Tomorrow (Thursday 15 March) is Spotify’s ‘Investor Day’ ahead of going public in April, when we’ll get a sense of how investors are responding to the figures, risks and trends laid out in the streaming service’s recent SEC filing.
The Financial Times has an interesting analysis of one of the biggest questions: when and how Spotify will make a profit. Among the nuggets: this quote from ‘the chief executive of one of Spotify’s four big music suppliers’ (i.e. UMG’s Lucian Grainge, Sony’s Rob Stringer, WMG’s Steve Cooper or Merlin’s Charles Caldas – place your bets now!) on the potential tensions.
“That battle for margin between Spotify and rights holders is going to be a difficult dynamic,” said the executive. “The music industry is cyclical. Next year we might not have an Ed Sheeran. I do worry about whether there is a natural compatibility between music and the stock market.”
It’s a fair question, although one counter-argument might be that the nature of streaming may actually soften the spikiness of those cyclical dynamics – one reason for higher valuations of catalogues of publishing and recording rights is that investors feel their future revenues are more predictable and modellable in a streaming environment, than in the traditional sales world.
The cycles are changing too, including lengthening. There may be no new Ed Sheeran album in 2018, but the last one is still streaming strongly – he has 44.6 million monthly listeners on Spotify alone.
Still, the FT piece makes some good points about the power dynamics between Spotify and rightsholders, which for an on-demand service *are* different to what Wall Street is used to with the obvious comparison, Pandora, whose main business remains its ad-supported, blanket-licensed tier.
The piece also puts some numbers on the potential impact of the recent songwriting royalty-rates decision in the US, which one analyst quoted by the FT claims could add $40m to Spotify’s annual costs, and eventually $100m. We’ll be interested to see whether this crops up as a topic at the Investors Day tomorrow.
The conclusion to all this is not that Spotify is doomed, but rather that its profitability and the business-levers it can pull to improve that profitability are going to be in sharp focus in the months and years ahead. Some of those levers will create tensions within the music industry – anything that seems to be cutting labels out of the loop, for example – while others will have its backing.
As one example, a ‘business intelligence platform’ for subscriptions called ProfitWell has put out some analysis of Spotify’s subscription pricing, suggesting there’s room to increase the price of a family-plan from $14.99 a month to $18.99 or even $19.99, based on what respondents to its survey say they’re willing to pay.
This lever in itself certainly isn’t the key to Spotify suddenly turning a profit, but it’s just one from many moving-parts in the company’s business that could be tweaked in the future.
The CEO quoted by the FT was right in one respect though: as soberly and carefully as people in our world can think about how Spotify’s business could and should evolve, from next month there’ll be another constituency looking to have their say in these matters.
Let’s hope they’re as keen on sober and careful reflection, whatever Ed Sheeran’s up to at the time.