Apple Pays Music Artists Twice as Much as Spotify

Just how much money do artists get when their music is streamed online?

The precise per-stream rate has been a closely guarded secret, and the topic has become controversial as streaming has reshaped the music industry.

It has long been suspected that Apple (NASDAQ: AAPL) pays more generously than Spotify (NYSE: SPOT) — the leader in paid music streaming — but now investors are getting a better sense of just how much …

Apple reportedly pays roughly twice as much as its Swedish rival.

A penny for a song

The Wall Street Journal reports that Apple pays about a penny per song streamed. That’s estimated to be twice Spotify’s per-stream rate, which typically ranges from a third of a penny to half a penny. The WSJ cited a letter that Apple sent to artists and record labels as part of the company’s ongoing effort to demonstrate that it is more economically supportive of the broader music industry.

Artists only get a portion of the streaming revenue that is generated when their songs are played because the record labels that represent them take a cut. However, the per-stream rate is a critical starting point for monetization, and a higher rate inevitably results in more money going to the artist.

Why Apple can afford to pay so much

To understand the gap between Apple’s and Spotify’s per-stream rates, you have to appreciate the differences between the two companies. 

First and foremost, Apple is the richest and most profitable company on the planet, so it can easily afford to pay more. Additionally, Apple Music is a side business that complements and supports Apple’s hardware sales, so the company doesn’t need the service to directly generate money because it has other strategic value. Finally, Apple does not offer a free tier supported by ads, which provide weaker monetization than paid subscriptions.

In contrast, Spotify is a pure-play music streaming company so it must rely on its core service to generate profits. And the company doesn’t have the deep pockets that Apple does. On top of that, Spotify has an ad-supported tier that it uses as a customer acquisition funnel, converting free users into paid subscribers. 

Still, Spotify is the dominant player in the music streaming business, with 155 million premium subscribers at the end of 2020. Apple does not provide regular updates for Apple Music subscribers. At the time of its last disclosure in summer 2019, it had 60 million subscribers.

How covid has affected the music industry

The way people use music streaming services has evolved during the covid-19 pandemic. While people have been commuting less, they have been listening to more music and podcasts at home. Spotify has pushed hard into podcasting, signing exclusivity deals and scooping up various podcasting startups in recent years.

But the pandemic has also ravaged the live music industry, which is one of the primary sources of income for artists. There are hopes that demand for live events will soon recover as vaccine distribution accelerates.

“The supply-demand fundamentals of the concert business remain strong, with artists ready to get back on the road and fans eager to reconnect at events,” Live Nation (NYSE: LYV) CEO Michael Rapino said during an earnings call in February. “All our data continues to show that there is substantial pent-up demand for concerts on the consumer demand side.”

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Evan Niu, CFA owns shares of Apple and Spotify Technology. The Motley Fool owns shares of and recommends Apple and Spotify Technology. The Motley Fool recommends Live Nation Entertainment and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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