Why is Spotify Tanking?

You have to ask yourself, why is Spotify looking more and more like a ponzi scheme?  They are feeling the squeeze based on analyst reports–revenues (likely mostly advertising) are not sufficient to cover their operating costs and royalty costs.

And remember, just like Pandora, Spotify has one product–music.

So you have to ask yourself why is it that when Spotify is delivering prime demos to advertisers, they’re not making more money.  Advertisers have been after music fans for a really long time and still are.

This is important to everyone in our business because of this quote from Greg Sandoval’s story in CNET:

[T]here have long been skeptics who say that Spotify won’t ever generate profits while supplying users with free music and paying the royalty rates it does. (emphasis mine)

The problem you see, must be those greedy record companies.  Not to mention the lazy artists who want to keep getting paid for work they’ve already done.

Welcome to the logic of the Google Shill List a/k/a The Real Fan Boys of Cubicle 54.

First of all, don’t forget that Spotify founder Daniel Ek is the 10th richest person in the music business , so things aren’t all that bad for the insiders at Spotify.  Spotify’s general counsel is after all in the “top 5” of “Tech’s Most Powerful Lawyers.”  I’m sure he’s doing fine, too.  We’ll come back to him in a minute.

So why is it that Spotify is not able to juice that advertising income into serious profits?  You need to know the answer to that, because just like Pandora, Spotify is going to start poor-mouthing just any minute now about how they need to lower royalty rates to increase profits and do us all the huge favor of staying in business.  And in the minds of some–actually many–cannibalizing sales.

Here’s one possible explanation: Supply and demand.

Not only does every legitimate music service have to compete with stolen in terms of attracting paying users, they also have to compete with stolen for advertising revenue.

As we have seen in case after case after case after case on the Wall of Shame on MTP but also on The Trichordist and other sites, big name brands support piracy through buying ad space from pirates.  This not only hurts artists, we know that.

It also hurts any other ad-supported business, such as Spotify.  Why?  Because the advertising inventory available to big brands who want to reach music fans or movie fans with their ads is exponentially bigger because of the hundreds of thousands of pirate sites operating on advertising revenue.  More supply, lower prices.

And–no royalty cost at all to the illegal site.

It remains to be seen if the brands would actually spend more money on advertising if the pirate inventory was removed.  I frankly don’t think they would.  But what they do spend will go to legitimate business and ultimately back to the artists and songwriters.

But what I do believe is that when legitimate brands are selling advertising on illegitimate sites it hurts everyone in the chain.  (This is the kind of thing you would expect NARM to figure out, but I guess they’re busy with something else.)

Spotify and its competitors should be leading the charge against big brands advertising on illegitimate sites.  But that would require going up against Google who is selling ads on pirate sites, driving prices down on identical goods they sell in the legitimate side of their business, and also using their market power in advertising to drive competitors to Google Play out of business.

Because Google makes money no matter what due to their debased set of business values.  Spotify doesn’t because they are trying to do the right thing.

And who would you have to bet knows all about this cycle?

Jared Grusd, General Counsel Spotify

During nearly four years at Google, Grusd helped build out the company’s highly profitable ad business. He also headed up Google’s New York legal team and the legal team responsible for Google ads, which included Adwords, Doubleclick and the monetization of YouTube.

If legitimate brands were only selling advertising on legitimate sites like Spotify, then I find it unlikely that we would not hear the Big Tech chorus warming up on Poormouthing in B Flat.  Because what Google wants to do is screw us by driving traffic to illegal sites through search, selling ads on those sites, using the pressure from piracy to drive down pricing in their legitimate business (think Genco Olive Oil), and using the commoditization of advertising to drive legitimate business competition out of business across verticals–while they subsidize Google Play and YouTube with profits from the illegal business.

But that would require Spotify growing a pair and taking on Google and the big Madison Avenue ad agencies who are complicit in the scam, so I guess we can forget about that.  And it’s very unlikely that Mr. Grusd would feel unconflicted in those conversations.