I think this might understate the problems Spotify has. Their earnings reports are public and they are, as the author says, at the mercy of the record labels. If Spotify has an unusually profitable quarter, the labels are simply going to take that as a sign that they set their fees too low, and they're going to rectify that mistake. It doesn't matter what costs they cut, it doesn't matter how they increase their profits, the labels are going to see themselves as entitled to that surplus.
I don't think that's feasible for Spotify -- why would you subscribe to a paid monthly music streaming service if most of your music (the 85% produced by artists associated with the "big 4" labels) isn't on the service? Sounds like a good way to drive people back to piracy.
Honestly, Netflix's selection is poor enough that I know quite a few people who have gone back to piracy. Spotify is in an even worse position.
I think the labels are more reliant on spotify at this point. Maybe you buy publishing rights for a lot of artists to be a label as there is no need for promotions for cds or interacting with radio stations
There are other examples (however imperfect) where this dynamic exists without it having a continuously negative effect on margins. Apple/iTunes doesn't seem to be called out as having a ton of risk in this area despite similar dynamics. Cable companies/satellite TV/radio for other industry examples.
Not saying it isn't a risk, just that there are accepted strategies for protecting profits as a distribution channel.
Those companies are all markedly larger and pull revenue from other places also. what % of iTunes profit today comes from Music vs (movies/books/app/etc)? Spotify is uniquely vulnerable on that front.
Video? I feel like they have a reputation for being good about paying artists, there's a need for a Youtube replacement that lets video creators act more like record labels for their own content instead of being passive participants in the Youtube ecosystem and subject to their whims.
iTunes is an awful example, if not an outright counterexample. It's famously been run at nearly break-even for most of its life–its sole purpose was to sell Apple hardware for over a decade.
even worse for spotify: Tim Cook said that Apple isn't particularly interested in on Apple Music turning a profit - when asked the question directly, he responded: "you're right, we're not in it for the money. I think it’s important for artists. If we’re going to continue to have a great creative community, [artists] have to be funded."[1]
I'd say his stated rationale for not caring about money (artists getting funded) is at best a low priority and at worst total fluff - they don't care because they make money on phones/hardware, and it also long-term allows them to price competitors (like spotify) out of the business (I don't think it's a coincidence that he gave this interview in the days before spotify's F-1 went public). to apple, streaming is an ongoing marketing campaign for their hardware and hey, if it breaks even great, but even at a loss they can make it up in hardware profits.
I would not be surprised if apple is planning to waiting to announce a significant price or other change to Apple Music right before spotify's first or second quarterly earnings report - not very nice, but it would be a pretty smart thing to do.
This is similar to sports team which have to renegotiate their talent costs pretty much every year, which I guess is the reason so many sports teams keep the finances private. MANU performance, for instance, lags all common benchmarks.
The authors central point seems to be that Spoitify is at the mercy of the record labels. Because the labels have the music. And that Spotify can't cut them out because they don't have enough users to attract artists:
Notice how little power Spotify and Apple Music
have; neither has a sufficient user base to
attract suppliers (artists)
But he does not explain his reasoning behind it. How big is their user base? Why is that not big enough? And how big would it have to be to attract artists?
People often use Netflix as a parallel to reason about Spotify and circumventing labels.
But it is a bad comparison. Start with the consumer and work back.
Consumers expect their music streaming service to have any song they are looking for. For video they don’t have the same expectation.
Music has a greater element of “I want to listen to this particular song/album because it is my favorite”. Video is more about “I want to find something new to watch”.
That fundamentally changes the value of having a complete catalog in music and puts Spotify in a weaker spot relative to Netflix.
I agree that comprehensive catalogues matter more for music, but I think we're missing another area where Netflix and Spotify are similar (and where Spotify may arguably be better than Netflix): acting as a recommendation engine.
Netflix has been able to track exactly what types of movies consumers are into so that it can deliver more in the same vein. Originally, it would send consumers to other movies it licensed. Now, as a producer, it can direct consumers towards its own flow of productions.
