Spotify Relies On The Big Labels For Most Of Its Music. It Thinks That Will Change.

from recode

Spotify is 12 years old and has never been profitable.

Last year, it posted an operating loss of $461 million.

Today, as it goes public, it wants investors to value it at something above $20 billion.

In order to believe that’s a good idea, you have to believe that Spotify has figured out a way to improve its margins, which it says it will do.

And in order to believe that, you have to believe that Spotify has figured out how to change the way it works with its most crucial partners: The big music labels.

Spotify hasn’t said it will do that, for good reason. Spotify and the big music labels are in a co-dependent relationship that is both fraught and fruitful.

The big labels provide Spotify with the music that makes up 87 percent of the company’s streams. Spotify provides the labels with billions in revenue, which is starting to replace the vanishing money the labels used to make from CD sales and digital downloads.*

But Spotify’s plans for the future do involve changing that relationship in the long run.

The idea, according to people familiar with the company’s plans, isn’t to cut out the big music labels or compete directly with them by signing acts to recording deals.

Spotify does imagine, however, that over time, a growing tier of music acts, or small independent labels, won’t use the big labels for distribution. Instead they’ll work directly with the streaming service.

More here.

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21 Responses to Spotify Relies On The Big Labels For Most Of Its Music. It Thinks That Will Change.

  1. Gabrielle Pietanza April 12, 2018 at 10:15 pm #

    I was surprised to learn that Spotify has been operating for 12 years and has never turned a profit. With that said, Spotify wants investors to value it at about $20 billion. In order for this to be the case the company must improve their margins which they believe they can do. It is interesting however to think about how that could be the case. The main portion of income this company has is resultant of the small fee that Spotify Premium users pay in order to use their complete services. This however is only a small portion of the population as most individuals use Spotify Free or a series of free trials. In this day and age it is difficult to get the public to pay for music as through YouTube, Pandora, Sound Cloud, and other free outlets individuals do not have to spend money and are able to listen to any song they can image in a few clicks.

    In the case of Spotify, label companies provide Spotify with music making up 87 percent of content the company provides while providing these respective labels billions in revenue. This has come to replace the money these labels make on CD sales and legal digital purchases. Although this is the case currently Spotify does want to change this relationship with labels. They soon want to begin signing acts to record deals. They believe overtime that entertainers will work directly with them instead of those music labels that currently provide the content. They then will produce profit in this way and will create good and fair agreements with artists in order to form a better relationship.

    I believe Spotify has come up with a strong business plan. By sticking with entertainers large enough to have fans but small enough that large labels do not purse them they are opening the doors to many entertainers that may not have the same benefits and abilities as big name stars. They still should hold on to their current relationship with these labels as there is not a strong chance they will gain the business of big name artists yet they know that and understand that in order to stream music they need the content these stars produce. I ultimately believe that this can be a good strategy for them and look forward to see if this plan come to be.

  2. zhijie Yang April 13, 2018 at 8:15 am #

    Although Spotify has 140 million users, most of them do not spend money. These people only listen to music loaded with advertisements, but Spotify earns only $300 million in advertising revenue each year. Coupled with the high cost of copyright music, the company has been losing money.
    Spotify has always had a stimulating effect on the music industry. Streaming media revenue accounts for more than half of the income of the entire American music industry. Music streaming service has become an important part of the music industry. Spotify, Apple Music, and Amazon Music account for nearly 70% of the US music streaming market. But Spotify’s expansion is a huge price. This music streaming media is reported to lose hundreds of millions of dollars every year. As a result of eager to seize the market, the company’s spending on staffing, marketing, and product development continues to increase. Not to mention the cost of the new office. Singers and songwriters are complaining that Spotify’s royalty is too low.
    Spotify did not apply for a traditional listing this time. Instead, it adopted a direct listing method. In the process, it will not issue new shares or raise funds. Spotify no longer needs to go to the roadshow, nor does it need to seek the investment bank’s promise. Employees and other shareholders can also trade stocks on the first day of listing. Spotify may be doing this because it is very confident in themselves and the public has already understood the value of Spotify, so no one needs to tell the story. Some analysts estimate that Spotify can save the company up to $300 million in costs by doing so. Spotify’s current private investors can also cash out in time. From this perspective, the direct listing can be described as a more effective way.
    However, the direct listing will bypass such aspects as fundraising, but the issue price of stocks will be directly determined by supply and demand and will face greater uncertainty. Will Spotify’s listing plan end in tragedy? In any case, Spotify must overcome various obstacles encountered in the rapid growth process, and ultimately gain the trust and favor of investors.

