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Penny Fractions: Spotify is an Audio Company (If It Wants)

Hello, hello, hello! Thank you to those who joined last week’s reader call and keep an eye out for de
Penny Fractions
Penny Fractions: Spotify is an Audio Company (If It Wants)
By David Turner • Issue #138 • View online
Hello, hello, hello! Thank you to those who joined last week’s reader call and keep an eye out for details on September’s call! To close out the summer, I’ll be off next week and back on September 9th. To repeat an ask, I’m interested in reading any solid academic or research papers on finances within the entertainment industries or digital platforms. Lastly, if you enjoy this newsletter, please recommend it to a friend or perhaps consider supporting via Patreon. Now, let’s dive into Spotify.

Spotify to Artists: Get Another Career
Last month, Daniel Ek gave an interview that didn’t go over well. Headline 1: ‘He’s Got A Point, It’s Just That His Point Sucks’ – Artists React to Spotify CEO Saying They Need to Work Harder. Headline 2: Spotify CEO Daniel Ek Says Working Musicians May No Longer be Able to Release Music Only “Once Every Three to Four Years”. Speaking to Music Ally, Ek’s usual unintelligible corporate babble struck the wrong nerve of many musicians who’ve seen their entire livelihoods disappear with the arrival of Covid-19 and the shuttering of the live music economy. I already planned a check-in on Spotify prior to Ek’s public blunt indifference towards working musicians. A stance that aligns with the company’s current trajectory of moving further away from the record music business. 
Over the last couple of years, Spotify, along with Amazon, Pandora, Google, and notably not Apple, have fought a Copyright Royalty Board ruling that would increase payouts to publishers and songwriters. The August 2020 update from the D.C. Circuit Court of Appeals is a mixed bag for both sides of the legal battle. On the side of streaming platforms, the court said the CRB didn’t provide enough time for implementing these changes and that the CRB needs to reestablish its authority to suggest such changes. However, David Israelite, the CEO of the National Music Publishers’ Association and public voice of publishers/songwriters, is clinging onto the agreed-upon increase of 44%. 
This protracted court battle reinforces a familiar topic in this newsletter. Spotify, and I’ll use them as a stand-in for the other firms in this lawsuit, don’t want to pay another dime, much less another penny, more towards workers musicians. This isn’t new behavior for technology firms: see the early days of YouTube and Pandora for similar struggles. The court case does bring to light the hypocrisy of Ek telling Music Ally many musicians are ‘actually super happy’ with Spotify but afraid to say it in public; meanwhile the company drags its feet on refusing an even moderate increase to songwriter payments. 
Right now, this disparity is being addressed via an online petition that demands that Spotify pay 1 cent per stream. Beyond the practical issues with such an ask—artists aren’t directly paid on a per-stream basis, evidence shows that even facing legal pushback, Spotify is still willing to fight even minor payment upticks. This isn’t to say that artists or the government shouldn’t confront these firms (they certainly should), but rather that demands should hold a clearer path towards how an outcome could be achieved. Now, let’s dive a bit more into why Spotify, in particular, is keen to avoid seeing its revenue go further into the pockets of musicians and publishers. 
Spotify’s Limited International Vision
Spotify posits global ambitions but its strongest business remains in Europe, Latin/South America, and the United States. The company’s Q2 reports showed nearly 300 million global listeners with 138 million paying subscribers. Success in those markets can be accredited to the support and investment of major labels in the platform over a decade ago. The excellent book Spotify Teardown notes how it was through major label pressure that Spotify made early telecommunication company deals like Telia in Sweden and Three in the United Kingdom, which provided the company with a solid, paying, userbase. This is a strategy that was repeated throughout Latin and South America, alongside Spotify’s arrival amidst a rise in smartphone adoption. Despite such a clear blueprint towards success, Spotify lacked the same cohesive vision since it went public in early 2018. 