Spotify's recommendation engine has long been a draw for many users. I believe Spotify is setting itself up to be able to increasingly direct users into its own Spotify-flow of artists and musicians. The recent change to playlist mechanics (so that playlists autoplay "recommended similar songs" once completed) will make this even easier.
Having a huge catalog is important, but controlling the flow of what's popular may trump the back catalog in the long run.
edit: Spotify is not as far along in the process as Netflix, obviously, and the entrenched nature of the music business doesn't help, especially with the market practice of locking artists into 7-year exclusive contracts. I believe it will go in the same direction - it's just going to take a little longer.
Spotify's recommendations used to be very good for me, but Discover Weekly has gotten dramatically worse in the past few months. I'm lucky to find one good new song in there these days, whereas I used to love the entire playlist.
Netflix's "recommendations" have been pretty terrible from day 1 -- it's mostly random garbage, and suffers from serious issues like grouping sci-fi with horror (seriously? Star Trek TNG belongs in the same category as Hellraiser?) -- and since they started producing their own content their recommendations have quickly become thinly-veiled attempts to push their own mostly-poor content. Add in their horrible UI, replete with autoplaying previews as you browse tiles paired with obnoxious stock music, and Netflix has become something painful to use. I've been moving back to renting/pirating depending on availability and price this year because Netflix doesn't have anything worth watching that I haven't already seen.
So I'm not the only one with that problem! All Spotify recommends to me these days are covers, most of them video game style themes. I like chiptunes and Minecraft parodies as much as anyone, but not to the exclusion of all else. I don't know what they changed to cause this, but I haven't opened Spotify in a month.
I think this has more to do with the economics of pirating movies versus music.
When Netflix started, people were not used to torrenting (or Napster-ing, or Kazaa-ing, etc) movies. They were already at the mercy of Blockbuster, so being at the mercy of Netflix instead wasn't that big a deal. Pirating movies is more popular today, but people are still generally OK with having a limited movie selection.
Whereas by the time iTunes Music rolled around, people were already comfortable with having the whole world of music at their fingertips. You can't undo something like that easily. So the only way forward has been to try to have everything.
Perhaps the most interesting part about all this is that there was never (to my knowledge) such a thing as a store where you could rent records, tapes, or CDs -- Blockbuster for music.
> Perhaps the most interesting part about all this is that there was never (to my knowledge) such a thing as a store where you could rent records, tapes, or CDs -- Blockbuster for music.
Not a store, but you can rent records, tapes and CDs at most libraries.
> Perhaps the most interesting part about all this is that there was never (to my knowledge) such a thing as a store where you could rent records, tapes, or CDs -- Blockbuster for music.
That is because it is illegal. 17 U.S.C. § 109(b).
> That is because it is illegal. 17 U.S.C. § 109(b).
It seems one could start a private non-profit library whose purpose is teaching about music history that rents CDs and promotes musical performances. I could call it "Musicbuster" perhaps. I'm assuming no one has done this because there isn't really a market for it? Or is that not a clear and easily exploited loophole in law?
> It seems one could start a private non-profit library whose purpose is teaching about music history that rents CDs and promotes musical performances. I could call it "Musicbuster" perhaps. I'm assuming no one has done this because there isn't really a market for it?
Even if there is a market for it, the nature of the legal limitation to a non-profit library is that the usual capitalist incentives for serving such a market are removed.
> When Netflix started, people were not used to torrenting (or Napster-ing, or Kazaa-ing, etc) movies
Can you provide a source for this that adjusts for the increase in worldwide internet use as well as bandwidth?
When Netflix started, it was an overnight DVD delivery company, not directly competing with online movie piracy. Pirating movies in 1997 meant making large sacrifices over quality and convenience, not because people "weren't used to it".
By the time Netflix entered the online movie streaming market to compete with piracy, the DMCA had been in effect for years. The world was very used to filesharing before the DMCA went into effect. And Blockbuster was already suffering poorly not just because of Netflix but because of a general shift in how people consume their movies.
> Whereas by the time iTunes Music rolled around, people were already comfortable with having the whole world of music at their fingertips
Through YouTube? Because otherwise I don't know of a truly comprehensive legal streaming service. Unless you're referring to filesharing?