  3. Ryan Mack April 13, 2018 at 4:54 pm #

    Spotify only recently went public after 12 years and is asking to be valued at $20 billion by investors and posted an operating loss of $461 million last year in 2017. According to an article published by Recode, Spotify has been planning to increase its margins by getting direct relationships with music artists and slowly moving away from music labels. Their current deal, however, has pros and cons. The big music label companies provide up to 87% of Spotify’s streams, and in return, Spotify provides the record label with billions in revenue. Spotify mostly makes it money through their paid subscription service called Spotify Premium. It costs an individual $9.99 per month. If a user doesn’t pay for the service, they have to listen to ads every now and then, which brings in only 10 percent of Spotify’s total revenue. The other 90 percent comes from their 70 million Premium subscribers. In moving away from large record labels, Spotify doesn’t plan to completely sever their relationship and compete directly by signing deals with artists. They’ll still have to maintain some type of relation/contract in order to provide streaming for older songs. What Spotify hopes will happen is that artists/producers will go directly to Spotify for distribution. Besides giving Spotify more room to come to better terms with the artists, it also benefits the artists themselves since it’s possible they will be able to keep more of the money it brings in because of not having to go through or pay royalties to the big record label companies. In the age of the internet, the need to rely on large record labels to record, market, sell, and sometimes produce artists’ music is diminishing. With YouTube, and other social media sites, as well as apps like SoundCloud and Spotify, its more possible than previously for artists’ to market themselves, for the most part, as well as find other artists to collaborate with. Additionally, artists’ attitudes toward streaming services are and have been changing to become more favorable toward them. For example, when Metallica was against music streaming back in 2012, it may have been due to the fact that their record label didn’t want to let them go since they would get control over their own music, then they struck a deal with Spotify directly. Lastly, the world of media and technology is changing. Streaming is taking over the declining physical sales which were once handled by the record companies.

  4. Dean Spenzos April 13, 2018 at 6:38 pm #

    As a Spotify user I really hope they get this right. Posting a $461 million loss last year looks really bad to the average person who’d does not know Spotify’s plan. What Spotify has done to this point is already impressive when it comes to music streaming. Years ago people would download tons of illegal music which is why bands like Metallica got upset at similar streaming services. If everything goes right for Spotify they could come out of this making a lot of money and changing music forever. It was a smart choice opting to partner with the major labels at first because they wanted to get as much popular music as possible and become a recognized company. Just like Facebook, they’ve created a large user base that is loyal for the most part. Unless they make a drastic change to the business model they will most likely keep a lot of their users while they make these smaller deals.
    There are certain instances when taking a big loss is necessary to the final plan and this is one of those instances. While it seems dangerous to take this kind of risk I personally trust Spotify to be successful. They are no longer a small company like when they first started; they have established themselves and undoubtedly have a strong team. I think the difficult part for Spotify will be getting enough small acts to hit their 35% margins. Making deal with bigger labels enabled them to get a lot of acts included in a single deal. What they are attempting to do now will require them to reach out to a lot of bands. The article mentions the possibility of acquiring Taylor Swift as one of the individual acts. Making this deal would be a huge benefit for Spotify’s new approach, especially if they can get her soon. With her following she could easily start a trend and have other popular singers partner with Spotify as well. Soon enough artists will be coming to Spotify and it will make things a lot easier. The key to this might be signing a popular artist and the rest will naturally play out. I’m excited to see how this goes in the future but I’m not opposed to finding a new way to stream if I don’t like what happens.

  5. Matt Henry April 13, 2018 at 7:08 pm #

    In this course we have discussed the numerous benefits of becoming a “platform.” Facebook is a platform that basically follows its own rules and regulation. Spotify, on the other hand, is simply a streaming service at this point, but they expect that to change in the near future. Valued at around $20 billion, Spotify has NEVER been profitable in its 12 years of operation. Why do people continue to invest in a company that has never posted a profit? Spotify has big plans to transform into an extremely profitable company. Spotify does not plan to compete with big music labels, but they plan on a tier of music that involves smaller musicians that will work directly with Spotify instead of an independent label. This way, Spotify will have better margins and not lose out on profit to record companies. This is comparable to Netflix. They used to profit solely off of the content they would license, but this is a costly business tactic. Now, Netflix is full of original content and they are worth more than ever. It will be interesting to see if Spotify is able to follow in the steps of Netflix. Now that Spotify is a public company, people will be tracking its progress closely and they are sure to see a lot of change in the future.

