2023 in Review: Spotify
10 min read

2023 in Review: Spotify

Helloooooo, readers. The usual updates today. If you have any feedback or good academic article recommendations, hit me at pennyfractions@gmail.com. The best way to support this newsletter remains to tell friends or peers and if you’d like you can subscribe here. This newsletter isn’t my full-time job, SoundCloud is, and the subscriptions help offset the costs of using Ghost, which is a great but kind of expensive newsletter platform. With that outta the way, let’s dive into Spotify.

Spotify is a music company, despite years striving to be the world’s biggest “audio company”. This distinction isn’t overly important but when looking at it in 2023, I feel it’s important not to understate the importance of music to the firm. Before unpacking that continuous struggle, the audio question remains. Last month, Spotify announced 6% cuts following a year of slow-rolling podcast cancellations, layoffs, and multiple podcast executive departures. The accelerated rollback reveals a company, and its decision-makers, who assumed a new entertainment industry could be built and sustained with lavish headline deals and the right celebrity cosigns. Reality’s been less kind. Historically, I’ve given little credence to the company’s podcast gambit and that won’t change this today. Still, to understand Spotify’s current position it’s worth drilling into what this podcast pivot was pitched to accomplish.

Spotify’s implicit reason to pivot towards podcasts was an effort to reduce the costs paid for major label content, a longstanding issue for the company since it started achieving popularity. Daniel Ek and other executives, when put in front of a microphone won’t be so blunt, but that was an industry-understood reasoning. A cursory look at the company’s financials should raise a few questions about that logic.

In 2021, the company said podcasts made €200 million in revenue, which one would assume is primarily coming from advertising since they don’t offer a way to directly monetize the medium. That’s roughly equal to about a sixth of the company’s overall advertising revenue (€1.2 billion) and in itself represented only a seventh of the company’s subscription revenue (€8.4 billion). In 2021, podcasts represented about 2.3% of the company’s overall revenue, while operating at a loss of €103 million; Paul Vogel, Spotify’s Chief Financial Officer, expected podcast losses to continue with the silver-slinging of 2022 potentially being the worst. The business not running at a loss is always around the corner; no one is ever clear on just how many turns that may take.  

The financial outlook of podcasts on Spotify could improve over the decade but the initial billion dollars plus of investment towards production companies, advertising technology, and signing big-name talent shouldn’t inspire much confidence. The company’s initial deal for Gimlet cost over $200 million, which was at least double the company’s valuation at the time, which took a number of industry commentators by surprise. What Spotify got out of the deal was a mismanaged podcast studio whose cultural relevance had already peaked, diminishing audience interest, and more broadly an industry that was incapable of producing a major hit since the mid-2010s. Various reports stated that many of the expensive podcasts with big-name celebrities were either immediate flops, or debuted strong only to peter as audiences fled. Bill Simmons, a former ESPN columnist turned media founder, internally pushed back hard against trying to put podcasts behind the paywall, a move that would’ve undercut the advertising business for his company (The Ringer) that Spotify paid $200 million to acquire. An excellent recent story in Semafor hammered home just how lost the podcast vision was in detailing that Dawn Ostroff, who shared a Hollywood Reporter cover with Ek in late 2019, wanted a Bored Ape Yacht Club podcast, a clear bit of self-dealing as she owned one of the tacky, but expensive, NFT artworks. Misguided ventures by unserious people weren't just limited to podcasts over the last few years.

Remember Clubhouse? Hopefully, you don’t. The app promoted by Andreessen Horowitz that got a $4 billion valuation based on a collective delusion that people wanted a subpar live audio experience 24/7. Spotify jumped on the bandwagon with its purchase of Locker Room that got rebranded ‘Spotify Greenroom’, and within 24 months was quietly being shut down. The company said it was going to dive into audiobooks, a relatively small part of the overall publishing industry, and also one where you’re forced to make your purchases on the web, instead of mobile. Unsurprisingly, the company hasn’t continued to hype this up in recent months. Nearly a year ago, the company also spent over $300 million on a four-year deal with FC Barcelona, because…I guess Daniel Ek likes soccer? Even though “chief freemium business officer” Alex Norström said this about the deal: “The vision for the partnership is to create a new platform to help artists interact with Barcelona’s global community of fans.” Please someone tell me what those interactions were. Nearly everything the company proposes outside of music streaming arrives expensive, undercooked, and trend-hopping.

