How Spotify Can Tear Up the Music Biz
How can Spotify shake up the music world? The music distributer has successfully found itself in the pockets of 40 million subscribers. But what if Spotify went the route of Netflix and became a producer as well as a distributor? Leila Abboud looks into the possibility of Spotify dipping its toes into label management.This article originally appeared on https://www.bloomberg.com/gadfly/articles/2016-11-01/how-spotify-can-revolutionize-the-music-business
Spotify Ltd today is essentially a massive music collection and radio station mashed into one: users can listen to whatever they want, or let the virtual DJ in their pocket recommend tracks and artists.
It's a seductive combination that's attracted 100 million listeners, of whom 40 million were paying subscribers as of September. Yet despite nearly doubling sales last year, the high cost of licensing music from record labels and publishers means the Swedish company has yet to turn a profit. Last year, U.S. rival Pandora Media Inc. had a gross margin of about 47 percent, Apple Music 40 percent and Spotify about 25 percent, according to Bloomberg News. A whopping 84 percent of Spotify revenue went on licensing fees last year, not the easiest of sells to investors when it tries to go public next year:
Spotify is growing fast but remains unprofitable in part because of the cost of licencing music from labels and publishers. Those costs consumed between 81-86 percent of annual revenue since 2013.
I've looked before at how Spotify could lure more paying customers by offering distinct high and low-end services at different prices. There's something else it might do to improve profits and shore up its power: mimic Netflix by becoming a producer as well as a distributor -- and take other steps to bring more music on board that doesn't cost so much.
That means acting more like a label. Traditional music labels do two big things: discover and nurture artists, and market them. With a trove of user data, a strong brand and global reach, Spotify could do that too. Imagine if it branched out into developing independent-minded artists such as British grime star Skepta. Or if it allowed unsigned acts to upload music to its service in a similar way to SoundCloud or YouTube. Spotify could even try buying independent music labels such as Beggars Group (home of SubPop and Matador Records) or Warp (London's electronic dance music specialist.)