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Spotify Can’t Keep Losing More Than $1 Billion a Year. Can Podcasts Rescue Its Business Model?

Why is the streaming giant getting into podcasting, and what does it mean for the record business?

Amy schumer spotify

Spotify recently made a deal with Amy Schumer - believed to have cost more than $1 million — to host her "3 Girls, 1 Keith" podcast

Courtesy of Spotify

Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis and jobs since 2015. This is the first in a series of weekly columns for “Rolling Stone.”

They say if you want the truth, follow the money. So if you want the truth behind the truth, you should probably follow the world’s richest people.

According to Forbes, Len Blavatnik is the 27th-wealthiest individual in the United States, with a net worth of $17.9 billion.

In July 2011, Blavatnik, via his Access Industries, paid $3.3 billion to fully acquire Warner Music Group — the third-biggest “major” in the global music market, and owner of famed labels like Atlantic, Warner Bros. and Asylum.

It was a gamble that’s paid off handsomely. Should you look hard enough in Warner Music Group’s fiscal filings, you’ll spot that Access withdrew $925 million in cash dividends from the company in the first eight months of 2018 — including a whopping $500 million lump sum in August.

It’s been able to do so because, driven by streaming, Warner’s annual revenues have grown by 29 percent since 2012. Plus, the company recently sold its 2 percent stake in Spotify, cashing in $504 million. (Twenty-five percent of this Spotify-shares windfall was subsequently paid to artists, leaving Warner with $378 million.)

The truth behind the truth, then: The music industry, which many wrote off as a dead duck, is now, once again, making exceedingly rich people significantly richer. Ask the guy worth $17.9 billion, and he’ll tell you: We’re officially back in business.

This rosy narrative, however, is built on strained foundations. Spotify is largely responsible for pulling the music industry back from the brink. Since being founded in 2008, the Swedish streaming company has paid out more than $10 billion to music rights-holders (labels, artists, songwriters, etc.) in royalties. And it’s currently handing them $288 million every month.

Yet Spotify’s business model remains fragile. Last year, the firm posted a net loss of €1.24 billion ($1.4 billion); this year, it’s on course for another billion-dollar deficit — after losing €563 million ($681 million) in the first six months of 2018 alone.

Spotify’s primary problem? It’s contractually obligated to pay the record companies the majority of its revenues. As one very senior major-label executive recently told me, “No company can survive those losses over and over. Spotify ultimately has two options: Sell up, or try to do a Netflix.”

“Doing a Netflix” is industry parlance for the idea of Spotify “signing” artists itself — cutting out the middle man. It’s a process that’s already started: Last month, Spotify announced that indie artists could now upload direct to its service, bypassing a central function of record companies.

This strategy, though, isn’t without risk. If the major labels (Universal Music, Sony Music and Blavatnik’s Warner) become irate enough, they could, in theory, walk — pulling their content from Spotify entirely.

Doing so would devastate Spotify: Last year, music distributed by major labels (and their indie equivalent, Merlin) accounted for no less than 87 percent of streams on the platform.

Ideally, Spotify should find a way to materially improve its gross margin, without trampling on the hallowed territory of the major record companies.

And that explains why it’s falling in love with podcasts.

Last month, Spotify quietly introduced Spotify for Podcasters — a tool that offers valuable analytical insights, while making it easier to distribute your ‘cast. At the same time, Spotify’s Premium app was redesigned to make podcasts easier to find.

This came after a slew of podcast-related announcements on Spotify in 2018, including a deal with comedian Amy Schumer — believed to have cost more than $1 million — to host her 3 Girls, 1 Keith podcast, and a timed exclusive deal for the new series of Joe Budden’s popular hip-hop podcast.

Additionally, there have been recent Spotify podcast partnerships with the likes of VICE and Genius, plus NPR host Guy Raz — not to mention the entire library of BBC podcasts being made available on the service.

spotify podcast screenshot

Vulnerable financials aside, there are a wealth of reasons why Spotify grabbing a stake in the burgeoning podcasting market makes sense. Around $14 billion is spent on U.S. terrestrial radio advertising annually, according to BIA/Kelsey. As digital upstarts continue to eat into FM’s popularity, those dollars are moving in only one direction.

Podcasting’s ad revenues pale in comparison to radio’s, but they’re mushrooming. According to the IAB and PwC, the U.S. podcasting market nearly doubled in 2017, growing 86 percent to generate $314 million.

What’s more, Spotify’s own advertising revenues remain a disappointment, making up less than 10 percent of the company’s total revenue. Podcasting could fix this in two ways: (1) Increasing Spotify’s “content hours per Monthly Active User” (which stood at 25 in Q4 2017), making it a more attractive proposition for advertisers; (2) Generating new money via audio brand partnerships — as seen with Spotify’s recently announced Ebb & Flow Podcast, which is supported by New Amsterdam Vodka.

Plus, Spotify is plagued by ad-blockers; the company admitted earlier this year that 2 million of its users were deploying them. Podcasts, with their “in-show” audio sponsorships, offer a neat way to circumvent this problem.

Ultimately, though, podcasts are attractive to Spotify’s investors for one key reason: You don’t have to pay record companies any royalties when people play them.

Spotify is surprisingly open about this fact. In August, the firm’s CFO, Barry McCarthy, told Music Business Worldwide that “the bigger the percentage of [podcast content in our] mix, the bigger the margin opportunity to be had.”

Translated: We have a much better chance of making a profit when you’re listening to podcasts instead of to Pink.

Just how irritated the major labels become with Spotify’s podcast strategy will be revealed in six months’ time, when the streamer’s current licensing deal with the biggest major label, Universal Music Group, expires. UMG could, and likely will, demand strict limitations on the presence of podcasts in Spotify’s audio mix.

Yet the labels might want to think carefully about the knock-on consequences of punishing Spotify too severely for its podcasting ambitions — and about the market opportunity this may create elsewhere.

The current richest individual in America, according to Forbes — 26 places and and $142 billion above Len Blavatnik — is Jeff Bezos. Amazon is already causing commotion in Spotify’s core field, claiming 12 percent of global music-streaming subscribers in the first half of this year. If there’s a multibillion-dollar opportunity in podcasting ahead, you can bet Bezos and Amazon — alongside Apple, Pandora, SiriusXM and the rest — are thinking hard about how they can seize it.

In This Article: music business

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