> Perhaps the most interesting part about all this is that there was never (to my knowledge) such a thing as a store where you could rent records, tapes, or CDs -- Blockbuster for music.
Music-ripping tools were ubiquitous at the time (everyone had a CD drive), movie ripping tools were not nearly as popular. It didn't economically make sense.
I do not agree with "For video they don’t have the same expectation" - this is exactly my expectations for say Netflix. Now today I know this is not true and never will be, but I did believe and expected it a couple of years ago.
Your expectations were probably influenced by having been a subscriber to their DVD service, for which they _did_ have nearly every movie you could imagine. Their streaming service is only a subset of the movies they had (have) on DVD.
There was a time when you could reliably say "I'll just wait for it to come out on Netflix." It was an expectation that led a ton of friends to sign up. I am talking about the streaming service. I just left Netflix because it's so far from what the service is now.
I've come to _expect_ that Netflix probably doesn't have a classic I particularly want to watch. Anecdotal, sure, but I find that I treat Netflix and <music streaming service of choice> differently. With Netflix I'll turn it on when I want to watch something but I'm not sure which. If I have a show/ movie in mind I'll check if it's there but generally I expect to pay a small fee to rent it on Amazon. The catalog changes monthly, so you never quite know what is going to be there on any given month. With music I know that the music I'm looking for is (probably) there and I won't have to pay more for it.
They are both media-consumption services but I think most people treat them like
What about back catalogs, though? Only the labels can provide those.
Edit: Just remembered that Spotify may already be doing something like this[0] for certain areas where name recognition and back catalog don’t matter. A very clever approach, if they commissioned more tracks like these and filled their playlists with them, and concentrated on growing the areas of their user base that listen to those kinds of playlists, they could decrease their dependence on the record labels.
My understanding was the vast majority of listens come from popular artists, and those listening to niche artists (of which there are tens of thousands) are the minority (~10%).
I really hope that is the case. I have more than a hundred artists in my saved list and a huge spread of genres and styles. I enjoy Spotify constantly for giving me some of these insights. I am just as likely to get a suggestion for an artist with 1000 followers versus someone with 500,000 thousand. The algorithm doesn't seem to give much weight to popularity and I love that. Popularity just isn't a strong indicator for quality music and people have been musing over that point for centuries.
I think for many, music is just background noise or social fodder. Used solely for those ends then popularity matters. Otherwise, it's a useless metric and you are just as likely to find a genius with 200 followers as you are a vapid repeater box with 500,000. The hurdles serve as enough of a barrier for people posting just garbage to the platform, but they don't seem to hinder those who are creative but unpopular.
> I think for many, music is just background noise...
That's me 90% of the time.
So names doesn't matter much AND I'd actually be happy if the artists got paid better, directly and without feeding the middle men in todays music industry.
As a someone who used to do music semi professionally, I'm intrigued by this statement. I've never considered signing directly to a distributor. The major problems I see are, no artist wants to be locked to one platform and all the artist management folks Spotify would need to hire.
Spotify wouldn't lock in the artist, but labels do. If the label demands full rights to a song/album, you would not be able to sign for the label since you've already granted rights to Spotify.
To me, they were suggesting that Spotify could replace labels if they had 'enough users'. Currently, band to record label relationships are exclusive (i.e. I can't release an album with both Label X and Label Y). Also, labels do a lot more than just getting your music on platforms. If Spotify wanted to replace the label, they would need to provide those services instead.
It varies, but mostly it involves marketing. Press, branding, merchandise, etc. Alongside all the other odds and ends like helping you find support staff (visual artists, booking agents, tour managers, etc), legal representation, and fronting money for the recording process. There's quite a bit that goes into it all, there's a reason why large record labels have so many employees.
They take the most of the money so the artists won't get rich too early (or at all). That way the artists has to be creative and come up with something new next years as well.
