Does Spotify hurt the music industry?

How much is music streaming hurting the music industry?

Some artists say quite a bit — most famously Taylor Swift and Radiohead's Thom Yorke. They've pulled all or parts of their catalogs off the music-streaming service Spotify in protest of the pay arrangements. Others, not so much: Adult contemporary star Ed Sheeran gushed in a Spotify blog post last month after his song "Thinking Out Loud" became the first to get 500 million streams on the service.

New research suggests they might both be wrong. According to economists Luis Aguiar and Joel Waldfogel, "interactive streaming appears to be revenue-neutral for the recorded music industry."

Aguiar and Waldfogel penned a paper entitled "Streaming Reaches Flood Stage: Does Spotify Stimulate or Depress Music Sales." In it, they use data to measure Spotify's impact on music sales (permanent downloads) as well as on unpaid consumption (music piracy). We first read about their paper at FiveThirtyEight.

Apps displayed on a smartphone.
Chris Ratcliffe | Bloomberg | Getty Images
Apps displayed on a smartphone.

The authors find that streaming does disrupt traditional music sales but revenue derived from the recent growth in streaming evens out what is lost in sales. Specifically, their estimates show that around 137 streams displace one track sale. Just 47 streams are sufficient to displace one unpaid download.

To get there, Aguiar and Waldfogel consider an aggregate approach to match sales, streams and unpaid downloads by country on a weekly basis.

The authors admit up front that the data is not complete. Spotify only releases the volume of streams for the top 200 songs by week and by country. (It was only the top 50 prior to October 2014.) Some complex data analysis shows that those top 50 tracks according for between 7.7 and 10.8 percent of total Spotify streams.

In terms of revenue, the authors find that Spotify is revenue-neutral. If streaming stimulates sales — akin to the way radio used to work — that would be promotion for the music and overall revenue would rise. On the other hand, if the per-stream rate is low, then streaming would be unsuccessful bundling and would decrease revenue. As it is, the authors find that Spotify's royalty rate (how much the company pays record labels per stream) meets the traditional sales displacement rate (an estimate of one stream's effect on a track's sales) in equilibrium.

It makes sense if you think about it: Just because the streaming service is disrupting record sales, it doesn't mean displaced revenue for the record labels or the artists themselves. The average digital track on iTunes sold for $1.17 in 2014, the authors say. After Apple's cut, that's $0.82 to the label.

How much did Sheeran make from those half-billion streams? According to Spotify's own figures, they pay between $0.006 and $0.0084 per stream (we'll average that to $0.007), depending on a variety of factors like what country the streamers are in and what percentage of the listeners are premium Spotify users.

If that's right, Sheeran would have made between $3 million and $4.2 million for the one song. If we accept the 137 streams per track purchased as the displacement rate, "Thinking Out Loud" would have sold 3.6 million times on iTunes. That's exactly $3 million by the $0.82 figure above.

Read more about the data at FiveThirtyEight.