  6. Moniqua Prince April 13, 2018 at 8:16 pm #

    I would choose Spotify over Apple music. I would choose Spotify because you do not have to pay for it to listen to it, and it provides mainstream and non-mainstream artist. Anyone can post onto Spotify and because it is free (with the exception of ads), you can listen to anything. Along with that, I know of a few people who use Spotify to post their music. These are musicians not signed to contracts, but just making a music on the side. I definitely believe that Spotify has the capability to get up to 35 percent margins. Spotify also has a good tactic in jumping into the music industry. I would also honestly post music I make or made to Spotify. It is a good platform for musicians who want others to hear their music. It is honestly like YouTube without the videos on subjects other than music.
    Spotify has a freshness that other music platforms do not have. I have not used or touched Pandora, IHeartRadio, and Apple Music in a long time. Each of these platforms have their own brand, and Spotify almost has a brand that is not yet established. Its brand is one that has not negative connotations to it, and it is also user friendly. I have to say that I did struggle when using Pandora.
    It’s tactful that Spotify has now made itself a public company now. I feel that because they have a good user base, and also because its brand is not yet established that Spotify has an advantage. Spotify did have to rely on the big companies in order to get a bigger user base, and get its name out there. Now, though I feel that their strategy of taking on small artist is a great strategy. I also feel that Spotify working with the big companies was also strategic. In the future, I believe that Spotify will not have to rely on the big companies to put music on their platform. I feel that big musicians will come to them, especially if they give them an incentive to come. Also, if Spotify can create singers like Netflix can create TV shows, it will attract many others to sign on with them. Spotify definitely in my opinion has a future.

  7. Chris Goldfarb April 13, 2018 at 8:41 pm #

    The music industry is largely a mystery to me so it’s very surprising to hear that Spotify for at least the past three years has been operating at a loss, with the total summation of the loses over those three years equaling 1.16 Billion dollars. Though this makes a lot of sense when you look at how much money they pay to “rightsholders” (https://www.allaccess.com/net-news/archive/story/173862/report-spotify-losses-total-1-billion-over-last-tw). As of 2017 they’ve paid out a total of 10 Billion dollars to “rightsholders” and also in 2017 they promised to pay 2 Billion dollars minimum to record labels alone over the next 2 years(https://www.recode.net/2017/6/15/15807382/spotify-revenue-2016-financials-guarantee-payment-universal-merlin). So when you operate at around 3 Billion dollars of annual revenue and right off the bat you lose a minimum of 1 Billion to labels and then you have to add finance charges, and you still have to pay the thousands and thousands of independent musicians, your costs rack up real quick.
    Still no one can argue streaming isn’t the direction of at least the short-term future. One way or another Spotify will find a way to make a profit and they very well could have with their IPO (Initial Public Offering). By taking their company public Spotify has raised some serious capital to try and figure something out to maintain their corner of the market. As the article points out they have a tenuous relationship at best with record labels which cuts deep into their profit margins. As of now those labels hold all the cards because without their music you alienate your customer base, which Spotify desperately needs.
    For the solution to this problem they should look to their fellow streaming service Netflix. While Netflix is meant for movies and TV, and Spotify is meant for music they could easily put in place some similar models due to the nature of how they provide their service. When Netflix first started streaming they got some real good deals with movie publishers because those publishers saw Netflix as a side project where they could make some quick revenue without much effort. Then Netflix exploded to become one of the most popular streaming platforms in existence and movie publishers realized they could do the same thing and make their money directly as opposed to giving a cut to Netflix. An example of this is Disney starting its own streaming platform instead of hosting their movies on Netflix. Netflix in yet another stroke of genius realized that one day publishers would wise up and discontinue their one-sided deals so they started producing tons and tons of original content.
    That meant that Netflix was no longer so reliant on outside sources to maintain their business. In order to grow Spotify needs to do the same thing and although the article says Spotify is hesitant to sign its own artists it would seem to me that unless Spotify wants to exist on the whim of record labels they need to adapt before it’s too late.

