• Henry Miller

How Does Spotify Make Money?

History


We’ve known for a long time that we don’t actually have to pay for music.

During the 2000's, Piracy wreaked havoc on the music industry as internet speeds ramped up. Listeners still supported artists they were fans of but for an album that they had lukewarm interest in it was more likely that they were going to go to the Piratebay.

But, as the industry evolved, streaming, rather than downloading, started to become the main method of consumption. Broadband internet was fast; 4G networks were widespread and high quality streaming was accessible to almost everyone. Media was consolidated and far more convenient than pirating everything you wanted to hear… (and I suppose more ethical too). Major Streaming Services began to pop up everywhere. I remember people linking Facebook to Spotify at my high school. Pandora was a mainstay on every iPod Touch and more independent services like Soundcloud and GrooveShark were also in the mix. Little by little, streaming became the primary way that people accessed their music.



Today


Fast forward to 2020, Spotify now has 158 Million subscribers, and the streaming ecosystem is now a ubiquitous part of people’s music consumption. Streaming has touched virtually every aspect of the way we consume media in the modern world; It’s expected now. A world where I don’t have a seemingly unlimited amount of media options at my fingertips is unthinkable. It’s hard to fathom a time where butts had to be in seats at 5:30 on the dot, otherwise The Simpsons is playing without you. Gone too are the days where you waited outside the CD store to pick up the newest single.


The Streaming Service Model


To explain streaming, let's use Spotify as the primary example since they’re the top dog right now. (But the other companies rely on similar models). Spotify earns money through paid subscriptions from their premium membership and advertising on the free version of their platform. Ad revenue also comes into play when companies want to advertise on the Spotify homepage or sponsored playlists. For Spotify the majority of their revenue comes from subscriptions. Artists are compensated based on the proportion of revenue that their streams generate. Basically, all the money goes into a pot and artists take from that pot based on the number of streams they contributed. If Spotify made $100 million in revenue and Justin Bieber had 1% of total streams then Justin would then earn $1 million. For the majority of artists this is a pretty unfair deal and for those consumers who don’t listen to Justin it seems strange that effectively 1% of their subscription money goes towards the Beebz. As a result the average artist makes roughly .003-.005 cents per stream on Spotify (Source)



Note that none of these streaming services actually own any of the music on their platforms. Instead, the music is contracted out by labels or individuals. In other words, these companies 'borrow' the music and offer it on their platform. Broadly this makes music libraries between different streaming services virtually identical. This is far different compared to video streaming where the marketplace is determined by exclusivity. If you want to watch Marvel you have to have Disney+. If you want Stranger Things you have to have Netflix. This isn’t the case for music streaming. Jay Z’s service, Tidal, tried this in the beginning of its inception, dangling Kanye West’s new album at the time, Life of Pablo, and Jay Z’s discography in front of consumers. But very few people ended up biting and now both are on Spotify. Instead, in the music streaming marketplace consumers choose services based on a variety of features including but not limited to: algorithmic personalization, interface, integration with their devices/social media, availability of high fidelity audio quality and of course, price.


The Market


The fact that there isn’t an exclusivity factor is actually quite healthy for the market. In video streaming each service is effectively its own monopoly. Video streaming companies don’t innovate in any way other than exclusives. Netflix, Hulu, Disney+ or any other number of streaming companies rarely, if ever, update their interfaces or offer new features. Instead what they focus on is consolidating, maintaining and creating intellectual property in the form of copyrights on movies and tv shows. A copyright is effectively a government mandated monopoly to protect ideas with low/no marginal costs. Since these companies’ business models are predicated on collecting things that cannot be legally reproduced by other companies they technically aren’t competing with one another. If you want to watch a Marvel movie, or a Star Wars movie, or a Pixar movie then you have to get Disney+. You have no other legal options.


Since these platforms have consumer’s hands tied, they don’t have to sink any money into platform innovation or consumer satisfaction and they can instead focus on consolidation and further exclusivity. This has another side effect of running niche markets into the ground making it near impossible for an outsider to penetrate into the video streaming market. If you’re looking to create a niche streaming service to cater to smaller more specific markets (for example: documentaries, horror films, anime) but a vast number of popular titles are exclusive to big companies, then there’s basically no way you could ever compete. But there’s enough competition within those major services that in order to have a full range of selection then you have to have subscriptions to all of them which in turn nullifies the original reason why they exist, convenience. And Spotify is trying their darndest to make this the case in audio streaming as well.


The Podcast Industry


This year, Spotify found a crack in the market: Podcasts. Podcasts for a long time were seen as low barrier to entry, low start up costs, but also low profitability. Earlier this year Spotify signed a landmark $100 million exclusivity deal to sign 'The Joe Rogan Experience', one of the most popular podcasts in the world. It’s a big investment from Spotify but it puts their cards very clearly on the table. In order to compete with Spotify you will now have to compete in this market as well. Currently, you can compete in the marketplace with a music streaming service based on niche ideas. The aforementioned Tidal is run by musicians and pays out the most per stream to the artists. The French streaming service, Deezer, offers a subscription tier to access lossless files for better audio quality. If Spotify is correct on their investment it’s not a far reach to imagine that what has happened to the video streaming market very well could mirror onto the audio streaming market. No matter what kinds of fun features or gimmicks a service may offer, if your favorite artists or podcasts aren’t on your streaming app then the decision has been made for you. A podcast, and possibly music streaming exclusivity war could be on the horizon.







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