Left to right: Billboard editorial director Bill Werde and Spotify chief content officer Ken Parks. (Photo credit: Glenn Peoples)
No other digital music company -- perhaps with the exception of Apple -- has been so closely covered in the last two years as Spotify. Every tweet or public utterance by CEO Daniel Ek, every product update and especially the occasional hole in its catalog have been dutifully, one might say obsessively, reported and over-reported in the press and blogosphere.
Tuesday's SXSW conversation with Spotify chief content officer Ken Parks was a crash in the questions, concerns and changes that come from shifting from a download mindset to a subscription and streaming mindset. Even though Spotify has infused innovation and excitement into digital music, the company came into SXSW dogged by persistent questions. How are artists getting paid? Does it cannibalize music purchases? Why have some high-profile artists stayed away from subscription services?
Parks addressed the "rare number" of subscription service holdouts by saying the issue needs to be kept in perspective. Even Coldplay, whose most recent release, "Mylo Xyloto," was originally a holdout, added its album to subscription services a few months after its release.
For every holdout there could be dozens or hundreds more with concerns about the subscription business model. Parks explained that artists and managers might not appreciate that Spotify is bringing inactive and previously wayward music fans into to a legal service. Most of its users fall in the 18-24 demographic that does buy music or acquires it illegally, he said.
"This really represents a massive re-engagement of a generation that had kind of been lost by the industry," he said. When asked by interviewer Bill Werde, editorial director at Billboard, on how the company knows it's converting pirates into payers, Parks said the company has "done our own surveys" on the topic.
There are other bits of evidence to back up Parks' claim. Some people in the industry who have studied their sales in Spotify's markets have come to the same conclusion. And U.S. digital sales show a correlation -- not causation -- between the proliferation of services like Spotify and growth in digital download sales, suggesting some subscribers may be buying more often due to greater engagement with music. Digital track and album sales are both up solidly in the last 14 months, according to Nielsen SoundScan. Digital tracks and album sales rose 8% and 19%, respectively, in 2011 and are up another 7% and 18%, respectively, through March 4. If subscription services are causing people to buy less music, it certainly isn't showing up in the numbers.
To understand subscription services one must think big. The U.S. is filled with music fans, but companies can do much better in monetizing their interest in music: the billions of online video streams, the billions of tracks acquired on P2P services, the billions of listener hours currently going to radio. Spotify wants to convert the consumers in that meaty part in the middle of the bell curve into paying customers -- or at least expose them to advertisements while they listen for free.
"We think that the opportunity is in that vast bulk of consumption that goes completely unmonetized," Parks said. This "found money" sits at the heart of Spotify's math: rather than get purchases from a small number of consumers, subscription services can tap into a much larger market.
It won't happen overnight. For Spotify and its peers to capture that segment of the market will take deeper partnerships (mobile carriers and broadband providers) and methods for paying that dramatically reduce friction (integrated billing with a mobile carrier, for example). For the lightest of music listeners, the services may need even simpler products that mimic the one-button simplicity of radio. And it will simply take time for consumers to embrace the subscription model.
But Spotify executives are optimists who see most everybody contributing to getting artists and labels paid. Global subscribers currently sit "well north" of three million and active users are "10 million and change," and Parks said he envisions the platform scaling to 20 million and beyond. "There's no reason why the recorded music industry shouldn't be multiples of the size it [currently] is," he said.