Spotify: Who Will Own the Streaming Music Service in 5 Years? – Rolling Stone
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Who Will Own Spotify in Five Years?

Industry insiders suggest Spotify will eventually end up under the ownership of a larger corporation. Here are five that could make a play for the streaming giant

Spotify co-founder and CEO Daniel EkSlush event, Helsinki, Finland - 30 Nov 2016Slush is the focal point for startups and tech talent to meet with top-tier international investors, executives and media

Spotify co-founder and CEO Daniel Ek in Helsinki in 2016.

Vesa Moilanen/Shutterstock

Spotify is proud of its independent status. Yes, the $26 billion-valued streaming service is partially owned by a raft of corporate giants, from Tencent (9.2 percent) to Baillie Gifford (9.7), TCV (5.3) and Tiger Global (7.1). And, yes, Spotify raised $1 billion in convertible debt three years ago, via the likes of TPG, Dragoneer, and Goldman Sachs, having previously attracted investment from Coca-Cola and Hong Kong mogul Li Ka-shing (and his $28 billion personal fortune).

And yet, relative to the rest of 2019’s blockbuster music-streaming pack, Spotify remains something of a plucky underdog. The company, which floated on the New York Stock Exchange last year, is the only “pure-play” major music-streaming company in existence. With 108 million Premium subscribers and 232 million total active users worldwide, Spotify also happens to be the biggest paid-for streaming service on the planet.

Unlike Apple Music, Tencent Music, YouTube Music, and Amazon Music, its biggest global rivals, Spotify’s music service doesn’t drive revenues in other, wildly lucrative areas (for Apple, device sales; for Amazon, e-store sales and Prime memberships; etc.). Say what you like about Spotify — and plenty in the music business do — but at the end of the day, its business lives or dies on the financial appeal of music itself. (Oh, and podcasts; as covered in this column last year, Spotify is also banking its future on the talk-radio-esque format. It has spent more than $400 million this year already on acquiring podcast content and distribution companies.)

Can Spotify ultimately succeed as a commercial entity on this basis? It’s debatable. Its status as a perpetual loss-making business is becoming less severe; in the first half of 2019, according to its filings, Spotify posted a €228 million pre-tax loss, less than half the €572 million equivalent loss from the same period in 2018. And yet there are those in the music industry who continue to doubt that SPOT will ever become profitable, or at least grow to the degree that its Wall Street backers demand. 

There are a couple of early warning signs in this regard. For example, in the first half of this year, Spotify added just 12 million subscribers globally, despite launching in India in February, where its potential addressable audience stands at 1.3 billion. It also launched in the Middle East and North Africa (MENA) last November, where around 380 million people are currently resisting its charms.

For this reason, many industry insiders suggest, Spotify will eventually, inevitably, end up under the ownership of a larger corporation that — just like the parents of Apple Music, Amazon Music, etc. — will have myriad corporate interests in a multitude of verticals. Technically speaking, this is possible: Like Spotify, Pandora was a loss-making publicly traded company when, in February, it was swallowed by satellite radio behemoth SiriusXM in a $3.5 billion deal.

Here are five other huge businesses that, with some strategic reasoning, could make a play to own Spotify over the next five years:

1) Netflix

Did you know that Netflix already runs a record label? OK, that’s a bit of a stretch, but it’s not false. This week, I spotted that the company’s Indian outpost, Netflix India Originals LLC, controls the rights to a hip-hop record, Kaam 25, recorded by Indian rapper Divine in 2018 — a track that was attached to a digital TV series, Sacred Games. This got my mind whirring, because Mumbai-based Divine, formerly an independent star, has just struck a major deal with Universal Music Group (and Mass Appeal), making him UMG’s big hope of distributing a breakout global Indian artist in 2019.

Question: What might happen if Netflix and Spotify worked together to break artists like this — with the movie/TV platform creating and promoting visual vehicles that put the artist front-and-center, then driving listening consumption on its audio streaming counterpart? Netflix’s current annual budget for making, licensing, and buying original content is $15 billion. Should it apply even a portion of this to the music industry, it would cause huge disruption; recent stats showed that the three major record companies, combined, spent $4.1 billion on A&R (the signing and development of artists) in 2017.

Netflix could help Spotify become a real player in the world of original content ownership, drastically reducing SPOT’s biggest financial drain (royalty payments to music rights-holders, which suck around 70 percent of its revenues away every year). In protest at this scenario, the major record companies might start pulling their content from Spotify, or punishing the platform by holding back major releases — an obstacle that, depending on Netflix’s zeal, may prove insurmountable.

As for Netflix’s selfish motivations? It lost 126,000 subscribers in Q2, thanks largely to its decision to keep on inching up its subscription prices. Its market cap hasn’t yet recovered from that news, and NFLX is also under threat from new players in its core space, like Apple TV+ and Disney+. Perhaps its stockholders would now like to see Netflix diversify into other entertainment media, creating a bundled music-plus-TV subscription price that would give it a robust advantage versus its competitors?

