Understanding The Broken Business of Spotify

0:00 few other companies have revolutionized an industry as radically as Spotify has revolutionized the music industry instead of paying to download each song We want to listen to Spotify lets us pay a monthly fee to access a virtually unlimited number of songs similar streaming services existed prior to Spotify but they limited the number of songs you could listen to each month what made Spotify the Undisputed king of music streaming is that it completely removed this cap and made it possible for people to listen to as many songs as they wanted and this strategy worked the service has over 574 million monthly active users of those 236 million are premium users paying a monthly fee and this is translated into billions in Revenue in 2023 Spotify reported revenue

0:48 of over 13.2 billion e as we can see their revenue has consistently grown over the past few years despite all of this Spotify has a problem as this graph shows Spotify has never made a profit in 2023 the company reported a net loss of over 532 million e so how come Spotify keeps losing money well the problem starts with spotify's fundamental business model let's take a deeper look spotify's business model is quite simple they generate Revenue primarily from two sources monthly paying users which account for the majority of their revenue and ads on ad supported subscriptions every time a song is

1:33 streamed Spotify pays a small fee to the artist or the record company as of right now Spotify pays somewhere between 0.3 to 0.5 C for each stream and this model of paying for each stream is largely responsible for spotify's negative net income this is spotify's income statement for 20123 look at the cost of goods line item this line item represents the total amount paid to artists and record companies as we can see the company paid out over 9.8 billion in streaming fees this means that for each Euro in Revenue the company pays 75 cents to the music rights holders this leaves only 25 cents for Spotify to pay for other costs like Staffing marketing content hosting

2:19 design legal and more which is obviously not enough now that we understand why Spotify keeps losing money let's examine some possible solutions and evaluate whether the would work the first and perhaps most obvious solution is just to lower the royalties it pays out Spotify is the leader when it comes to music streaming so why doesn't the company use this power to force artists and record companies to accept lower royalty fees the problem with this idea is that the companies to whom Spotify pays royalties are also very powerful see the music record industry is an oligopoly made up of three large companies Sony Music Warner music group and Universal Music Group control of over 70% of the music recording industry artists sign the

3:05 rights of their music to these companies in exchange for marketing promotion and distribution help meaning that it is these companies that Spotify pays royalties to and these three companies furiously fight a possible decrease in royalty fees and even threaten to remove their music cataloges from Spotify if this decrease is to happen having just one of these companies pull their content out of Spotify would be catastrophic for the let's take an example where Universal music group is unhappy with the fee Spotify pays and decides to Stop Licensing its content to Spotify music by Major artists like Taylor Swift Drake Adele the weekend and many more would no longer be available to stream on Spotify overall Spotify would lose the rights to the entire catalog of 4 million songs

3:50 owned by Universal this in turn would mean that a huge number of Spotify users would stop using the service and would opt to use one of spotify's competitors as this example illustrates music companies have enormous power over the streaming industry which makes it difficult for Spotify to negotiate lower royalty fees another possible solution for Spotify would be to increase their prices based on 2023 numbers Spotify would turn an operating profit if its Revenue grew by just 20% so why doesn't Spotify just increase its subscription price by 20% well this is also difficult to do considering the competitive landscape of the mus music streaming industry the music streaming industry has become quite crowded Apple music Amazon music YouTube music and 10cent

4:37 music are some of the other big players in the industry despite this the industry is all very homogeneous all streaming services have access to all music cataloges it does not matter whether you use apple music or Spotify you can listen to any song you want with either service this means that each streaming player offers the same identical service to the other players in the industry and this is the reason why all these services are priced identically since there is no differentiation between these Services customers are quite price sensitive so if Spotify were to increase its subscription price customers would simply move to another cheaper streaming service in fact out of all these major players in the industry Spotify is perhaps in the worst position for a price increase see apple music and

5:23 Amazon music are Services provided by already profitable companies meaning that apple and Amazon can afford to lose money on this service as long as it means that more people are using the apple or Amazon ecosystem additionally these companies are using music streaming to push their service bundles which might be more profitable Apple 1 is a subscription service that allows users to bundle up to six Apple subscriptions Apple music Apple Fitness Apple TV plus Apple arcade Apple news plus and iide plus so Apple has combined services that lose money with services that make money to offer a bundle that ideally should generate profits the same goes for Amazon which offers a prime bundle that combines Amazon music with prime delivery Prime video Prime gaming

6:09 and more Spotify increasing its subscription price would benefit these companies the most because it would mean that more people stop using spotify and sign up for another streaming service like apple music these new users would be more exposed to the Apple ecosystem making them a target for Apple to promote its bundles or even its Hardware like the iPhone and the MacBook as we can see decreasing costs through lowering royalty fees or increasing Revenue by charging higher prices are deeply flawed Solutions this leaves Spotify with one other possible solution expanding into new markets and this is exactly what the company is trying to do Spotify CEO recently claimed that the company is trying to become the largest audio Company spanning audio books

6:55 education Sports and news and Spotify is already taken its first steps towards this Vision the company has spent more than $1 billion to build a podcasting Empire making deals with Kim Kardashian the Obamas Prince Harry and Megan Markle and Joe Rogan part of the company's Ambitions in podcasting is to make money from its own shows and expand its advertising Revenue by selling ads across other networks and Publishers shows spotifi has invested heavily in its ad business including developing technology to insert ads via streaming which allows it to more precisely track ad Impressions and other data and creating its own ad Marketplace which allows advertisers to buy spots targeting audiences rather than on specific shows but whether this strategy

7:42 will work remains to be seen as of this writing spotify's podcasting strategy has become somewhat chaotic some of their big names have already stopped working with Spotify and when we look at the company's financials they suggest that podcasts might not have turned out to be as profitable as the company expected as we can see Spotify is in a very tough position within its industry on the one hand the powerful music record companies are eating away at their profitability and on the other hand competitors are stagnating spotify's Revenue growth and it will be interesting to see how the company navigates this fragile situation in the future