  8. Tanner Purcel April 15, 2018 at 5:02 pm #

    I am a long time Spotify user, and I was shocked when I found out that Spotify has never turned a profit. Spotify now wants investors to value it at $20 billion, and Spotify must find a way to improve their margins. Spotify only makes a profit from their premium membership prices, which really isn’t that expensive considering the amount of music that one has in their hands. As of right now, label companies give Spotify music in exchange for Spotify making them billions in revenue. Spotify wants to cut the middle man and they hope that entertainers will make music directly with them instead of these big music labels. I believe that this could turn out as a very good business plan by Spotify because these artists will be making money for Spotify instead of these record labels. Also the artists they are targeting will be those who are big enough to have a good number of fans, but small enough where these big music labels are not constantly pursuing them.

  9. Antonio Macolino April 16, 2018 at 6:49 pm #

    As an avid listener of music and user of music streaming services, this article definitely caught my attention for many reasons. First of all, Spotify is going public. This is huge news for a company that has been around for 12 years but has not made a profit once. Now, they will be able to attract investors and possibly finally make it over the hump and start profiting. I found the fact that Spotify has never profited to be very surprising. I have always viewed Spotify as a huge company with millions of users. I know so many people who cannot live without it and prefer it to iTunes, Pandora, and other streaming services. Along with the millions of users, Spotify uses tons of ads. One would think that the combination of users and ads would generate tons of ad revenue but apparently this is not the case.
    Another aspect of this article that I found to be particularly intriguing is the fact that Spotify is considering working directly with artists and cutting out the middle man. In other words, Spotify is planning on signing artists to contracts directly as opposed to the artists signing with a record label and then having Spotify pay the record label for their music. By doing this, Spotify could cut costs dramatically. This could also have huge implications on the entire music industry. If this plan becomes a huge success, I feel that more and more music streaming services such as iTunes and Pandora will join in. If this occurs, then more and more artists will sign with these music streaming companies rather than the record labels. This will then cause two different things to occur: the music streaming services will make way bigger profits and record labels will lose tons of revenue and some may even go out of business. Another impact of this new method of business is that lesser known artists will have a far easier time making a living off of their music. Instead of being rejected by a record label, more and more smaller acts will be able to sign with these streaming services thus bringing them to a bigger audience and increasing their chances of being able to make a living off of their music. It will be very interesting to see if this move by Spotify will succeed or not and the implications it will have on the music industry.

  10. Timothy Guerrero April 17, 2018 at 8:40 am #

    I was extremely surprised to see that Spotify has not been profitable in over a decade, riding the surge of Steve Job’s introduction of iPods and iTunes to forever reshape the way consumers consume music from artists and big label companies. However, this makes sense – roughly just under half of Spotify’s total subscription base pay into the service, and the rest deal with advertisements that only generate so much for Spotify in comparison to the enormous costs to bring the most popular music to this platform. This is a pivotal time for Spotify as well, as numerous new streaming services have emerged to challenge Spotify’s top spot, most notably being Apple Music, as Apple has the advantage of the further integration of that seamless Apple ecosystem to further incentivize Apple products. Spotify’s approach is interesting, however, and it will be curious to determine how it will work out. Essentially, Spotify is now opening the doors to small artists many have come to love over sites like SoundCloud, and with the largest audience in streaming could come a triumphant revitalization or an epic fall from grace. For this to work to the grand hopes of Spotify, they will need to convince a new generation of artists to skip through major record labels and go straight to the largest streaming platform in music, which is tempting and substantive. However, these artists are in the business of getting paid, and Spotify simply will not be able to pay artists the way major labels can. If these labels go nuclear, Spotify’s entire business plan will be altered. Given the company’s prominence in music today, this strategy will set the precedent as to the relationships between producers and consumers of music.