2) Facebook 

There was a time when it looked as though Facebook was destined to be an enemy of the music business. Back in 2016, music publishers were continually hitting the social media service with legal takedown notices, in reaction to its users’ (and some artists’) posting content that contained copyrighted recorded music.

Yet over the past two years, this situation has changed dramatically. Largely thanks to Mark Zuckerberg writing three big checks for the major music companies in 2017 and 2018 (believed to amount a hefty nine-figure sum), Facebook is now fully licensed and fully legit. (This is why you can easily post audio and lyrics to your Instagram Stories today without the fear of a litigious music publisher bringing down the guillotine.)

And yet, despite paying these weighty figures for legitimacy, Facebook has resisted entering the on-demand music-streaming game and taking on the likes of Apple Music. That’s partly because of its aversion to the subscription model: Some 98.5 percent of Facebook’s $55.8 billion revenue in 2018 came from advertising, according to its SEC filings, with just 1.5 percent from “payments and other fees.”

That said, the heat is now on Facebook’s advertising model in the wake of the Cambridge Analytica user-privacy (and related political lobbying) scandal, a historic transgression that led directly to the firm losing $36 billion in market cap value. Perhaps now is the time for Facebook to show its investors that online advertising isn’t the only commercial play in its future.

For Spotify, Facebook’s audience is the stuff of fantasy: More than 2 billion people use Facebook each month, while Instagram and Whatsapp have more than 1 billion apiece. What’s more, Facebook has in excess of 240 million users in India — a priority territory for Spotify — making it FB’s biggest market worldwide.

3) AT&T

I’m not the first to note that Spotify has been quietly forging alliances of late with massive corporations that could one day make an appropriate buyer of its own company — but when you join the dots, things get intriguing. Take, for example, AT&T, the USA’s largest mobile network, with 159.7 million tariff subscribers as of the end of June this year. 

Thanks to a partnership inked in early August, customers on AT&T’s priciest tiers (AT&T Unlimited & More Premium) now get a free subscription to Spotify Premium wrapped into their monthly payment. Behind the scenes, of course, it’s not “free” at all — it’s subsidized by AT&T, which will pay Spotify a certain rate per bundled subscriber. 

We’ve already seen one large telco buy into a music streaming service (AT&T rival Sprint acquired 33 percent of Jay-Z’s TIDAL for $200 million in January 2017). Could AT&T, perhaps tempted by the ability to drive down the price of a subsidized long-term Spotify partnership, be tempted by a deeper alliance?

4) Samsung

Another company to keep an eye on: Samsung. As of September last year, the South Korea-based electronics giant had 893 million active smartphones in the world, comfortably more than its key rival, Apple (which had around 864 million, according to Newzoo research). 

In March, Samsung inked a global deal with Spotify, which will see the music service come pre-installed on millions of new phones, while eligible U.S. Samsung device owners qualify for six months of free Spotify Premium. Could Samsung and Spotify now take this one step further, wrapping a lifetime subscription to Spotify into the upfront price of a Samsung product — or ensuring that Samsung customers gain access to new tools and features on Spotify that other phone owners don’t get? 

Samsung ownership of Spotify, whether in part or full, would bring the Korean company more in line with Apple, which uses Apple Music, part of its Services division, both to drive revenue and fuel interest in its hardware. Samsung previously ran its own music service, Milk Music, but canned it in 2016. Could Spotify become its natural successor?

5) Tencent

Last, on the theme of companies Spotify is already in bed with, there’s Chinese media goliath Tencent Holdings. Tencent is the majority owner of Tencent Music Entertainment (TME), which runs China’s biggest digital-music services, like QQ Music, Kugo, and Kugou; it also owns minority stakes in Fortnite maker Epic Games and a key Spotify rival in India, Gaana.

In 2017, Tencent and Spotify performed a “stock swap” that saw Tencent acquire 9.2 percent of Spotify and Spotify take a 9.1 percent stake in Tencent Music Entertainment. TME is the dominant digital-music service in Greater China, a mantle claimed by Spotify in Europe, North America, and Latin America. A meaningful merger between these two entities would create a music service with true global dominance — and weighty leverage when trying to barter down those record-company royalty payments. 

Adding some spice to this scenario: Universal Music Group still owns around 3.5 percent of Spotify, with Sony Music owning around 2.8 percent. On the flip side, Tencent Holdings is on the verge of buying 10-20 percent of Universal. If Tencent now also ups its ownership stake in Spotify, especially to a majority position, this one could get complicated. 

Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis and jobs since 2015. He writes a weekly column for “Rolling Stone.”

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