There's possibly a bit of assumed knowledge in Ben Thompson's posts; he analyzes web companies through the lens of his Aggregation Theory. If you're not familiar with that, then it's possible that some of his arguments seem unfounded. [1]
It perhaps sounds borderline tautological, but I think the reasoning under Aggregation theory is simply: if they could attract suppliers directly, they would have, and therefore because they haven't, they can't.
I think this is reasonable where Aggregation theory holds, since being an Aggregator is an incredibly strong position in the market.
To make a reductio ad absurdum example, as a musician, I believe you could currently just upload your recordings to Spotify, and skip the record label, in the same way that Youtube video producers upload their content directly.
(Youtube is an example of a true Aggregator in Thompson's terminology.)
However it seems quite clear that the Spotify-only approach wouldn't be sensible, because Spotify doesn't get you onto radio, tv commercials, and all the other channels that a record label has available. And Spotify revenue alone is less than Spotify-plus-record label. (e.g. see Taylor Swift, who gets (by a very swift Google search) $160m in revenue [2], vs. $2m paid by Spotify
[3] (and split between her and her record label). Obviously some of that revenue comes from non-music revenue, but the album sales numbers suggest that she's netting at least tens of millions per year.
If Spotify were to pull a Netflix and begin signing artists, this would put it in conflict with its current supplier gateways, other labels. Unlike Netflix however, Spotify does not have enough of a market share to prevent the labels from pulling out.
On top of that I don't think streaming music and videos is completely the same thing. I think for video new content is vastly more valuable than the back catalog, keeping a steady stream of fresh exclusives might be enough to justify a Netflix subscription.
Meanwhile I'd say that maybe 2/3rds of my playlists are tracks from the past decade or older. Having only access to a subset of the music being produced today is not really enough for me to justify paying 10 euros a month. When I hear some music that I like on the radio I fully expect to be able to find it on Spotify and most of the time I'm right. If suddenly I have to use 3 different streaming services to access all the music I like then it'll be back to pirating for me. How do you even compile a playlist in these conditions?
I really don't think that "pulling a Netflix" would make any sense for Spotify at all, and it would be a terrible thing for the users.
On the contrary, a ton of licensors have pulled out of Netflix. Its just that their content is good and at a large enough scale that it doesnt matter. Netflix was lucky to build its in-house production muscle before a lot of the licensors wised up and started building their own platforms.
also, if the record labels are keeping royalty rates 'high' (most artists would say they are pitifully low...) and are therefore acting in this case, through their own self-interest, as collective bargaining agents for artists (or at least, rights-holders) then anything that gives Spotify more power and profitability is presumably even worse for artists
- People very very infrequently watch the same movie/tv show twice.
- People very very frequently listen to the same song
therefore
- The past is important for songs since at any point in time there are more songs in the past that you want to listen than new songs that have been just released
- The future is more important for movies since you are looking fwd to watching something new
> People very very infrequently watch the same movie/tv show twice.
While probably true now, this will change over time. Most people I know (mid/low 20s) use netflix as a replacement for the radio - putting on The Office / parks and rec just as background noise while doing other things. Those shows have been on repeat in my house everyday for a few years.
Spotify's ad studio (and sales team) deserve more acknowledgement. I don't pay for a Premium account, but I'm a daily user. I find the ads tolerable, the voices relevant. And they dont interfere with my enjoyment of the platform.
In contrast, the ridiculous ads on Pandora is what sent me to Spotify. I can only assume Pandora has low inventory, because I'm getting ads for a tractor company 30 miles away. I'm a Sr dev, listening to Drake, and I don't have a lawn or a farm.
As far as I have understood, that's not how it works economically.
Spotify is trying hard to make free users upgrade to premium, while enlarging the user base. I don't think they have any interest in playing real ads (except some music-related ones that maybe keep the labels a bit more quiet); that's the reason you get tolerable ads. But in the longer term, Spotify might decide to kill the free service (or just make it a timed trial.)
> Spotify might decide to kill the free service (or just make it a timed trial.)
I doubt this will happen. A lot of teenagers right now have only have a free spotify subscription because they don't have any money, and spotify probably wants to keep them as subscribers so in the future they do become customers.
