7 February 2018 Issue 21 Feb/Mar

Spotify’s big play

As Spotify prepares to go public, there’s a high-risk plan inside the company to become ‘the Airbnb for artists’. But will it clash with music labels?

The country and western singer Russell Dickerson didn’t expect to find himself on the same billing as rapper Trippie Redd. Yet there he was. The pair were among the first to front Spotify’s new initiative, Rise, launched last October.

Redd and Dickerson share a common struggle. Both need to break through the sea of aspiring musicians and persuade a record label to take a punt on them.

Rise, Spotify said, will give emerging artists like them a leg up, even without a label backing them. Each year, 16 artists will get Spotify’s support.

It had the hallmarks of the sort of well-meaning initiative usually unveiled with much fanfare only to be quietly shut down some months later. But, according to people close to Spotify, Rise is far from a PR stunt.

In fact, they say, it’s the precursor to something far more fundamental: turning Spotify into ‘the Airbnb for music’. The vision for the streaming service is a platform with music consumers on one side, and the tools to serve artists on the other.

If it works out and Spotify can reframe what it fundamentally does, it will find itself on a collision course with the record labels. The move comes as Spotify, founded in Stockholm over a decade ago, is poised to become a $20bn publicly-listed company in the coming weeks.

Having upended how we listen to music, its next disruptive act could be how artists make money from music.

Destabilising frenemies

Spotify has been quick to emphasise it won’t be stepping on record labels’ toes. Neither will it take cuts from artists’ copyrights or income made from touring and merchandise.

At least, not yet.

Rise has come out of Spotify’s Creator Services division, a unit it has been steadily (and stealthily) building over the last couple of years. As this side project takes shape, many see it as simultaneously giving Spotify a more stable long-term footing but also destabilising its already delicate ‘frenemy’ relationship with record labels.

Get Carter

Troy Carter was hired in June 2016 as global head of Creator Services. He has been spearheading the platform’s move to think of ways it can get closer to artists. Carter’s background was managing artists like Meaghan Trainor and Lady Gaga.

‘You sense the frustration with just being a repository for music. Spotify is slowly, quietly and subtly reversing into label services.’ — Mark Mulligan, Music industry analyst

What Carter and his team (now reported to be in the hundreds) are building is a modern artist support platform; a cross between a music manager, a record label and a publisher.

One person with close proximity to it says, ‘It’s better to think of [Rise] as what Airbnb does for hosts’.

Spotify would create tools for the supply side of its business; a means for anyone from hobbyist musician to superstar to put music out via Spotify and get paid. In this vision, making money from music would be liberated from the way the industry has traditionally worked.

Artists will get a rich feed of data and analytics, financial forecasting and other tools to market their work, make money and manage their businesses.

Spotify has been enthusiastically showing artists big and small what it can do for them.

Last year, it promoted high profile releases from artists including Katy Perry with billboard advertising, emails to subscribers, and links to live shows. ‘We didn’t ask for a billboard,’ Martin Kirkup, a partner at the marketing firm that represents Perry told Bloomberg. ‘[Spotify] offered it.’

Suspicious labels

It’s reckoned Spotify’s motivation behind the artist platform play is wrapped up in its imminent stock market listing. Although its estimated $20bn valuation would make it the biggest initial public tech stock since Facebook, Spotify knows it has to prove it is underpinned by a stable commercial model.

The company has been engaged in a constant power game with the record labels which has in many ways defined its business model to date.

The ‘big three’ labels all have equity stakes in Spotify – Sony BMG has 5.8%, Universal 4.8% and Warner 3.8%. Merlin, representing independent labels, also has a small stake.


Spotify’s journey in numbers

$2.7bn raised over 17 rounds.

80%: Average proportion of revenue from subscription fees.

50%: Percentage of revenue Spotify pays labels.

2015 valuation: $8.5bn.

Estimated 2018 IPO valuation: $20bn.


But beyond that, as Spotify has made streaming music the new standard, the exorbitant royalties it pays have pumped much-needed revenue back into previously ailing record labels.

Each of the big three has seen its valuation skyrocket in recent years. Warner’s revenues, for example, increased almost five-fold between 2016 and 2017, from £30m to £149m.

Despite this, the labels remain deeply suspicious of Spotify. Many operate in a state of paranoia, still carrying the scars from the power exerted over them by various disrupters down the years (MTV, then Apple, Napster and even early Spotify).

On the other hand, insiders at Spotify still believe the power balance is tilted in favour of the labels.