According to my own back-of-the-napkin math, from Q1 to Q2 Spotify only grew by 880,000 subscribers in its “Rest of the World” category, below an average of slightly above 900,000 it’s achieved since at least 2018. That broad category includes Japan, South Africa, a cluster of Middle Eastern and North African countries, India (where it debuted in early 2019), and Russia along with a host of eastern European countries where it just launched in July. Spotify didn’t aggressively pursue telco deals in many of these markets but at least in Russia, a deal was announced with Mobile TeleSystems (MTS), which could stabilize these numbers. Without a more exact breakdown of country numbers, it’s hard to gauge just how much of a footprint Spotify really has in a number of these markets and how Covid-19 might’ve affected growth last quarter. Still, it’s as-to-be expected international growth isn’t why the company’s become a favorite for Wall Street. 
Back in 2017, GP Bullhound, a Spotify investor, projected the company hitting 200 million subscribers by 2020 with a valuation of $55 billion. (One of two predictions isn’t too bad.) If overly bullish on the company’s international growth, they were on the mark as to where the market would value the company. However, Spotify’s stock rise isn’t connected to platform success benchmarks but rather to its willingness to invest more resources into podcasting. This is why record industry executives constantly grumble to the press about Spotify’s ever declining average revenue per user (ARPU). Blame, if that’s the right word, can be placed on family plans, inexpensive subscriptions in newer markets, and that the company doesn’t seem to be seeing rapid flipping of these new users to pay. (Although, certainly, that could change over the next few years.) This results in more free users in markets where Spotify most certainly isn’t making the same advertising revenue they would be in the United States or Europe. 
The recent spikes in Spotify’s stock associated with the Joe Rogan deal and other podcast purchases (see: Gimlet, Anchor, etc.) would show that investors are following the company’s narrative pivot from music to audio with little resistance. This could help better contextualize the increased agitation against Spotify that was heightened by the Covid-19 pandemic. Daniel Ek can state in press interviews that his company aspires to allow a million artists to sustain themselves, but that’s not what Wall Street and artists see.
Never Forget Your Advertising Roots
Now, let’s take a small step back to remember: Spotify is an advertising company. An immediate rebuttal is that a large majority of Spotify’s revenue is derived from subscriptions, not advertising. A quick flash through the company’s history could refute that point. The company’s two co-founders, Daniel Ek and Martin Lorentzon, both made their initial wealth in advertising startups. Again, to cite Spotify Teardown, the authors argue that Spotify’s initial business model of advertising was interrupted by the financial crash. This disruption saw major labels, then all still investors, push Spotify to adopt subscriptions to potentially mirror the recession resiliency of television subscriptions. Thus, Spotify, as noted earlier, turned to telecoms. A decade later, that tension remains within the company, as its reliance on family bundles and cheap international promotional efforts only further hurts the amount of money labels can make.
That’s why it’s worth not thinking of Spotify’s subscriptions as offering corporate autonomy like a Patreon-backed project. Instead, Spotify still serves the purpose of being an advertising platform. (Netflix exists in a similar space, where even with well over a hundred million paying subscribers it’s still figuring out how best to interact with brands.) That isn’t only limited to brands but also to music itself, which is why in Spotify’s most recent deal with Universal Music Group, the headline-grabbing takeaway was for increased marketing efforts. Or one can look at the lengths Spotify’s gone against stream fraudsters or even ad blockers. Its own devaluing of a subscription price is okay but attempting to avoid seeing a Lady Gaga ad is unacceptable. 
This is why Daniel Ek has for years huffed the fumes of radio advertising money as what will really make his company sustainable. Again, even though Spotify could potentially reorient itself towards isolating out the influence of advertising, it is embracing them. That’s why the company keeps leaning on new video formats, digital experiences, and whatever might force a brand to spend a few more dollars on ad spend. Potential new formats and higher ad buys are constantly being trodden out, while the company still refuses to budge on its current $9.99 subscription price. That refusal to move on subscription price should be challenged more. Nell Jones recently wrote in the Duke Journal of Economics that according to her research, music fans would be willing to pay $14.40 a month for streaming access. Spotify, and in many ways artists, are held back from further experiments in this space due to Apple, Amazon, and Google being capable of withstanding loses from cheaper subscription fees. 