Count me as a single data point for the example of a teenager switching to paid Spotify as a college student (albeit discounted to half-price). When I graduate I'll probably keep paying, at the full $10/month. Apple Music is tempting for Siri integration, and Amazon and Google are certainly alternatives, but I'd rather stick with the cross-platform "underdog" that doesn't lock me into using iTunes.
Also, screw Apple Music and Tidal for "exclusives."
Not disagreeing with your point, but just because spotify isn't tied to an already-huge company doesn't make them more of an underdog. They already have a much larger subsriber-base than all the other music services, and it's clear to me from seeing the way people act and their choices in what they do that, similar to netflix, it's bound to succeed despite all the armchair analysists pointing to graphs with lines pointing down.
Also, I'm curious, what issue do you take with exclusives? Do you also find fault in netflix, hulu, and amazon creating media and making it exclusive to their service?
Ben Thompson delivers again. I love reading this guy’s stuff. I’m not saying it’s earth shattering, but it’s accessible, well thought out, and leave feeling much more informed.
> Making matters worse, the U.S. Copyright Royalty Board just increased the amount to be paid out to songwriters; Spotify said the change isn’t material, but it certainly isn’t in the right direction either.
I can be wrong but wouldn't something like this affect Spotify's bottom line in short term already?
That said, the situation might be even worse. As pointed by the top post from an earlier Spotify IPO discussion, record companies might squeeze Spotify even more if it starts becoming profitable:
It’s an interesting article.
I think it overplays the power of the record labels though. If Spotify increases its user base substantially enough, then bargaining power goes to them in the Long run. Record labels can’t make money selling directly to the consumer anymore.
Secondly, I don’t think the cost is a problem. if it IPOs, the proceeds will be used to fund (my guesss) customer acquisition which would be in line with their strategy of incurring larger costs now in return for future gain.
This is a little tangental, but tangental to a couple of the themes here...
One tangent is that I'm totally dissapointed with the dominant "content aggregators" like kindle, netflix, spotify, apple and such.
Amazon wrapped up the ebook market quick. But, even though it's a revolutionary change in medium, very little changed.
The book publishing industry was ripe for change. Physical publishing gradually got less expensive and less risky. From physical typesetting to short run modern printing. ebooks bring that capital cost down to $0. In response, publishers maintained their "venture capital" status with advances (money upfront to authors) and (supposedly) "marketing," the impression that a publisher can make a book sell.
The point on publishers' marketing importance is dubious, especially in the context of amazon & ebooks.
Advances, editing and the remaining jobs publishers do... The value/cost does not add up to 80-90% of the revenue. Typical royalty rates (5%-20%) are absurd. Amazon could have disrupted this, easily. It would have completeley changed the industry, and made writing a viable living for many more people, producing many more books.
Also, mediums. Magazines famously spawned whole new formats and genres. So did things like paperbacks, pamphlets and other medium changes. Serials and shorts stories. Comic books and gossip collumns. The internet gave us blogs, tweets, infographics and PG essays.
Ebooks gave us digital versions of paper books. The impact has been minimal.
It is as if amazon did their very best to revolutionize books, but change as little as possible.
Spotify did something similar, maintaining and reinforcing the norms of artist-label dynamics, even though they are completely unsuited to the modern industry.
My second tanget is a point on the cost that does scale linearly: customer acquisition costs. This generally means FB & Google. They started as free discovery (customer acquisition from the customers' perspective) and became paid customer acquisition tools.
Today, they are mostly paid customer acquisition tools. This means (a) that these guys charge a toll on certain sectors and (b) that ability to pay this toll is a major factor of success.
It sucks to be in a market with head-t-head competition. These markets are efficient (especially on adwords) and the price of acuiring a customer tends to stabilze near marginal revenue per customer. IE, whatever your margin is on customer, it goes mostly to google.
If you earn less per customer (per impression, more accurately) than the competition, these channels are closed to you. This results in a uniformity of business models. Examples are many, but think of all the subscription food delivery, maid services, laundry, etc.
