In the past few months, Spotify’s reputation within the music industry has hit a new low. Since the company said goodbye to its biggest industry-facing champion, global head of creator services Troy Carter, in September last year, Spotify has: (1) been sued by Warner/Chappell in India for copyright infringement; (2) attempted to legally obstruct a pay rise for songwriters in the USA; (3) baited major labels by signing direct artist deals, before threatening that podcasts may claim 20 percent of listening on Spotify in the future; (4) started anti-competitive legal proceedings against Apple in Europe (before getting slapped back by Tim Cook); and (5) pulled down the entire catalog of Saregama, India’s oldest record label, after making it available without permission.
I’m not going to fib: For someone who earns his daily crust writing industry-facing headlines (hello!), all of this has been manna from heaven. Like the time Warner went on the record to call Spotify a liar. Or the time Spotify called Warner “abusive.” Or the time leading pop songwriters labeled Spotify “shameful,” as top music-industry lawyer Dina LaPolt, who reps the likes of Steven Tyler and Britney Spears, vented, “Spotify, you cheap pieces of shit — fuck you.”
Mud, glorious mud, slung left, right and center. At the heart of all this delicious drama, however, is a business dispute as staid and predictable as they come: loss-making Spotify wants to pay less money to artists, labels, songwriters and publishers — and artists, labels, songwriters and publishers ain’t having it. Thus, we have a perennially strained scenario where the biggest retailer in the global record business is continually (sneakily?) looking to claw back margin from its largest suppliers. Cue perpetual fallout.
Spotify’s argument: If you want streaming to thrive, and not to be dominated by tech giants who don’t have music at their core, we need more cash. The labels’ argument: You’ve already taken quite enough of our cash, thank you — plus, since floating on the New York Stock Exchange, you’re worth more than $20 billion, so stick your begging bowl where the sun doesn’t shine.
Coarsening this argument is the fact that all three major record companies will be out of contract, and into tense re-negotiations, with Spotify by the end of this summer. (Spotify’s most recent deal with Universal Music Group, it is believed, has already lapsed, meaning the two parties are now on a rolling global agreement.)
So what’s the solution? The labels argue that, before any negotiation occurs over how much profit they should be sacrificing to help Spotify, the streaming company should slash its operating costs, which, across R&D, sales and marketing, and general/admin expenses, hit a whopping €1.4 billion ($1.9 billion) in 2018.
The fact is, Spotify simply can’t sustain losing hundreds of millions of dollars year after year, especially if the firm’s best hope of profit comes from squeezing its industry partners. Something has to give. Certain industry insiders suspect that “something,” eventually, will be a sale of Spotify to a larger tech corporation within FAANG (Facebook, Apple, Amazon, Netflix and Google).
There is one hypothetical possibility, however, which is a little more radical, and rarely gets any industry airtime. What if the major music companies (Universal, Sony and Warner) teamed with Merlin — the body that represents the recorded interests of the largest independent labels worldwide — and raised the capital to buy Spotify?
First, the halcyon vision: If Spotify was owned by the music industry, today’s vicious arguments over how much money the company should be paying out in royalties, versus how much it should be holding on to, would largely vanish. The music industry would finally attain a more direct relationship with its consumer, and instantly create a mutually aligned relationship with its biggest ‘retail’ partner.
Obviously, to avoid corporate pandemonium, Spotify would have to be run autonomously and without undue influence from any of its would-be label owners. There is precedent here: Vevo, the video ad sales and content creation company, which hosts a wealth of major-label content on YouTube, is 49 percent owned by Universal Music Group, with Sony Music Entertainment owning somewhere close to the same-size stake. Vevo is run as an autonomous organization, operationally independent of Universal and Sony. It’s also a serious player in the music business, comfortably turning over more than $500 million each year.
For the major record companies to hold majority ownership in Spotify, then, they would need to relinquish any hope of day-to-day influence over the platform. They could, however, join Spotify’s board, allowing them to set the company’s budgets, while delivering them oversight of its operational expenditure — i.e. removing another pain point in the current relationship between Spotify and the music biz.
Unfortunately, even when this prospect begins to make logical sense, there’s still no getting away from two major sticking points: regulatory issues and Spotify’s price tag.
Should the music industry try to make this deal happen, you can bet your bottom dollar that FAANG (there they are again) would fight it tooth and nail in front of anti-competition watchdogs. According to Midia Research, Spotify commanded a 36 percent global market share of music streaming subscribers last summer, making it the clear industry leader, with Apple Music on 19 percent and Amazon Music on 12 percent. Ownership by the music industry would risk supercharging the number-one player in the market, harming healthy competition.
Then again, there are some strong counterarguments. If Spotify keeps going the way it currently is (i.e., scrabbling to claw back margin to salvage profitability), it could get swallowed up by FAANG in the long run anyway. What’s more, if the record companies became Spotify’s owners, they could legally commit to fairly licensing any rival streaming services that met certain criteria (i.e., paying market rates). This wouldn’t be a million miles away from the current situation in China, where the majors all exclusively license their content to Tencent Music, which is in turn duty-bound to then fairly sub-license this catalog to rivals such as Alibaba.
As for Spotify’s current price tag, well, that’s a bigger obstacle. The firm’s Wall Street owners haven’t invested in the company to see it sold off cheap to strategic buyers. Spotify’s current market cap, following some recent turbulence on the NYSE, sits at a pricey $25 billion. As one major-label exec told me when I raised the ‘majors buy Spotify’ hypothesis to him, “None of us would pay anything near that just to distribute our own content.” His point: as Barron’s recently noted, the bigger value in the Spotify/music-biz relationship, currently, at least, seems to sit with the labels.
Yet consider this: some 87 percent of streams on Spotify in 2017 were of music owned or managed by the major labels and Merlin – and the removal or restriction of these catalogs (or even the threat of doing so) would send Spotify’s share price plummeting. So if Universal, Sony and Warner wanted to drive down Spotify’s price, with a view to buying it for what they consider a fairer valuation, well, they could in theory do just that (so long as they didn’t collude).
Perhaps, however, the music industry has already missed its chance. When Spotify first launched in Sweden, back in 2008, Universal, Sony, Warner and Merlin were cumulatively granted 18 percent equity in the company between them, in exchange for a start-up license for their music. This sparked the possibility of a jackpot moment over the next decade, which finally arrived last year: After Spotify floated on the NYSE in April 2018, Sony sold half of its shares for $768 million, while Warner and Merlin offloaded 100 percent of their holdings for $504 million and circa $100 million, respectively. Universal still retains its entire stake, which is currently worth around $840 million.
When the definitive story of Spotify is written, it may contain an intriguing chapter on what might have been, had the labels boldly tried to acquire control of the company as it was growing — rather than cashing in when their big pay day materialized.
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.”