  11. Nicholas DiBari April 18, 2018 at 9:41 pm #

    As a music enthusiast and someone who loves finding new music that would not have otherwise made it to mainstream radio, I found this article particularly interesting. I have always read articles and snippets about artists feeling underrepresented or struggling to take off in a market dominated by headliner, Top-40 artists. It was around this time that I also learned about the streaming service Sound Cloud. Sound Cloud is a service that allows for users to upload audio files to the site for anyone to listen to. It allows those musicians to, even if they do not make it mainstream, to have some sort of audience to their art. I did look into Sound Cloud as a means of publishing music before; however, there is an interesting legal stipulation. Sound Cloud, despite publishing your music, does not protect it at all. It still requires that, for total assurance of protection of your work, you should still file for a copyright on your music (https://help.soundcloud.com/hc/en-us/articles/115003567888-Do-I-need-to-copyright-my-content-).
    Another interesting legal conversation I have read about in regards to Spotify, as involving big name artists such as ACDC, is the decision to make their music unavailable on streaming services such as Spotify. Oftentimes, these artists do not feel they are being adequately compensated for the usage of their music on the service. Spotify is paying 70% of its revenue to the music industry, however, some do not see this as enough. In addition, streaming understandably does serious damage to album sales as individuals can simply listen to whatever song they want as opposed to purchasing the whole album. Another significant reason for artists pulling their music from the service is that they feel that streaming devalues their art.
    While I am not a musical artist who has an enormous financial stake in the game, I would have to disagree with the stance of the artists who are seeking to pull their work from streaming platforms or those who feel that the smaller artists deserve the spotlight. Permit me to get up on my soapbox and say that I feel that music is something that should truly be for everyone. I am not saying that we should not properly compensate artists for their work (we should), but artists should understand that not everyone in this world has the luxury to pay for their work.

  12. Coby Dunn April 18, 2018 at 11:34 pm #

    Spotify is yet another platform that we can use to listen, share, and download music. You can create playlists, get followers, and stream any music you want. Personally, I pay for the membership which is about five dollars a month. I get to skip songs, there are no ads, and I can listen to as much music as I want. That is why Spotify is so appealing to music companies, artists, and customers. It is an easy way to listen to as much music as you want. The problem however, is that Spotify wants to increase its profits. Deals with big companies are great, but they aren’t proving to be substantial enough for Spotify. So, they want to branch out to newer artists that have a following, but cannot get signed by big companies. I think this is a fantastic idea. It provides Spotify with more fans, more music, more profits, and the artist makes money too. It eliminates the need to deal with big companies. Bigger companies however are a little apprehensive about Spotify’s desire to sign on smaller artists. I think Spotify needs to be strong in this decision to sign smaller artists. Spotify has enough listeners to still remain attractive to companies that need to release music and make profits. I think that this could be a new era for music. Apple music, Spotify, and other streaming platforms make it easy to listen to music. In todays connected world it is impossible to ignore these companies. So, big record companies are going to be forced to stay in contact with Spotify to release new music and make a healthy profit.

  13. Nicholas Marinelli April 19, 2018 at 4:07 pm #

    I have been using Spotify Premium for well over a year, maybe even two, and I have no complaints about the service, what they offer, and the music that is on the streaming platform. Although the company is yet to leave the red and flow to the green, they are quite successful. According to Digital Trends, Spotify has more than 70 million paying subscribers- double that of the closest and fastest growing competitor, Apple Music. Along with a positively growing subscriber rate, Spotify’s recent IPO broke headlines as an unorthodox method. Rather than filing with an underwriter, the CEO decided that the company will list its shares directly on the NYSE, under the ticker SPOT. This method however makes sense for the company that has posted an operating loss of almost $500 million last year, because it is actually a cost-cutting way to list shares; it allows employees and shareholders to sell directly to the public. Though unusual, the company had a stellar listing with shares soaring nearly 26% to $165.90 at open. At the end of the first trading day, the company was valued at a staggering $26.5 billion.
    Spotify was actually introduced to the public in 2006 when their founders wanted to create a way to target piracy, as the music industry was taking a hit with loss revenue and album sales from piraters. Their business plan goes as follows: Spotify allows users to either stream music for free if they are willing to listen to advertisements, or pay a subscription fee for a premium service, meanwhile paying royalties due to artists and record companies.
    To be honest, I am not surprised that Spotify has not been profitable. It is a great company and I love their services, but that is exactly it- they are a service. Netflix was not profitable for quite a while (began in 1997 and not substantially profitable until 2017), but then they finally got the ball rolling. I believe it will be the same for Spotify, but for a company to go public, without being profitable- ever- it quite dangerous for investors. Investors need to see results and if there are no results, with a high beta, it could be quite a scary, volatile company they may take a hit because of the uneasiness within the shareholder community. Personally, I believe in this company, as they have showed innovation within the platform and can definitely stay in the forefront of the music streaming business.
    https://www.digitaltrends.com/music/apple-music-subscriber-growth/
    http://www.scmp.com/comment/insight-opinion/article/2142213/spotifys-ipo-was-success-never-mind-its-loss-making-company
    https://www.recode.net/2018/2/28/17063892/spotify-ipo-margins-music-labels-streaming

