Spotify Has Paid Out $40 Billion To The Music Industry, So Why Is No One Happy?
Maybe Artists & the Industry Should Take a Closer Look at Apple (Who Created the Fundamental Rules of the Game in the First Place)
Spotify recently trumpeted that it has paid out nearly $40 billion to music rights holders since its launch in 2006, an impressive number to be sure. But few in the industry were impressed. Artists certainly weren’t. In its most recent earnings report, the music streaming leader celebrated 3.17 billion Euros (about $3.4 billion) in Q4 2022 revenues and 205 million paid subscribers, representing a free-to-paid subscriber conversion number of 42% that is the envy of the entertainment business. Yet few in Wall Street are impressed. Certainly, investors aren’t. Spotify’s stock price is about one-third (1/3) it was just two years ago.
Essentially no one is happy, and here’s why. Spotify’s dirty little secret is that it’s saddled with pricing and a business model that make it improbable to make artist payments that matter and practicably impossible for it to be profitable. The company achieved its first profitable quarter in Q4 2018 – a full 12 years after launch - and has since achieved only a handful of positive quarters. The more it makes, the more it seems to lose in fact. That happened again in its latest self-described “strong” Q4 2022 quarter, where losses dwarfed those one year earlier.
At its core, Spotify’s pure-play economics simply don’t work. Its variable cost structure burdens, and its gross margins (the amount it keeps from each dollar after its costs of goods sold – here the music) are simply too thin. The streamer pays out 70% of each dollar to rights holders (record labels, publishers, distributors, performing rights organizations and collection societies). And these variable costs – which come off the top without even considering Spotify’s operational costs (employees, marketing, overhead) - show no signs of abating. In fact, they likely will get only worse over time due to understandable industry pressures. After all, artist rights holders only earn about $.005 per stream. That means 1 million streams pay out about $5,000 on the high end – and artists and composers themselves only collect a small share of that number from the rights holders.
All this means that apart from a few mega-artists, Spotify and other streamers put little food on the table. Yet, in some respects, Spotify shouldn’t be seen as the industry pariah it’s made out to be. The streamer entered the music scene with its basic price structure and monetization constraints already in place after two cataclysmic events had already disrupted and fundamentally changed music industry economics forever. The first, of course, was the original Napster (and other pirate sites of that ilk “back in the day”) that facilitated outright theft. Napster and its users essentially stole twice – both by taking money directly out of the pockets of artists and then by driving down the perception of music value to zero.
The second shoe to drop was Steve Jobs and Apple. In a music industry understandably panicked by Napster’s insidious peer-to-peer pilfering, Jobs promised to be its savior. His solution was $.99 downloads of course. Remember those? Apple essentially stripped out singles from albums to give consumers – those who agreed to pay, at least – precisely what they wanted. Usually, that was one hit song from an album of 12. Apple profited handsomely of course, “inventing” its now notorious near one-third (1/3) share of every dollar that still define the content rules of the game (which is at the core of Epic Games’ epic lawsuit against Apple).
The iPod, enabled by and coupled with Apple’s 30% “tax,” transformed the company into the $2.3 Trillion juggernaut we see today. The New York Times recently called Apple’s fees its “primary driver of growth.” Jobs’ sleight of hand essentially shifted billions of dollars away from the artists and creators and into Apple’s pockets. And with that 1-2 punch, Napster and Apple laid the foundation for today’s industry streaming economics, despite the fact that Jobs never believed streaming would amount to anything. He notoriously said this in 2003, demonstrating that he too is fallible: “The subscription model of buying music is bankrupt” and couldn’t even be saved “by the Second Coming.” He simply couldn’t conceive that consumers would jettison song “ownership” via downloads for what he called song “rental” via streaming.
In that context, Spotify launched at a price point arguably necessary to compete against the Apple core - $9.99 per month. Fast forward to today after faster broadband and processing power fueled realization of streaming’s power and potential – we have Spotify on the music side, and Netflix on the video side. Netflix doesn’t share Spotify’s variable cost structure, but it too faces similar structural challenges to its model. Undoubtedly both leading players would like to change their fundamental economics, and Spotify tried at one point. In 2014 it raised its monthly subscription from $10 to $13 to cover Apple’s 30% toll. But Apple later launched Apple Music at a conniving and predatory $10 and Spotify retreated. Perhaps not so shocking then that Spotify’s price point in the U.S. is the same today as it was when it launched in July 2011.
Consumers seem to be the only winners here. We can all now enjoy the entire world of music – over 100 billion songs – anytime, anywhere and on any device. All of this power ad-free for $9.99/month. Think about that. Unlimited listening to over 100 billion songs for just a bit less than one Starbucks coffee. It’s an incredible bargain and unmistakable value proposition. The amount pales to the joy we feel – and the blood, sweat, tears and creativity (not to mention livelihoods) of the artists behind it all.
Even so, significant numbers of consumers bristle at paying anything at all. Technology in the form of Napster and the Internet – and then Apple’s iPod and Apple Music - ultimately forever transformed the perception of music’s value. And tech’s latest disruptive force of generative artificial intelligence (AI) is likely to do the same. AI can, and already does, spit out endless streams of new songs without sleeping, eating and payment of any kind after the initial infrastructure investments have been made. Why pay for a musician to write a film score when AI can look at past scores and endlessly re-create new ones?
Faced with these sobering realities, what can artists do? First, musicians – and all creators – should simply learn, understand and internalize these new threats and realities. Second, they should acknowledge that those forces are here to stay and cannot simply be sued out of existence (which was the preferred method of the RIAA when first faced with piracy). Third, rather than fight new tech and transformed economic realities, artists should learn to leverage new tech as best they can to empower new possibilities. Yes, technology certainly threatens. But technology also can empower and open new doors of possibilities.
Streaming, at least theoretically, enables musicians to build a global audience and community with deeper ongoing engagement. Yes, the streamers themselves add only pennies to the bottom line. But artists now have new tools to deploy to reach out and monetize their fans, and it only takes small numbers to drive bigger numbers. This is the famous “1,000 True Fan Theory” that describes the monetizing power of fandom, even at small numbers. If those superfans pay only $100 each year to support their favorite artist, that’s $100K right there. I’m not saying it’s easy, but this is the creative community’s reality. Web3 and NFTs hold tantalizing promise here, as I’ve written several times in TheWrap.
Let’s go back to what many still consider the villain in this story, Spotify. Faced with its daunting realities, sure it could finally raise its monthly pricing. But price hikes certainly come with their own risks and likely would scare off large numbers of users (many of whom may go back to theft).
The more obvious answer is that Spotify ultimately must sell. Try as it has, the streamer has yet to significantly monetize anything other than the music itself. And pure-play business models in the world of content – including Netflix on the video side – simply can’t compete against Big Tech competitors Google/YouTube (the biggest music service in the world by far), Apple and Amazon. All of those behemoths use content as marketing. YouTube drives more Google ad revenues, Apple drives more sales of iPhones and Macs, and Amazon drives more commerce.
Only an acquisition of Spotify will make investors happy. But even then, artists understandably won’t be. Maybe the industry needs to take a harder look at Apple.
[Reach out to me at peter@creativemedia.com and check out my media, entertainment and tech-focused legal services and advisory firm Creative Media - we can can be your external General Counsel and business development arm. Check out our impressive client list here.]