The Stockholm-based tech firm has a stubborn problem: for every dollar of revenue the music streaming giant earns, it sends 65 cents directly to the music industry.
The fees that Spotify pays to labels, publishers and artists limit its revenue potential. It’s fair: without the musicians, the company wouldn’t exist. But it also means that, despite all the superficial similarities between Spotify and Netflix as subscription services offering an endless supply of content, Spotify’s business model is less robust.
If Netflix pays, say, $ 30 million to make a new season of a drama like Ozark, that cost won’t go up if it attracts more eyeballs. Media Rights Capital, which produces the show, earns the same money with Netflix, whether the audience is 5,000 or 50 million.
It’s not the same for Spotify. Costs increase with subscribers. For example, each hit by Bad Guy, Grammy winner Billy Eilish, will see another slice of the listener’s monthly subscription fees directed to Universal Music Group, the Vivendi SA unit which holds its recording rights and of publication. Spotify’s gross margin will likely only reach 25% of revenue this year – a low figure for what is supposed to be a software and services company. Netflix, for every billion it spends on content, is expected to make a gross profit of 39% of sales.
With only three major record companies controlling most of the music industry, Spotify’s relatively high cost base is unlikely to change anytime soon. And it’s difficult for Spotify to cultivate its own artists. This would anger the labels, and musicians generally want to be on as many platforms as possible, as it helps sell concert tickets.
Podcasts provide Spotify with a source of revenue over which it has more control. The firm recently spent more than $ 600 million to acquire four podcasting companies: Ringer, Gimlet Media, Anchor and Parcast. Rogan’s signing on Tuesday brings one of the most popular podcasts in the world.
For a fixed – or capped – cost, Spotify attracts new listeners and potentially subscribers, especially if it creates podcasts itself. The more time listeners spend on podcasts, the less Spotify donates to record companies.
Then there is the advertising opportunity. Spotify made only 4.42 euros ($ 4.84) per user through its subscription activity in the first quarter, and an additional 91 cents per user in advertising revenue. Facebook Inc.’s thriving advertising business earned it $ 34.18 for each of its North American users over the same period. Advertising could represent 12% of Spotify’s revenue by 2022, up from 8% currently, according to Bloomberg Intelligence.
Certainly, Spotify has yet to reach its market capitalization of $ 33 billion, a turnover multiplied by 3.7 (which should not be profitable this year). But CEO Daniel Ek is starting to play the tunes investors should hear.
This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering the European technology, media and communications industries. Previously, he covered Apple and other tech companies for Bloomberg News in San Francisco.