Why Is Daniel Ek Repeating YouTube's Arguments From Four Years Ago? - Rolling Stone
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Why Is Daniel Ek Repeating YouTube’s Arguments From Four Years Ago?

The Spotify boss suggests the future growth of his company will rely on the migration of free radio listeners — and he thinks record labels should back the strategy

NEW YORK, NY - AUGUST 9: Daniel Ek, chief executive officer of Spotify, speaks about a partnership between Samsung and Spotify during a product launch event at the Barclays Center, August 9, 2018 in the Brooklyn borough of New York City. The new Galaxy Note 9 smartphone will go on sale on August 24. (Photo by Drew Angerer/Getty Images)

Daniel Ek, chief executive officer of Spotify.

Drew Angerer/Getty Images

“If the ad revenue currently spent on radio instead flowed to online platforms, it would double the current size of the music business.”

Spotify founder and CEO Daniel Ek is making that argument in the wake of his company’s Q1 earnings announcement. According to Ek, the record industry should stop obsessing over paid streaming subscriptions and instead pay more mind to the opportunity presented if a billion people, currently listening to linear radio worldwide, started listening to Spotify instead.

Cards on the table: Daniel Ek didn’t actually say the words above. They were in fact written by Christophe Muller, YouTube’s Global Head of Music Partnerships, in an op-ed posted in April 2016. Yet the similarity between Muller’s argument four years ago and Ek’s now — via an interview the Spotify boss gave to Bloomberg’s Emily Chang on May 5th — is striking.

Ek said last week: “When I look at all of the paid subscriptions combined today, the IFPI has that number at, call it, $12 billion. Then you look at radio and the entire US radio industry in 2017 or 2018, on just the ad side, was $18 billion — that’s larger than the entire streaming [business] for the music industry.” The Spotify boss then encouraged the record industry to fantasize about what will happen to this mighty advertising haul when AM/FM’s remaining audience dump traditional radio, and transfer instead to “a legal environment being monetized for the music industry” — a.k.a. Spotify’s free, ad-supported tier.

What I find most intriguing about the resemblance between Ek and Muller’s arguments is that the latter’s was made from a defensive position, in the face of a vicious PR assault on YouTube conducted by the music industry.

April 2016 was boiling point in the music industry’s so-called “Value Gap” debate, when the three major record companies publicly pilloried YouTube for paying a pittance per-stream compared to services like Spotify or Apple Music. In March that year, then-RIAA boss Cary Sherman accused YouTube of paying “meager” royalties to labels and artists, as he slammed an “alarming disparity between the growth in the number of ad-supported streams compared to the growth in revenues generated from those streams.”

Added Sherman: “This is why we, and so many of our music community brethren, feel that some technology giants have been enriching themselves at the expense of the people who actually create the music.” (A moment, please, to marvel at the sheer brass balls required for a veteran rep of the blockbuster US record industry to fire potshots about third parties “enriching themselves at the expense of people who create music.” And we move on.)

As the record industry expressed its fury over YouTube failing to pay what was (perceived to be) fair value for music, YouTube, via Christophe Muller, essentially replied: Just you wait till traditional radio’s ad money comes our way; then we’ll all be enriched. (My words, not his.)

Now, four years on, Daniel Ek is making that exact same argument. The difference being, of course, Spotify isn’t in a PR war with the music industry, which may have something to do with the service claiming a 35% global streaming market share in 2019, in a sector now paying $11.4 billion to the record business annually.

Ek is a clever man, and he’ll know that getting his digs in ahead of any potential music biz showdown is a smart political strategy. He’ll also be aware that formative ingredients for a future fallout between Spotify and the record industry may now be starting to simmer.

On last month’s Q1 earnings call, Ek did very well to disguise a serious blemish in Spotify’s — and therefore the major labels’ — business. In the three months to the end of March, paying subscribers to Spotify Premium grew faster than they did in the prior year, up 30 million YoY, something Ek was only too happy to trumpet. But the total amount of money these subscribers paid in this period actually grew by a smaller amount than it had in Q1 2019. Conclusion: paid-for streaming revenue growth at Spotify is starting to slow, despite the actual number of subscribers worldwide increasing by ever-larger amounts.

The reason for this disparity is because of Spotify’s declining Average Revenue Per Premium User (ARPU), something explored on Rolling Stone previously. Forget any notion of the average Spotify subscriber paying $9.99 a month: Globally in Q1 2020, the average Spotify subscriber actually paid $4.87. That was down 6% year-on-year, and the first time in history this figure fell below $5.

Some of this ARPU decline was due to Spotify being sensitively priced in areas of the world where per-capita wealth is much smaller than in the US — a debatable, but generally accepted market reality. Yet Spotify also conceded that a third of that 6% ARPU decline in Q1 was simply down to its own aggressive pricing offers and discounts, designed to tempt new subscribers to hand over their credit card details.

If Spotify’s ARPU continues to tumble, you can bet your bottom dollar it will make the bosses of the three major record companies increasingly uncomfortable. You can consequently expect pressure to be exerted on SPOT by these labels in two main areas: (i) Calls for the Spotify subscription price to rise in mature markets; and (ii) A potential revision of how much of their catalogs Universal, Sony and Warner are willing to keep available on Spotify’s ad-funded tier, either globally, or in specific territories.

By repeating YouTube’s argument from four years ago, Daniel Ek has now laid down a preemptive narrative as to why, if record business bosses want to see maximum monetary growth from Spotify, they should retain their faith in giving stuff away for free.

Not only that, but when questioned last week on the potential for subscription price rises in Spotify’s mature markets (à la the 10% price hike SPOT put in place in Norway two years ago) Ek acknowledged that “long-term, there’s that opportunity”, before firmly kicking the prospect down the road.

After referencing AM/FM radio listeners and the “billion-user opportunity” they represent for Spotify around the world, Ek told Bloomberg: “All the people consuming radio in the US today [comprise] well north of 80% of the population. That’s the opportunity we’re going after, and we still think it’s early days. Once you’re hitting more maturity, when it’s hard to grow, that’s where you’re looking at price increases. We’re just not there yet. Even in what you would call the mature markets, we’re still relatively early in that cycle of growth.”

In other words, Ek’s suggesting that any exec fixating on Spotify’s slowing subscription revenue — and the potential remedy of price rises — is short-sightedly ignoring the advertising cash mountain coming over yonder via the migration of a billion free radio users.

It’s a clever rationalization, and one that might yet buy Spotify some much-needed patience in Label Land. But he must know we’ve literally heard it all before.

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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