No Netflix and chill

Unlike its commercial hero, Netflix, Spotify can’t build a business on creating its own content. It relies instead upon providing a comprehensive catalogue from all the labels. It’s a precarious situation with little leverage. By contrast, no single TV network or film studio holds such sway over Netflix.

Spotify’s investors have talked about trying to make it ‘too big to fail’ for the labels, and yet been frustrated by how the three labels can dictate Spotify’s fortunes.

Chirag Modi, an analyst, argues it would be difficult for the labels to emulate Disney’s withdrawal from Netflix. ‘The reach of Spotify is too influential for music labels to play such a strategic game,’ he says.

Apple and Amazon growth

One label insider admitted twitchy labels are eager to ‘ensure Spotify doesn’t get too big’; the strategy is to ‘divide and conquer’.

Spotify has found its hopes of accelerating subscriber growth in the US in particular stunted by Apple Music and Amazon, fuelled by the big three who are only too happy to have several streaming players slugging it out. Recent growth in users signing up to streaming services from Apple, Amazon and smaller subscription services like Tidal also leaves Spotify with less scope to raise prices.

Amazon and Apple are playing bigger games with music subscription. Both have vast existing customer bases and platforms to integrate their music services into. They also have no need to make profits from music, thanks to enormous cash piles gained from other parts of their businesses. It gives the ‘pure play’ Spotify little wriggle room under the current rules of engagement.

Experimenting with options

Tweaking the model has been a subject of debate at Spotify. There have been experiments ‘beyond music’. But the size of the business of podcasts is questionable; video and messaging too complex; news too far a lurch.

Spotify’s thinking is to focus its efforts on music. It has enjoyed decent success in building its playlist channels, notably Rap Caviar, as standalone music brands with the aim to exert some power as a ‘hit maker’ within the industry.

But becoming a platform for artists would represent a big transformation in how the company’s finances are structured.

The financial squeeze

Spotify has a very narrow revenue source: in 2017, subscriptions made up 90% of its total revenue; the rest comes from advertising on its free service. Its costs are huge and don’t get much better with scale. In 2016 it spent a staggering £2bn on its ‘cost of goods’ (royalties) – accounting for 85% of revenue.

One music executive says: ‘The cost of content [for Spotify] on a marginal basis is very high. And it doesn’t get cheaper to keep attracting new customers [with scale].’

If the platform play works, not only would Spotify create a considerably more diversified revenue base, it would blunt the power of labels.

Spotify also admitted last year to racking up much higher costs from expanding into new countries, improving the platform with features and hiring staff. It spent £344m in 2016 on signing up customers, and its wage bill reached £190m.

Industry analyst Mark Mulligan says: ‘You sense the frustration with being a repository for music. Spotify is slowly, quietly and subtly reversing into label services.’

It will be hard for Spotify to do so without sparking panic among the already paranoid partners it relies on. Its coming disruption could cause big problems for labels in the near future. For the soon-to-be publicly traded Spotify, it needs them on side for the time being.


Direct listing in sight for Spotify

The streaming service is set to be one of the most eagerly anticipated public listings for some time.

At the time of writing, Spotify is on course to be listed on the New York Stock Exchange in a matter of weeks. The move could propel the music streaming service to a seat alongside the elite in consumer tech.

Being a publicly traded company has been Spotify’s goal for some time, with its investors eager to see a return. The business has been expensive to run, with billions needed to keep paying record labels royalties, as well as the cost of sales and marketing as it seeks to maintain the growth rate by unlocking consumers in more parts of the globe.

It has had 17 private funding rounds, raising around £2bn, ratcheting up its value every time.

Fit to float

Its stratospheric value has made a ‘trade sale’ too remote a possibility. Few companies in the world can afford to buy it, and those that can no longer need to.

Public markets typically take a dim view of loss-making companies. Spotify has long been one of those. (The interest rate on its debt apparently rises by 1% every six months it doesn’t go public.)

Barry McCarthy, Spotify’s CFO, has been working on getting the company fit for float ever since he was brought on board from Netflix four years ago. He guided the film and TV streaming business’ IPO in 2002.

Around 18 months ago, McCarthy hired Paul Vogel, a seasoned Wall Street operator as Spotify’s head of investor relations.

Direct to market

In December, Spotify filed its documents with the Securities and Exchange Commission in the US.

It also put flesh on the bone of how exactly it intends to do what many thought impossible with its existing financial model and become a public company. It wants to do this through a rather unconventional ‘direct listing’, which will see it issue no new shares and raise no new money but allow investors to make their return.

The combination of this unorthodox float mechanism, the excitement of a new high profile tech stock and concern of its long term viability will give it star billing for anyone connected to tech, music or finance.