Spotify the Music Company

Ek’s claims to be an audio company to the press but his company’s core business remains tied to people willing to pay money for music subscriptions. Unfortunately for Spotify, it would appear that their main partners in that side of the business aren’t feeling too happy. Lucian Grainge, the CEO of Universal Music Group, wrote an open letter to the industry (well technically UMG employees but a leak quickly expanded that audience) arguing their catalog deserves to be paid more. I plan to dive deeper into that letter but what’s important for Spotify is that UMG sees an opportunity to strike its major partner. The concerns about fake streams, self-release distributors (DistroKid, CDBaby, etc.), and the overall shrinking of major market share are leading to a desire to change the current pro rata streaming model. UMG’s specific aims are still unclear but it’s easy to see how any change pushed by the label could further strain, rather than improve, Spotify’s margins.

Last year, Apple Music increased its price with a couple of others doing the same, only increasing pressure on Spotify to follow suit. An increase in costs, while pleasing nearly everyone in the music industry, won’t significantly help the company’s margins. Apple basically made the same point in their own press around the price increase, stating that excess revenue flows mostly toward rights holders. Reports continue to drip out that tease the company investing in merch, ticketing, tipping, or any way to imagine a revenue line with better margins. The lack of substantive progress in these efforts shows both an app experience, and its parent company, oriented around passive consumption with a narrow vision of how to connect to fans and artists. These efforts are all attempts to escape the bubble placed onto the company by major labels but a previous plan fell off the radar in recent years.

A story Spotify speaks less about in 2023 than it did five years ago is international expansion. There was a decent run of trade press coverage of the company’s launch into India due to conflicts with the majors but little assessment of the company’s real business prospects. The simple reason is likely that Spotify, like most streaming platforms, struggles to make advertising-based music streaming work. An oft-forgotten part of the rise of Spotify, as detailed in the book Spotify Teardown, is the company’s early success in securing telecommunication deals in Sweden, the United Kingdom, and Latin and South America. (Excluding the United States, all its strongest markets.) That, combined with the 2010s smartphone usage exploding, helped solidify the company’s position in the music streaming market. That less-credited path toward success is instructive in understanding an inverse trend where advertising funding is a much harder business to maintain.

Spotify doesn’t break down revenue by geographic region but a little reading between the lines of its financial reports, alongside its peers, could offer some insight. Roughly 90% of Spotify’s paid subscribers are in North America, South America, or Europe; while 28% of overall listeners are in what it categorizes as the “Rest of the World”. This means that not only are those subscribers paying less than other markets but they’re also by far the lowest row of paying users. So, if these users aren’t paying, then they’re free users, and a quick glance at other platforms struggling with advertising could lead us to question the viability of the business.

Last year, Gaana, an India-native streaming platform that’s fallen behind the last few years, completely removed its free tier as its parent company, Times Online, was making cuts across its business. Anghami, an Abu Dhabi-based streaming platform that went public via SPAC last year, also announced 22% layoffs in the fall and last month revealed that it received a notice of delisting from the NASDAQ after not properly releasing financial information. Combine this with an industry-wide decrease in digital advertising spending seen to hit Snapchat and YouTube, it’s surprising there isn’t more inquiry into how Spotify is doing in those markets, where subscriptions are comparatively low, ad users are high, and the market for advertising is soft. The value of global reach appears to be much harder to find, and thus no longer part of the company’s vision toward success.

