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WILL SPOTIFY BECOME A RIVAL TO THE MAJORS?

In a piece headlined “Having rescued recorded music, Spotify may upend the industry again,” U.K. publication The Economist pairs some intriguing stats with provocative speculation about the streaming giant’s future moves. Specifically, as the subhead puts it, the Daniel Ek-led company’s “clout in streaming could allow it to sign new artists itself, challenging the major record labels.” 

As the story—which has no byline—points out, “Global revenues from music streaming, which Spotify dominates with 70m subscribers, more than tripled in three years, to an estimated $10.8b last year, for the first time surpassing digital and physical sales of songs and albums.

“But if it is earning billions for others, Spotify is losing money for itself—with an operating loss of nearly $400m in 2016—because it pays out at least 70% of its revenues to the industry, mostly in royalties. As it prepares for a ‘direct’ listing on the New York Stock Exchange, it must convince investors that it has a path to profitability. Some reckon it can find one, but only at the expense of the labels it has enriched: by paying them less in royalties; by getting them (and others) to pay for promotions and data services; and even by competing with them directly, by making its own deals with artists. In other words, Spotify may only be able to make money by reshaping the industry yet again…

“On average, a billion streams on subscription services brings in about $7m for big labels, with perhaps $1m of that going to the artists. Another pot of money goes to songwriters and composers… With a big and widening lead over its competitors, Spotify has quickly become the industry’s most important distributor. Redburn, a research firm, estimates that in the first quarter of 2017, Spotify accounted for 17% of the $5b in revenues taken by record labels, and its share is growing…

 “Spotify’s most obvious power is its ability to make stars via its playlists and recommendation algorithms, much as radio DJs used routinely to do with simple airplay. Spotify has more than 2bn playlists; most of them are made by users themselves, but Spotify’s own curated lists attract millions of followers. Redburn reckons that up to 20% of streams are via one of Spotify’s own playlists. AWAL, an independent label run by Kobalt…says that getting on a Spotify playlist boosts a music act’s streams by 50% to 100%. Spotify would have to be careful how to monetize this clout, lest it be suspected of charging for a place on its playlists. But last year it did begin testing ‘sponsored songs’ on its free service.

“The streaming service’s most intriguing point of leverage is that it could use these advantages to become a recorded-music label itself, working directly with artists. Matthew Ball, an analyst, argues that Spotify is sure to start cutting deals with artists in which it pays an upfront guarantee and promises a percentage of streaming revenue that is much smaller than it pays labels, but far more than artists get now.

The maths for these sorts of deals may be simplest for established artists, for whom performance is most predictable (though many will use their clout to get better deals with their existing labels). But with its data and playlist advantages, Spotify can identify, elevate and theoretically sign contracts with up-and-coming artists too. The channels that the labels knew so well, such as radio and record stores, have diminished in importance: ‘Breaking artists is one of the most important things labels do, but it is becoming harder than ever,’ says Mark Mulligan of MIDiA.”

The piece concludes by noting that the major-label heads “have long been conflicted about the company that changed their industry (and in which they each have a small equity stake). Early on, they were skeptical about whether Spotify would make them much money. Now they may worry they are creating a future rival, much as the Hollywood studios licensed their content to Netflix. For the first time in 20 years, the music industry is growing strongly. The fight for who comes out on top may have only just begun.”

 

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