  14. marcello bertuzzelli April 20, 2018 at 1:00 pm #

    “Spotify talks about becoming a “platform” — a term it used dozens of times in its public offering documents and then again during its investor pitch day last month — it is talking about a bunch of different things. But the main one is that Spotify wants to connect music acts directly with music listeners and take a cut of the transaction.” The idea of eliminating hard copies is prevalent in today’s society as we see technological advances taking over what once was. The direct co-dependent relationship it has with big labels however is one that not only Spotify uses but other well-known music platforms as well such as Pandora, Sound Cloud, and Apple Music. From the outside, things look great. Spotify announced in January that it has 70 million subscribers worldwide, and the U.S. recorded music business grew 17 percent in the first half of 2017, compared to the same period of the previous year. Spotify depends on the major labels to supply most of the popular music that it streams, and it is hard to imagine that changing in the near future. Soon the company will no longer depend as much on the major label goodwill it needed to ensure its stock listing goes smoothly. The scrutiny it will receive as a public company will give it an incentive to focus on profitability: The company’s filing with the Securities and Exchange Commission shows that in 2017 it brought in $€4.1 billion ($5.1 billion) in revenue, with a loss of €1.2 billion ($1.5 billion). Yes, it is said that in the 12 years it has been active there has not been much profit, but without the need of big name labels in the future, things will change.

  15. Grace Galuppo April 20, 2018 at 3:10 pm #

    Streaming has become the new way for consumers to access their television shows, music, and movies whenever they want. Spotify is a music streaming service that allows their users to make playlists out the over 35 million songs they have. In addition, consumers can listen to one of the over 2 billion playlists Spotify has on their network. For instance, one of your friends made you a playlist with all of your favorite songs, in the past your friend would have to put all the songs on a CD and burn it so that you could also have a copy. However, with Spotify, all you have to do is search the title of the playlist and anyone who uses the platform can listen too. Spotify and other apps like it have destroyed the need to pay for songs or albums on iTunes and allows for playlist structure unlike illegally downloading songs would. The concept of Spotify is like no other on the market, but surprisingly they had an operating loss of 461 million dollars. One could argue that a new company is never profitable at first however, Spotify is no spring chicken; the company has been around for 12 years and has never been profitable. So why has a company as well-known as Spotify not profiting from their unique music service?
    Spotify is flawed in the way it has structured itself, regarding their relationships with big music labels. Moreover, Spotify pays the big music labels in order for them to acquire and maintain songs from famous musicians and songwriters. Without the songs from the labels, Spotify would have little to offer their consumers. One way Spotify is trying to combat this problem is by eliminating the middleman aka the music labels. Furthermore, Spotify plans to attract small labels and performers to distribute their music directly to them rather than a large music label. Spotify has to be careful who they choose to scout because they do not want the big labels to pull out their copyrighted music, which includes future songs and songs from the past. In order to avoid stepping on the labels toes, Spotify wants to focus on performers that the big labels “won’t spend a lot of time pursuing”, yet those who have somewhat of a fan base.
    Spotify also offers three types of subscriptions to their consumers: a free option, premium, and premium for family. I think that if Spotify eliminated their free subscription, they would become profitable. Right now, Spotify charges $9.99 per month for their premium account and $14.99 per month for their premium for family account. In addition, Spotify offers $4.99 per month deal for students, which also includes Hulu. I personally use my brother’s Spotify and Hulu accounts because he utilized the deal and I am too cheap to pay for my own account. Furthermore, I think it is reasonable to assume that many people share accounts with their friends and family and because of this Spotify should increase the price of their subscriptions.