Shortly after Spotify announced layoffs and its Q4 2022 results, ValueAct, an activist investor, revealed it purchased an undisclosed amount of the company. The company stock ticked upward on the news, likely due to ValueAct’s previous investments in Microsoft, Nintendo, and the New York Times where more aggressive business tactics and stock buys were implemented. However, I’m skeptical of the real impact when the press language from Spotify was almost overly gracious in welcoming the investor. As if any sudden business shift could be credited to, or blamed on, this outside force; as if Spotify’s shareholders weren’t already growing anxious about the company's loose spending. The company said it was going to spend another $3.5 billion on podcasts in the fall of 2021, an absurd number when again looking at any industry that just climbed over a billion dollars of annual revenue. Those kinds of proclamations make it easy to see why potential or current, shareholders might believe the company’s ship could be run a bit tighter.

This account of Spotify might not be too encouraging. Revenue remained connected to the hip of major label deals. Podcasts may at some point eventually not be a money pit, but that wasn’t last year, like it won’t be this year, or even next year. Again I mention that a former exec who owned a Bored Ape Yacht Club NFT wanted a Bored Ape Yacht Club podcast. The high turnover within that part of the company is unfortunate for those who have lost their jobs but it's hard to argue, based on the reporting coming from Spotify, that this Swedish music company was ever equipped to dominate a fairly niche industry. So, Spotify remains a tool of the music industry that may be even less independent in the coming years than it thought since going public. Price increases, non-music efforts scaled back, and maybe a recommitment towards parts of the music industry; the major labels got a good deal out of it.

Unheard Labor

Good news, bad news this week. Kudos Records, a London-based label and distributor announced it was becoming an employee-owned enterprise, so workers will have an increased say in the company operations and profits. Congrats to them. On Monday, musicians with the Distinguished Concerts International New York (DCINY) as part of Local 802 of the American Federation of Musicians, held a strike rally on Monday for better pay and benefits. Unfortunately last Friday, it was reported that Motown Records laid off an undisclosed number of employees, as the label is reabsorbed into Capitol Music Group.

A Note of Financialization

Critically acclaimed songwriter Tobias Jesso Jr. sold his entire publishing catalog to Hipgnosis Songs Capital, the company’s Blackstone-backed fund. Diplo sold the publishing of his label Mad Decent to Iconoclast, a relatively newer song rights hoarder that was founded by Olivier Chastan, after leaving Iconic Artist Group in 2021. The songwriter Tyler Johnson sold the publisher's share of his work to Influence Media Partners. Beyond deals, MusicBird, a Swiss song rights company, reportedly got a $100 million loan facility from Mitsubishi UFJ Financial Group to assist future catalog purchases. Cutting Edge, a firm that aims to buy up film music, raised another $100 million primarily led by Pinnacle Financial Partners. Then last, Alexi Cory Smith, a former BMG executive, raised €30 million from the London-based private equity firm Freshstream to buy catalogs and announced they already completed a couple of deals with David Gray and R3hab. While there were a number of catalog deals; there’s still quite a bit of international corporate news.

Kakao, the South Korean internet and media company bought a 9% stake ($172 million) in SM Entertainment, one of the major K-Pop labels; only a few days later Hybe, best known as the label of BTS, additionally purchased a 14.8% stake ($334 million) in SM Entertainment. These moves sparked not only concerns from current SM leadership but even South Korean regulators may look into the moves. The direction of both companies would appear to be further pulling K-Pop into their own respective IP factories, so picking a “side” in this struggle may prove fruitless. Also, not to be forgotten, Hybe America, led by Scooter Braun, paid $300 million to buy Quality Control, home of Migos, Lil Baby, and Lil Yachty. Curious to see how much western expansion Hybe America is keen to pursue.

Warner Generated $1.48BN in Calendar Q4, Down 2.7% YOY; Recorded Music Streaming Revenues Fell 2.6% YOY - Music Business Worldwide / Warner Music’s New CEO Calls Songs “Undervalued,” Charts “Next Phase of Our Evolution”- The Hollywood Reporter

Even if Lucian Grainge and UMG dominate industry headlines, I’m increasingly interested in Warner Music Group with a new CEO in charge, and the trajectory of their aggressive investments into the metaverse/web3 over the last few years. I’m still skeptical of such initiatives but even slight slippage in their core business (streaming revenue) may help contextualize such diversification.

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