Spotify must profit from the music revolution
Music is important to the economy as a whole. It was one of the first industries to be impacted by the internet, and it was also one of the first to rebrand itself as all-you-can-eat rather than all-you-can-steal. For years, the status quo has been the norm: Napster was shut down two decades ago, Metallica's rival accepted streaming services more than a decade ago, and Spotify Technology SA's membership fees have remained around $9.99 for years.
It's time to consider the possibility of drastic change. For starters, if this is the endpoint for music, it's a terrible state of affairs. The streaming industry is horribly uneven. It's excellent for consumers, labels, and rights holders who have found methods to survive off royalties, as well as the most popular artists like Taylor Swift and Ed Sheeran. It's been less kind to lower-level musicians.
It hasn't been good for Spotify or other standalone music-streaming companies like Deezer SA, though, with intense competition in a saturated industry jeopardizing their positioning as high-growth tech investments. Platforms also have little bargaining leverage with record labels and rights holders who want to get the most out of their successful songs and star singers. Spotify has never made a profit, and it appears to be in "perennial start-up phase," as music licensing analyst Phil Bird recently described it.
With inflation and economic slowdown eating into growth, MIDiA Research analyst Mark Mulligan estimates 2022 global streaming revenue may have increased by only 7% — and profits at Spotify likely to be unattainable for a few more years as it invests more funds in podcasts and audio books, what are the alternatives for breaking out of start-up phase?
The first option is to raise prices, as Apple Inc. just did. Music is really affordable; spending $10 per month turns out to be a few cents per hour. Former Spotify economist Will Page observed in 2021 that the price of a glass of Malbec wine had doubled since 2009 despite providing no significant improvements for consumers, whereas songs remained the same despite an increase in the depth of music libraries, personalization, and algorithmic curation.
Higher pricing would undoubtedly expand the total economic picture. It may even provide some incentives to transform the uneven distribution of membership payments into an overall pot that benefits the top artists regardless of what particular subscribers choose to play.
However, the reduction of Spotify's stock price last year suggests that this strategy is laden with danger. Nobody knows what price increases will do to demand in a shaky economy. We're approaching saturation, with platforms only gaining subscribers by stealing from others. Spotify is competing with large internet companies who see music as a loss leader, packaged in with other services.
Spotify appears to be taking a different path, upsetting its own main product by incorporating it into a new type of tech product dubbed the "Spotify machine" by investors. Daniel Ek, co-founder, envisions a platform for all things audio, from music to podcasts to audiobooks. More goods would lock in more customers at higher subscription prices, as well as more advertising income and more advanced algorithms and payment systems to tie everything together. The strategy includes some startling ambitions, such as a $100 billion annual sales figure in the next decade, which would place it on par with Citigroup Inc. or WalMart Inc.
But, once again, the stakes are tremendous. The tale of different audio channels merging and increasing profit margins is taking a long time to play out; Jefferies analysts predict Spotify's gross margins to be lower in 2024 than in 2021. The podcasting bubble has also burst, and there's no assurance that Spotify's foray into spoken word will be lucrative this year. Audiobooks appear to be yet another lengthy voyage. The notion that these expenditures will not have an impact on music consumption is also questionable: the potential for shocks when one platform offers both Neil Young and Joe Rogan has become clear.
Something much more significant is currently on the way: artificial intelligence. ChatGPT and similar programs are already being treated in the same manner Metallica attacked Napster, with lawsuits and boycotts. It's just a matter of time until AI-generated music makes its way into music platforms — you can already listen to AI-assisted music on Spotify — and the proliferation of auto-tuned vocals and drum loops in pop music has made people simpler for computers to impersonate.
AI, of all the developments on the horizon, has the potential to disrupt all kinds of long-term objectives. Record companies have previously accused Spotify and others of flooding their platforms with flotsam and jetsam, reducing star artists' market share (and hence negotiation strength) by embracing all types of freely released music. AI-generated music, particularly if it did not require payments to artists or companies, would completely transform the business.
This was most likely not the intention of the architects of the post-Napster movement. It implies that governments and authorities will have to keep a close eye on what occurs in the music sector; considering that one in every three music jobs was lost in the UK during the pandemic, another wave of upheaval would be devastating. Things will become louder when Spotify revs up its machine and techies experiment with real Metal Machine Music.