Greg Sandoval is one of the great reporters on tech and music. While I don’t always agree with him, I think he’s fair and one thing I know for sure–he is old school when it comes to getting facts and sources right. So when Sandoval says Spotify is going back to the well to drive down artist royalties even further, you better believe that I believe him.
According to his story at the Verge:
About 70 percent of Spotify’s revenues pays music-licensing fees while another 20 percent covers customer acquisition, these sources said. That leaves 10 percent to pay all of the company’s other costs, including its much praised technology platform. Insiders have told The Verge that this cost structure zeroes out Spotify’s profits.
So brace yourself–Spotify is about to do a Pandora-style argument about how artists should take even less because Spotify’s “profits” are consumed by royalties. (And yes, I do know that Spotify doesn’t pay most artists directly, but I also know that the reason that Adele held back her records from Spotify wasn’t because Beggars or its US distributor Sony weren’t making enough money.)
Since You Brought It Up
Since Spotify has put its profits at issue, then let’s discuss those profits. The good thing about Pandora is that it’s a public company. So when Pandora asks artists and songwriters to take less, the creators can look up the CEO’s salary (around $750,000) and can see that Tim Westergren is cashing out of Pandora stock to the tune of about $1 million a month. Just to be clear, I don’t mind at all if Westergren makes bank on the company’s stock. That’s they way it’s supposed to be in a free market, entrepreneurs should be rewarded. That $750,000 salary though…again, none of my business if the stockholders approve it, but it is my business if Pandora pays too much in executive comp and wants to take it out of royalties.
Spotify is a private company, and so we don’t really know what they pay their executives–but something tells me they’re not wanting for much. Why? Because Daniel Ek (Spotify founder and CEO) has a net worth of $310 million (or had) and showed up on the Sunday (London) Times 2012 Rich List as the 10th richest person in the music industry.
So since Spotify seems to be putting its profits at issue, perhaps they also need to be transparent about exactly why they make so little money. Do they have to disclose their executive compensation? Certainly not. But artists don’t have to agree to participate in the charade…sorry…license their music, either. And after all, Spotify are the ones who brought up profitability.
Maybe Their Management Team Is Incompetent
Given all the goodies that Spotify is rumored to have gotten from the labels and publishers, why is it that they are not doing better? Particularly given their spectacular valuation–while it dropped from $4 billion to $3 billion after the Facebook and Zynga IPO debacles, it’s still $3 billion. For a company whose sole product is distributing other people’s music.
And let’s not forget–this is an Internet company. Feeling a little bubbly down in the tummy, maybe? It’s still probably overvalued at $3 billion–as Peter Kafka put it in All Things D:
Investors already know what a digital subscription business looks like at scale.
That would be Netflix, which has some 27 million subscribers at around $8 a month….Netflix has a market cap of $4.3 billion.
Spotify says it has 4 million paying subscribers at around $10 a month. Bear in mind that if you value Spotify at $4 billion today, you’re really saying it will be worth three times that — $12 billion — in a few years, when it would presumably go public.
The two companies aren’t exactly analogous — Spotify, for instance, also has a nascent advertising business — but they sure look similar from a distance. They’re both international, they’re both dependent on rights deals for their content and they both face the perpetual threat of competition from the likes of Amazon, Apple, etc.
So even at $3 billion, Spotify backers will need to work hard to explain why their digital subscription business is worth so much more than Netflix when it comes time to IPO.
Notice–no crocodile tears from Netflix about mommy saving them from their royalty obligations.
Or Maybe It’s About Brand Sponsored Piracy
There’s another way to look at both Pandora and Spotify’s profitability problems–even discounting the grotesque executive salaries. Both are dependent on advertising, and both offer advertisers a shot at music fans. Just like the illegal bit torrent sites that major brands buy advertising from.
Imagine if that illegal inventory wasn’t available? I think there’s at least a plausible argument based on supply and demand that those advertisers would be buying advertising from legitimate services like Pandora and Spotify in even greater quantities. Perhaps at higher prices, which is what one would expect.
Is Google shedding any tears over Pandora and Spotify suffering from the ads that Google serves to pirate sites? Not really. Lower royalties help Google in its quest to commoditize all culture. If Google can drive down royalty rates by selling advertising to pirate sites and driving traffic to those sites from search–while skimming ad revenues away from legitimate sites–all the better for them, right?
The Most Important Man in Music Has Never Made a Record
What I think should happen here is that Spotify should put its books out into the public. After all, as Forbes told us, “Spotify’s Daniel Ek [is] The Most Important Man In Music”. How did we ever get along without him?
Maybe Mr. Ek would like to open his books and show us all what we’re doing wrong? And why we need to help him make a profit so he can say on the rich list.