There are about 1 billion people in the world who listen to recorded music, co-founder Daniel Ek estimated Wednesday at the Fortune Brainstorm Tech conference at Aspen Meadows, and most of them don’t pay anything for it.
If a quarter of those people subscribed to Spotify to get their music, Ek argued, it would nearly double the total current revenue of the entire recorded-music industry, totaling about $25 billion.
That, Ek argued, could revive the music industry from the downward slide it’s suffered in the age of widespread Internet piracy.
“The primary thing for us is we want to grow the overall industry,” Ek said.
Musicians who have complained about the small royalties the company pays out might scoff at that idea, along with labels that aren’t among the company’s investors. But, Ek said, artists will benefit, too, in the long run, if Spotify continues to grow.
“It’s natural that suppliers and distributors are arguing about price,” he said. “You can see it in any industry. But, fundamentally, the biggest thing here isn’t trying to get more of the existing pie. … The main focus, and this is what I’ve found with my label partners, is they want to grow the pie. I agree with them.”
Spotify claims 40 million total users, with 10 million subscribing to the company’s $10-per-month subscription service and the rest using its free alternative.
It was launched in the U.S. three years ago this week — with a presentation at Fortune Brainstorm and a launch party in Aspen — and the model of music consumption has shifted sharply since then.
“We’ve really gone from an ownership model to fully embracing an access model,” Ek said. “And this means a profound shift in the entire industry. It means people are listening to a lot more music than they ever have before and more artists than they ever have before, and it’s starting to shift the culture.”
The access model, he argued, is better for both the industry and music listeners because listeners can sample different or new artists without having to worry about making a purchase — this gives artists wider exposure and gives listeners seemingly infinite choices. Ek said that 80 percent of the music available on Spotify actually gets listened to. On iTunes, by comparison, 20 percent of available music is downloaded.
“When you’re forced to pay a dollar a song (on iTunes), you’re going to revert back to the big brands and the things you’re aware of,” Ek argued.
But with Spotify — or SoundCloud and other streaming services — listeners have no barrier against listening to something new or different.
Ek cited Lorde as the biggest Spotify success story thus far. The singer last year went from regional New Zealand artist to world pop star in a matter of weeks. That began with Spotify’s Sean Parker — formerly of Napster and Facebook and known to many as Justin Timberlake’s character in “The Social Network” — putting Lorde’s “Royals” on his “Hipster International” playlist on Spotify, which has roughly 1 million followers. From there, the song hit Spotify’s “Viral Top 50” list, where the most-shared songs on the service are ranked, and then went on to chart-topping worldwide success.
All of that happened, Ek pointed out, through streaming and without Lorde releasing anything in the U.S. or coming here to showcase her sound.
“That wouldn’t have happened in the old-school media world,” he said. “It happened because of the lightning speed of streaming and because there was no risk for people to listen to Lorde.”
While the service has been widely adopted by U.S. music listeners, it also has courted controversy.
On Wednesday, more than 700 independent music labels launched a “Fair Digital Deals Declaration” initiative, calling for musicians to be compensated fairly for digital downloads and plays of their music on streaming services like Spotify, specifically demanding fair and transparent accounting of digital revenues. They also issued a “Global Independent Manifesto,” calling for musicians on independent labels to be compensated for downloads and streams at the same level as those on major labels.
Ek explained Wednesday that Spotify pays 70 percent of its profits to labels and artists, and the amount of its royalty payments will increase as its number of subscribers grows. In 2012, he reported, the company paid $500 million in royalties. In 2013, that total doubled to about $1 billion.
“If we have more users, the dollar amount that we pay out is going to be bigger,” he said. “If we have fewer, it will be less money that we pay out.”
Three years ago, he admitted, labels were dubious. But they also were desperate to get listeners away from listening to pirated music.
“We had a pretty tough selling proposition,” Ek said. “We went to the labels and said, ‘Hey, you should start giving away your music for free, and eventually people will start paying for it. … The biggest problem was piracy, so getting people on a legal service was most important.”
Ek also noted that music has always been constrained by the format on which it is consumed — going from single records to long-form vinyl albums to CDs that could fit 12 to 14 songs. As the Internet becomes the home of music, he said, a new form is likely to emerge that won’t look like the albums of decades past.
“We have a medium right now that’s not limited by any file size; it’s an audio and visual and an interactive medium,” he said. “So if you’re an artist, the canvas you’re creating on for the Internet generation is one where it’s audio, visual and interactive. (But) I don’t pretend like we’ve figured out what that format is.”