Flying Vinyl Blog

Spotify: The next major record label

- Craig Evans

Spotify’s current business model doesn’t work. It never has and never will. Regardless of scale or domination of the streaming market Spotify will not reach sustainable profitability using its current businesss model for a number of simple reasons:

1. They are forced to pay major labels big fees for blanket licenses over their content 

2. The subscription cost is too low to pay Spotify or artists anything close to what either party needs to survive

3. Most of their subscribers, remarkably, are still on free deals only generating money through advertising

4. They now face race-to-the-bottom with Apple and other competitors, many of whom own a separate core business - for instance Apple sells devices and computers so can afford to run its streaming platform at a loss.

Like most modern data-driven networks, the company carries a high valuation, over $8bn despite haemorrhaging money since is began. Spotify reported an operating loss of around 200 million Euros in both 2014 and 2015 and is propped up by substantial venture capital support.

One of the biggest problems it’s faced is that most of the sought after music of the last 50 years is licensed exclusively by only a handful of major labels. Without their support and backing (as with companies like iTunes when it was conceived) the company simply wouldn’t keep its user base. Spotify users want to know that the big releases are available to listen to and if they’re not, will jump ship to competitors like Apple.

This gives major labels a level of domination over streaming platforms (for now) and it was recently revealed that Spotify was being forced to pay big yearly payments to major labels in order to blanket license their content. The artists did not participate in this deal only gaining the measly sub-1-penny-per-play offering by the service. In effect, streaming is cash-rolling all three majors in a big way. But is this short term cash they’re receiving going to mark a long-term downfall? I think so. 

What’s interesting about music streaming is that we have an almost perfect comparison that’s further developed in the film industry. Netflix rose to fame very quickly licensing content and then struggled under the weight of competitors pouring into the market and increased licensing fees for popular content. 

Their solution was really simple… fund and produce exclusive content that can’t be viewed on competitor platforms. By becoming a content creator it becomes much easier to control the cost of content and where else that content is available.

The music industry has been traditionally bad at controlling its distribution channels and in the digital age has farmed this out to 3rd parties that have gone onto take the lions share of revenues.

Now, imagine a world in which Spotify is a major record label in complete control of its distribution. It currently has around 50 million active users and the ability to push music directly into people’s consciousness via playlisting and, more importantly, the ability to not promote content from other parties.

There are scary ramifications if this happens. First off, the power to market music is the most important tool that most labels have and if you’re able to guarantee artists a certain level of coverage to 50m people, then you’re going to be able to cut better deals with the artists than your competitors (and let’s be honest, those deals are already pretty terrible for most artists). 

As artists are being signed at later points in their career, Spotify also has a leg up on the competition in the form of data. Whilst record labels are still looking for hype on social media, streaming companies are able to rely on algorithms to manage which artists are worth investing in and which aren’t. All those Facebook comments on posts are meaningless in comparison to how long an average user listened to a bands single for, how many playlists picked up certain songs, which global territories artists are successful in. They have a huge leg-up on the competition when it comes to who to sign. 

I’ve always been personally uncomfortable with the lack of innovation that the music industry has had when it comes to technology and the heavy-handed nature of Silicon Valley in waltzing into creative spaces and taking most of the revenue for very little of the work or investment. 

This was proved with iTunes, that took almost as much revenue from a single sale as a label that may have invested half a million pound in artist development, simply for listing a track on their platform. The music industry helped to market the iPod and push iTunes as a platform and turned Apple into one of the wealthiest companies that’s ever existed and it feels like very little of that wealth ever made it back into art. 

Here, we could see a situation where a Monopoly is able to dominate music sales, sign artists in a way that other labels can’t compete with and use the power of their user base to really dictate to people what music will be successful. After all, this is an entity that believes that paying artists a $0.004 per stream revenue is acceptable compensation for artistic work. 

As labels increasingly rely on Spotify to give their artists exposure via their playlists, as they become direct competitors to that company it seems logical that the heavy-hand on capitalism will see Spotify not promoting artists that are signed to rival labels. We’ve already seen them wield this stick with artists that did early exclusive releases through Apple Music then had their music dropped from all the big Spotify playlists a couple of weeks later.

So it may be that record labels are trading short term juice in expense of a long term squeeze and the monopolisation that the major labels have in the music market is only going to be further polarised when they are challenged by a much bigger Goliath technology company.