Spotify – Campaign launch

The assault on the labels begins.

• Spotify has formally launched what I think is the first element of a strategy that will see the obsolescence of the record labels resulting in the enrichment of both the streaming services and the artists.
• Spotify has brought out of beta testing a tool that allows anyone with a Spotify for Artists account or a rights holder using Spotify Analytics to share unreleased tracks directly with Spotify’s editors for inclusion in its playlists.
• Spotify has about 100 editors worldwide which in conjunction with algorithms curate its playlists.
• Much like radio in the days before digital streaming, the curated playlists have become a major avenue by which users discover new artists and music.
• With declines in sales of recorded music, streaming is now the engine of growth in listening, but the real money is now made in events and performances.
• This means that maintaining and growing the fan base remains critical, underlining just how important music discovery is.
• This is the function that has historically been fulfilled by the labels which is obviously becoming obsolete as algorithms get better at matching tastes to music.
• The new tool means that a new artist no longer necessarily needs a deal with a record label to have his or her music widely distributed and critically, to make money from it.
• I have long believed that the labels are the real reason for artists not making a healthy return from their content being streamed.
• This is because Spotify’s (and I estimate) and Apple’s gross margins on streaming music are extremely low.
• This is because they pay the majority of the revenue that they make from subscription services to the rights holders in the form of royalty payments.
• If the artists are only seeing cents on the dollar, then it can only be the labels who are keeping the vast majority of the proceeds as financial disclosures pretty much prove that it is not the streaming companies (see here).
• Consequently, in the long run, I see artists going directly to Spotify and Apple Music and getting far more lucrative deals than they have today as the music labels will no longer taking a big share of the pie.
• I think that the music labels are well aware of this threat and are doing everything that they can to delay this scenario for as long as possible.
• In the long-term, I think that artists going straight to Spotify, Apple, Tidal, Deezer and so on is inevitable as the artists will get to keep far more of the money their creations earn, and the streaming services will be able to improve their gross margins.
• This new tool combined with the more favourable deals that Spotify has most recently signed with the labels is clearly indicating that this is the way things are going.
• Hence, I still think that the long-term picture is still rosy for music streaming and that the labels will eventually be removed from the sale and distribution of music.
• Spotify has weakened considerably in 2018, and so there is an opportunity to benefit from a gross margin expansion story that many seem now to be forsaking.