  16. Daniel Colasanto April 20, 2018 at 3:31 pm #

    While everyone is busy getting caught up in the fact that Spotify hasn’t been profitable for 12 years or how the company posted an operating loss of $461 million last year, most of you are still missing the bigger picture. Spotify has figured out a way to improve its margins, and it says it will implement the modifications soon.
    Most of Spotify’s music streaming is provided by big record label companies. The real incentive for big record label companies to partner with Spotify is because of the loss in revenue over the years from diminishing (almost non existent) CD sales and music downloads. Spotify and the big music labels are in a co-dependent relationship that is both stressful and rewarding. However, Mark Zuckerberg does not plan on maintaining all the partnerships he has at the current moment. The plan is to over time, put in place a growing tier of music acts, or small independent labels, who won’t use the big labels for distribution. Instead they’ll work directly with the streaming service and provide tens if not hundreds of millions of potential revenue when set in stone.
    When this happens, when Spotify can command better acts, and retain more equity in smaller/midsize acts/performers, the money will flow….
    I cannot express in words how Spotify will change the dynamics of the music industry once they implement these changes to their music service. People will become famous overnight, and the money will come. Talk about cash flow. Gross margins have already been up 21 percent at the end of last year because of new deals it has struck with the big labels. Now the goal here is to reach 35 percent gross profit margin. I don’t know what these numbers mean without looking at the cash flow charts, balance sheet, or income statement. Bottom line. However, I don’t see Spotify having any problem if they can make 100 niche artists by the end of 2019. That’s it. 100. Because you know what 100 means. It means having a percentage of every artist on tour, every clothing label they sign, everything. That all adds up. That’ll be a lot of money. If Spotify creates 100 millionaires by the end of 2019, mark my words they’ll be in the black by 2020.

  17. Zachary Corby April 23, 2018 at 10:19 am #

    Spotify going public poses a lot of new challenges and troubles for the company. Being that Spotify has not been profitable at all yet, going public will put it under a microscope to make a lot of money very quickly and I am very skeptical that they will be able to pull that off. From reading this article, it seems that first off Spotify really does not have a plan. You would think that a major company that wants to be valued at around 20 billion dollars would have some sort of plan to make money when becoming public but Spotify does not. They know that they want to try and increase their margins to 35 percent which is great to see that they realize where they need to get to, but how are they going to get there? I really do not see how people would invest in them when they do not have a sound plan, and the one they do is very unconvincing. Spotify’s current idea is that they want to try to go to artists directly to get their streaming rights and work exclusively with Spotify. Seems like it would certainly make more money and it would cut off a big portion of costs, but they never say in the article of how they plan to convince artists to join them rather than going to a big name label. Labels are able to give artists so much more than Spotify would be able to offer them. They can produce and work with them on their new work, help plan tours, and countless other things that Spotify at this time cannot offer them. The only thing they can do is give them more money from all their streams since the label will not have to take any of it from them. How will that really matter in the end if they cannot get to fame as they would be able to with the help of a label? Even if Spotify was to go another route and try to convince big name people to leave their labels and to come to Spotify because they can earn more money, it would not work out very well because the labels have rights to their music that they produced and could withdraw it from Spotify. Why would someone like Drake leave his label and have all of his songs removed from streaming services to try and get an extra few percentage points of money from Spotify? He would end up losing so much more money because of the switch form his old music. It seems a lot similar to when Kanye West said he would only publish his new album on Tidal and nowhere else. That lasted for about a week before it came to other major platforms because no one wanted to go get a Tidal subscription just to listen to his new album. People would rather just wait for it to come out illegally. Kanye could not do it anymore because he was missing out on so much money. The actual plan by Spotify is to target low to mid-range artists who are not with a label yet that could sign their streaming rights exclusively to Spotify. First, that would not be smart for the careers of any aspiring artists, and second how many people are actually going to switch to a Spotify membership just to hear a few lesser-known artists? Overall, the plan laid out by Spotify is very lacking and investors should only be investing on the leadership and believing that they could figure out a better plan then the one that they proposed. Especially with so much competition from Itunes, youtube, soundcloud, and the market for illegal music it seems like Spotify is in a very tough spot to try to make money. I am not very high on Spotify’s potential for growth with it becoming public.

