Exclusive: Windowing Hurts Sales, Increases Piracy, Says Paper Released by Spotify

Windowing is doing more harm than good, suggests a new paper by Will Page, director of economics at Spotify and former chief economist at PRS for Music.
 
In "Adventures in the Netherlands: Spotify, Piracy and the new Dutch experience,", Page looks at two factors that impact subscription service: piracy and windowing, or the act of holding back a new release from some digital services. Piracy is a well-known scourge and something legal services like Spotify are meant to combat. Windowing is occasionally employed to entice purchases from fans that would otherwise stream.

Why Radiohead Producer Nigel Godrich Trashed Spotify's Business Model

The paper's release closely follows public statements by producer Nigel Godrich about Spotify's royalties. Godrich, producer of numerous Radiohead albums and member of Atoms for Peace (which includes Radiohead's Thom Yorke and Red Hot Chili Peppers' Flea), believes Spotify is bad for artists and record labels because it returns less value than new albums require. A catalog title that has recouped its expenses, he says, is a better candidate for a streaming service.

Jay-Z's 'Magna Carta' Sets Spotify Streaming Record -- Despite Samsung Giveaway, Topping Album Chart

Implicit in Godrich's statements is an argument for windowing, the practice of staggering a title's release date so consumers have access at different times on different services. Windowing is standard practice in the film industry -- in order: theaters, DVD, rental, streaming -- but far less common in music. Nevertheless, some artists have opted to release an album first to retail and later, usually after one or two weeks, to subscription services like Spotify.
 
Artists see windowing as an opportunity to sell more units before fans can access on subscription services. Spotify and its peers see windowing as something that undermines their value proposition and frustrates their customers.
 
Page addresses windowing in "Adventures," a 26-page document that also examines piracy in the Netherland's piracy and examines the relationship between streaming and illegal downloads. The paper's key component is its assessment of the value of engagement on Spotify. In other words, Page looks for evidence that a single release date brings different results than a staggered release date. 
 
So Page looked at 14 pop artists with a range of release strategies. The two albums with the best sales-to-piracy ratio, One Direction's Take Me Home and Robbie Williams' Take the Crown, had normal releases -- no windowing -- and were streamed heavily on Spotify. But the two albums with the worst sales-to-piracy ratios, Taylor Swift's Red and Rihanna's Unapologetic, had windowed releases.
 
The paper's critical argument is that windowing had no impact on the albums' sales while resulting in an increase in piracy. "Importantly, we saw no examples at all of where people were popular on Spotify and also had a high piracy-to-sales ratio," Page tells Billboard. "To be clear, there were no examples of where people were successful on Spotify and were being stolen more than being sold."
 
In Spotify's view, awareness through its platform is good for artists because it can be good for sales. "Adventures" happens to coincide with news that Jay-Z's Magna Carta...Holy Grail set a single-week streaming record at Spotify in the United States. Magna Carta debuted at the top of the Billboard 200 album chart with first-week sales of 527,000, according to Nielsen SoundScan, a number that was undoubtedly aided by the attention to the artist's unique partnership with Samsung for the album launch.  
 
A deeper implication is that single actors might actually be harmful. A few windowed releases by self-interested individuals send some fans back to illegal services. In an effort to generate more sales -- which Page argues won't happen -- these lone wolves may hurt the collective industry by undermining legal services.
 
Just making music available won't solve the piracy problem, however. Page found that two artists' illegal downloads -- but not sales or Spotify streams -- spiked after they performed at the Stöppelhaene Festival last year. Fans that wanted immediate gratification went to their preferred, illegal venue rather than a legal one like Spotify.
 
Windowing and catalog outages aren't so problematic that subscription services are unable to find traction. Numbers from various sources indicate the number of active pirates in the Netherlands has declined to 1.8 million in 2012 from between 4.3 million and 5 million in 2008. (Spotify launched in the Netherlands in 2010.) Subscription services may have imperfect catalogs, but consumers have flocked to them anyway.
 
But the question remains: how successful could subscription services be? Page compares Sweden, the Netherlands and Italy. Sweden got Spotify in late 2008 and -- coincidentally or not -- immediately saw a rebound in total recorded music revenues. The Netherlands got Spotify two years later. The service launched in Italy just this year.
 
The three markets have different demographics, approaches to piracy and digital marketplaces. Page compares the three to show the potential in the Netherlands and Italy. Last year, Sweden, the baseline case, had $10.93 of digital music revenue per capita compared to $3.53 in the Netherlands and $0.95 in Italy.
 
Now imagine a scenario in which the Netherlands and Italy had Sweden's per-capita digital spending. The Netherlands would generate $124 million in additional revenue to record labels -- more if counting publishers -- and Italy would generate an additional $611 million.
 
Will the Netherlands and Italy rival Sweden in per-capita revenue generation someday? Possibly, but it's complicated. Digital spending is a function of many variables, from the size and shape of a country's telecommunications market to approaches to piracy -- in both private market and government -- and consumers' general attitude toward spending money on entertainment. 
 
"Adventures" is an exercise in finding "fresh carrots and different sticks," says Page. Spotify is intent on creating a legal service -- the carrot -- that rivals illegal options. The paper could end up informing the public policy that creates the deterrents -- the sticks -- for piracy use.
 
The fact that Spotify has released a self-serving position paper may raise some eyebrows or detract from its conclusions. Page says he strove for objectivity. He collaborated with independent analysts and submitted the paper for peer review by academics and professionals -- and the paper details how BitTorrent data can be less than perfect. 
 
But "Adventures" makes a good case that piracy will be less problematic, and digital growth stronger, if music is simply made available for fans. The current discussion about royalties and windowing should benefit from the paper's release.

Questions? Comments? Let us know: @billboardbiz

Print