artists.

Despite this, analysts suggest that streaming services are now becoming an integral part of major artists' marketing tactics.

"Artists like Beyoncé don't appear to complain about a low level of earnings on streaming services. So I would say the artists that tour and have new releases see a Spotify as part of a positive marketing machine," Alice Enders, analyst at Enders Analysis told CNBC in a phone interview.

But he added that smaller artists whose work is played very little would struggle with the earnings from subscription models.

Music revolution

Rdio, another music streaming business, argued that the streaming structure means independent artists can fight for a share of listeners and get paid.

"With streaming, for the very first time, artists get paid based on people listening. They're competing for a share of listening," the company told CNBC in an emailed statement.

The potential effects of these subscription services on the music industry's revenues and artists earnings is hard to judge, but companies are bullish on the future.

"We're only at the beginning of the music streaming revolution, and we expect the market to continue to grow. With that in mind, we're convinced that the artist community will see a significant increase in the money they get back," Gerrit Schumann, VP of Europe for Deezer, said in an emailed statement.