Podcasts fit neatly into this plan since they hopefully won’t be encumbered by major label and publisher deals, and they can, like Google or Facebook, hold more sway over how much money is being funneled towards creators. The public displays of outrage or frustration between major labels and Spotify are often needless public theater since major labels are showing they can even survive a pandemic without the recorded music industry collapsing into itself. 
Spotify isn’t alone in world audio. Apple podcasts are still huge, SiriusXM bought Stitcher this year, and iHeartMedia is still finding new podcast partnerships. Matthew Stoller argued that Spotify is trying to position itself as the Google or Facebook of eventual audio advertising like those companies did for internet advertising. An astute observation and one that should inspire further government oversight over this industry before online audio shrinks into an unmovable oligopoly. A decade of waiting for Spotify to turn into a profitable business in a way limits our understanding of how much success it has actually achieved so far. It’s one of the world’s largest audio-focused platforms and there’s no reason to wait for its billionth user to put it under more regulatory scrutiny now. Soon it won’t just be artists up in arms about why Spotify isn’t paying a perceived fair wage for their labor. 
A Note of Financialization
Quick note, the Hipgnosis Song Fund bought a 50% stake in Wu-Tang Clan member RZA’s publishing catalog, and Round Hill Music, a fairly prominent music publishing  private equity firm, signed a deal with the country/rock songwriters the 4 Horseman. These firms, and their peers, hold relatively small chunks of global publishing catalogs but as I’ll write about in the coming months, there are a number of red flags with their involvement in this space. 
6 Links 2 Read
Spoiler alert: Neither. That’s the answer Cherie arrives at and I’d tend to agree that neither company is well-positioned to replace traditional AM or FM radio. A contrast worth noting is that Apple’s “radio” efforts are effectively giant advertising buys often for major label-backed musicians, while Spotify’s efforts are just self-promoting its own content. A dichotomy that traditionally fits within the space both companies have fashioned for themselves over the years. Still, the contrast in this example is a bit stark. 
This is an excellent paper, which challenges a lot of assumed wisdom about contemporary music streaming criticism, myself included. Certainly a paper I’ll keep in mind as I continue to write about these topics and try and challenge my own blindspots and poor assumptions. 
The value of the United States Postal Services for certain parts of the record industry cannot be understated, so hopefully, it can withstand current intra-government attacks. 
The positive press train continues for Bandcamp over at NPR. I’ll push back on the framing of Bandcamp vs. Spotify, since there is very little direct territory that the two companies share, especially in 2020. 
Chal Ravens offers a solid journey across various post-streaming companies and collectives, and shares his thoughts on attempting to create a more equal music community. Many of these are small efforts, and some are honest about limitations they’re already hitting, but it’s nice to see where folks are in the current realm of ideas. (I am quoted in this piece, so yes, there’s a little bit of bias there.) 
Neither of these press releases disguised as news stories mentions that Tencent owns Epic Games and just earlier this year invested in Universal Music Group. The lack of foregrounding of this information only further obscures just how much the contemporary record industry is centered upon these double-dipping brand collaborations.
Blog Roll
The Penny Fractions newsletter arrives every Wednesday morning (EST). You can support via Patreon or by following on Twitter. If curious, here is the newsletter’s budget sheet. The artwork is produced by graphic designer Kurt Woerpel, and copy edited by Mariana Carvalho, with additional support from Taylor Curry. My personal website is davidturner.work. A list of my favorite 2020 albums, books, and mixes can be found here. My current job is Emerging Creator Lead at SoundCloud, so all thoughts here represent me, not my employer. Any comments or concerns can be sent to pennyfractions@gmail.com.
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