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dave morris

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Imagine a nascent tech company – say, a video game firm – whose core product attracts a mix of free and paid users, who number in the millions. Their subscriber base has swelled, according to figures from the Wall Street Journal; since 2011, free users have jumped by roughly 270 per cent, while paid users have grown by 600 per cent. And while the company isn't yet profitable, revenue more than doubled in 2012, to €435-million ($600-million). By now, most investors would be asking, where do I sign up? The company is not a video game one, but Swedish streaming music juggernaut Spotify, and it does indeed have enormous potential. But if and when the firm does IPO – rumours have swirled for several years, and valuations have approached $3-billion (U.S.) – it will have to reconcile with musicians, and right now, they seem further apart than ever.

The long-simmering debate about royalty rates began sucking up more oxygen when Radiohead frontman Thom Yorke and producer/collaborator Nigel Godrich announced that they were pulling some of their work from Spotify, explaining in a series of tweets that less established artists make so little from Spotify that it isn't worth their while to participate. Mr. Yorke and Mr. Godrich, of course, are not new artists, but Mr. Godrich explained that the move was intended as a gesture of solidarity with them. The major labels' music is available on the service, as are a number of indie labels such as Merge (Arcade Fire) and Matador (Queens Of The Stone Age, Cat Power), though an increasing number of artists are speaking out against it.

Figuring out streaming royalties is confusing, particularly for those who aren't accountants. The truth is that whoever owns the copyright of the recording receives $0.005, or half a cent, for each stream on Spotify. That means a million plays would earn the copyright holder $5,000. By contrast, the copyright holder receives $0.70 of a one-time iTunes download, the equivalent of the revenue from 140 plays on Spotify.

In that light, Spotify doesn't seem so bad for artists. I don't know about you, but I imagine I've listened to my favourite songs more than 140 times – more like thousands. That said, the company has evidently done an awful job of communicating its model to artists, not to mention how their existing relationships with their record labels and/or their management may be complicating or diminishing the amount they actually receive. It is not necessarily Spotify's fault if they are earning even less of a pittance than the company pays out. It's no pittance to Spotify: the company reportedly pays 70 per cent of revenue to copyright holders.

Another way for Spotify to view musicians is as a group of independent contractors, some of whom are organized in large groups (the majors) and others of whom are in smaller cartels or who are entirely independent. Their concerns are too diverse for Spotify to be able to negotiate with them all directly, yet it has to keep the majority of them happy enough to prevent them from pulling up stakes and migrating to the competition. In that, Spotify is like Apple or Blackberry, who need to court app developers in order to keep their software offerings robust, as well as users.

Spotify CEO Daniel Ek may believe, as he asserted in an interview last year, that growth is all five of the company's top priorities, but it's not the only one. He is walking a tightrope: underpay the artists and risk a having them flee to a competitor like Deezer or Rdio; pay too much, and there's no capital for the crucial operations of growing a young business. Managing what is turning into an artists' revolt will likely consume more and more of Spotify's resources in the coming years, and until the concerns of artists and the company reach equilibrium, investors shouldn't be in any hurry to tune in.

Dave Morris is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Dave on Twitter at @morrisdave.