How Does Spotify Work?

For those of us experiencing the early indicators of middle age—you know, living above an ideal body weight and dabbling in hair dye—the rapidly evolving music world has left us feeling, well, middle-aged.  We lived through the times of vinyl (which is kind of trendy again) and cassette tapes.  After years of resistance, we finally stopped buying CDs.  We even stopped downloading MP3s, mercifully transitioning into the era of music streaming.  But how exactly does a music streaming service like Spotify even work? And I’m not talking about how to create an account, pick a plan, and miraculously listen to whatever song (or podcast) you want.  That’s the easy part.  How does it all really work? Here is a very brief overview.

The Concepts

A key concept to at least peripherally grasp is the idea of audio data compression.  While CDs ushered in an era of digital music, they contained a rather large amount of data.  Highly intelligent individuals who studied psychoacoustics—the science of sound perception—were able to remove sound that was imperceptible to the typical human ear.  Examples include very high and very low frequency sounds.  The result was a digital audio file that was around one-twelfth the size of its corresponding CD version, though of similar sound quality.

Due to the removal (or deliberate loss) of information, such files are often called lossy audio files.  While some may object to the process, these smaller files are perfectly suited for transmission across the internet.

For several reasons, the most widely adopted lossy audio file type was initially the MP3, prompting a transient proliferation of MP3 players in the early 21st century.  As research and technology evolved, another format called AAC (advanced audio coding) became widely adopted.  Spotify currently streams its files in the Ogg Vorbis format.

The Business

In order for Spotify’s operation to work legally, the company required licensing deals from some large players in the music industry, namely record labels.  Given the widespread proliferation of digital music piracy in the late 1990s and early 2000s (think Napster), Spotify likely had the upper hand in such negotiations.  After all, the giants in the industry preferred to settle for some revenue rather than the zero revenue that came with piracy.  Spotify also offered the labels an equity stake in the company.

With the success of Spotify’s strategy and the widespread adoption of streaming, the days of owning music gave way to subscribing for the right to access files in a massive library, in this case Spotify’s servers (managed either by themselves or another cloud provider).

Spotify pays the rights holder based on a formula that takes into account the number of file streams relative to the overall number of streams in a time period. The result ends up being somewhere around $0.004 per stream.  Depending on how many parties split that amount (record label, producer, songwriter, etc.), artist compensation per stream can be negligible.  This model has therefore been a source of criticism from, not surprisingly, artists.

Spotify, as expected, now has a host of competitors, with Apple Music, Amazon Music, and YouTube Music being prominent examples.  As mentioned above, certain audiophiles object to the concept of lossy data compression, claiming a loss of sound quality.  For this group of individuals, streaming services such as Tidal, which offers a lossless audio file format called FLAC, can fill a void.  Tidal also offers a larger payment per stream (around $0.01), addressing another point of contention.

Regardless of these controversies, music streaming is now an undeniable part of life.  Those who have yet to adopt the technology are probably sentimental, kind of old, or just not into music.