If you are offering one-off housecleaning and your competition is selling subscriptions, they will probably outbid you on adwords. You will need to change to a subscription model to stay on adwords.
Free discovery channels (eg, HN) have (had?) a totally different dynamic then the paid ones. I think this is an important thing to realize, if you're starting a something these days.
> Ebooks gave us digital versions of paper books. The impact has been minimal.
Eh maybe. These days I read a fair number of what I assume are self-published-on-amazon ebooks, as recommended to me by amazon's system. I assume the publisher has been completely cut out, and the length expectations have certainly changed (serials of more shorter books). Maybe people are still figuring out the medium. If you look at the early days of television you'll see "television plays" which at first were literally theatrical actors performing a play to the camera, and these plays were limited to a maximum of one rebroadcast and destroyed after by agreement with the actors' union. Television only became its own distinct medium (with the corresponding economic changes) over time.
I was generalizing, of course. Your experience may be the exception or (hopefully) the vanguard.
Self-published books with non-traditional page counts, at wildly different price points, discovered via recomendation engines is exactly the kind of thing I was hoping to see.
From what I can tell though, this is still a marginal phenomynon, less impactful to the median author than twitter or blogging or somesuch. I don't think this is a coincidence. Amazon has allowed for it, but not really pushed on it, or gambled on it.
When kindles came out, I read a Seth Godin (blogger/writer) comment that eachone should have shipped with 1,000 books, including his. He'd have agreed, in order to get to readers (with his back-catalogue).
Maybe (hopefully) you're right on the timing. Maybe we're just discovering the medium. But, (a) I think things move faster these days, and 10 years should have been sufficient. (b) amazon controls most of the levers, and I think it won't happen unless they decide that it happens.
This has actually been fairly clear (if you have exposure to ad buying) since early days, but I've heard relativley little talk of it.
They put a lot of effort into making ad "ROI"easier for advertisers to track at a granual level. Micro1001 will tell you that firms spend upt to that point where marginal spend yields $0 marginal profit. In most markets this is pretty academic. Spending isn't that granual and return isn't that transparent.
In the simple economic model, the assumption is that marginal profit on the 2nd to last dollar spent is more than $0, and the dollar before that is even better. On adwords, it's typically more "efficient." Initially adwords leaned into this, with their "bid-for-ranking" approach. Pay more per click, get more clicks. You could bid to optimize for profit, profitability or volume, as you wished. An 8th place ad might cost a fraction of a 2nd ranked one.
Then, they dropped the RHS ads and focused on getting more clicks to the highest paying advertisers. This has brought adwords close to an on/off decision. There is no more "bid-for-volume" dynamic. The highest bidder takes the whole pie.
Th upshot of all this is that average roi and marginal roi are the same, approaching $0 in competitive markets.
There are a lot of markets where this is completely played out. That is, Google get a cut (anywhere from 10% to 50%) equivalent to the average margin that advertisers earn on whatever they're selling. The advertiser is whoever has the highest margin. Insurance, for example.
> There are a lot of markets where this is completely played out. That is, Google get a cut (anywhere from 10% to 50%) equivalent to the average margin that advertisers earn on whatever they're selling. The advertiser is whoever has the highest margin. Insurance, for example.
Sounds like actual insurance has been commoditised, whereas Google is still making monopoly rents on advertising. There's some kind of analogue of Amdahl's law: the cost reduction from commoditising part of the work of producing a product is smaller than you would think, because the cost will increasingly come to be dominated by the parts that can't be commoditised.
Is there anyone similar to Thompson who has such an interesting take on business topics? I have been looking for a while but this is really hard to find!
More finance than business, but I really enjoy Matt Levine (he writes for Bloomberg). Even though his articles are technically finance there's enough tech and business analysis in there that you don't have to be a finance nerd to find good content. And he publishes Money Stuff most weekdays!
In addition to the other suggestions, Horace Dediu does a nice job with technology firm analysis (as he says, using Apple as a lens). http://www.asymco.com/
I admit I've been paying less attention over the last couple of years, but historically his content has been well worth reading. I was fortunate to catch one of his talks in person in Chicago, was quite interesting.