  18. Andrew Kuttin April 25, 2018 at 11:59 pm #

    From the perspective of the consumer, Spotify is a dream come true. As a college student I pay five dollars a month for access to almost every song I could ever want as well as a subscription to Hulu. That being said, from a business perspective the streaming service leaves me conflicted. They have been constant fire from artists for the royalties they pay out on each stream. Each stream of a song comes out to only a fraction of a cent in the artist’s pocket (https://tinyurl.com/ycmrpp88). My favorite story to come out of this controversy came from my personal favorite band, Vulfpeck (https://tinyurl.com/yd5l6ye7). The group created a 5 minute silent album entitled “Sleepify” that they encouraged their fans to play on loop while they were asleep until the service removed the album. When all was said and done, the band had raised $20,000 and used the money to provide free shows for their fans. Ranting about the best band in the world aside, Spotify is infamous for not giving artists their due. This could be a result of the large licensing fees that the company pays to the biggest record labels. As this article points out, these labels make up 87% of their content. This article hypothesizes that if labels are cut out of the equation, revenues may increase for both Spotify and the artists. There is a noticeable trend in the streaming industry of streamers choosing to create their own content. Netflix, Hulu, and Amazon just to name a few have started their own studios that create content for the parent company to stream without paying a licensing fee. It would be almost impossible for Spotify to operate as its own label, but as this article theorizes, they would likely be able to cut individual deals with mid to low tier artists so that they do not to join a label to enter the Spotify library. These artists can be bribed with higher royalties to avoid joining a label.
    This would not fix the problem that Spotify has with large labels and artists. The article points out that artists like Drake and Taylor Swift will not be going independent any time soon to cut a deal with Spotify. If I were an investor I would still look favorably at Spotify’s future. Despite the fact that they still have yet to declare a profit, they have plenty of revenue without much operating cost outside of licensing fees. If this cost can be minimalized, Spotify could easily join the promising future that Netflix, Hulu, and Amazon represent.

  19. Jacob Abel April 27, 2018 at 3:05 pm #

    It was surprising to learn that Spotify seems to be operating at a loss and that it has never really be profitable. Currently Spotify is currently trading at around $159 up from around $132 when it initially started trading. This would suggest that the company is gaining traction on the market, however this is obviously subject to change in a relatively short amount of time. As the article notes Spotify is still subject to the whims of the big music labels. I think their hope in trying to sign smaller, independent artists is that one of them may become big and then persuade other top artists to negotiate with Spotify directly. I think the music industry is definitely something that could be subject to massive change in the future
    The issue I see with Spotify in gaining value is that its an app with limited possibilities which are constrained by the current set up of the music industry. It may be hard to gain anymore profits without being able to sign a big star directly. Being able to expand its clout even more in the music industry I think will be key to Spotify’s Future. Their current relationship with the record labels is going to create a mixed relationship as the article notes. The two may be able to come to better terms however both have such large interests that it will be difficult. It will be interesting to see if Spotify is able to sign their own artist as this may lead to the margins they are looking for in the future.

  20. Adam Facella April 27, 2018 at 7:34 pm #

    I never realized how long Spotify has been in business and how much money they have lost in the last 12 years. I am an everyday Spotify user so when they went public about a month ago it caught my interest. I had heavily thought about stock in them because they are a relatively unique company which I know that many of my peers are using. With their premium service I figured that they would be able to make more money because people are forced to pay for the service. After looking at how unsuccessful they are I do not think I will be investing. The one way that I would consider putting my money into their company is if big named musicians began leaving their labels for Spotify like Metallica did. However, as the article states this is very unlikely to happen even if the musicians are often threatening to do this. This would leave problems for the artists to lose access to play time on the radio and other services as well. What would be the point just to get a little bit more money from Spotify, there would be a much bigger negative impact to them. Some artists are also not even on Spotify and then the user would not be as happy as they could be if Spotify had access to every artist. There are many problems that the company faces with groups who are not together still, such as the Beatles. When they finally joined Spotify’s library it was a very big deal. I hope nothing but the best for the company.

  21. Matthew Martin May 25, 2018 at 10:45 pm #

    I was extremely surprised to learn that over the duration of 12 years, Spotify has yet to turn a profit. Considering their massive amount of listeners with the most up to date music, it’s hard to see that NOT being turned for a profit. As an everyday listener on Spotify, the thing I enjoy the most is that just about any band’s music is up on the streaming site to listen to at any time. Reflecting back on this article, I think that the only way they could stabilize profits is if Spotify somehow gets big time musicians such as Eminem or Kendrick Lamar to leave their respective record labels to directly work with the company. However, many well known musicians are locked up tight with their labels and are highly unlikely to join Spotify. Essentially mid tier artists should be sought after under label’s radar to use this platform. Overall much effort will be needed to eventually create profit, but with a solid plan in place, Spotify might actually continue to grow in both revenue and notoriety.

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