How Spotify can survive the size of Apple, Amazon, Google & YouTube

The streaming genie is out of the bottle. There is no going to back to CD sales or downloading as the primary model for music revenue. For industry leader Spotify, whose stock has dropped from a high of $196 in July to $120, more challenges lay ahead. 

Streaming may be acceptable to celebrity artists with CD sales and negotiating leverage, and who play concerts, but not for more mainstream musicians who have difficulty securing a record deal and receive pennies per stream.

With more than 87 million current subscribers and 191 million active users, Spotify appears to be well-positioned for success. Whether or not you believe that Spotify has gone from music industry slayer to savior depends on you ask and when you look.

The service survived the wrath of Taylor Swift and has settled a class action suit brought by musicians, including Cracker frontman David Lowery, publisher of The Trichordist, for $41 million. (More on how Swift is improving fellow artists streaming compensation in a future IP CloseUp.)

But if Spotify is going to bring the music industry forward it will need to show more than the ability to add subscribers. It must be able to work collaboratively with all recording artists, despite the adverse economics of the music business, and to become profitable in the not too distant future. 

Cash Out

Spotify (NYSE: SPOT) went public in March 2018 with a much-publicized offering that did not raise capital, but enabled some insiders, including investors like Sony Music and Warner Music Group, to take cash out and for the market to broadly value its model. The company’s offering price was $132 and had traded as high as $196.28 in July, but Spotify shares are down to about $120 (as of December 17), below its IPO price, an indication that its shares may not have been as accurately priced as initially believed, or that they can expect to struggle in a bear market.

To go public, Spotify executed an unusual move called a direct listing, forgoing investment-banking underwriters and opting not to raise any money for itself at this time. In the process, Spotify showed confidence in its future and saved tens of millions of dollars in fees while still giving its employees and early investors the chance to cash out at least some of their holdings without diluting the share price.

It’s not clear that streaming – and Spotify agreeing to pay higher royalties to some for their content – will save the music industry or earn the company a profit.

The Main Stream

Spotify was the first company to make streaming mainstream, a simple alternative to both the murky Torrent digital music piracy sites and the more expensive downloads model popularized by Apple’s iTunes.

The brainchild of Swedes Daniel Ek and Martin Lorentzon, Spotify launched as a desktop application in October 2008 and quickly gained millions of users across Europe before spreading to the US.

Spotify represents hope for the patent community, where serial infringers use others’ inventions with much the same impunity that streaming services employ content

“A good example of a tech B-lister is Spotify, which appears to be winning its battle with its biggest suppliers but lives in perpetual danger of being steamrolled by a tech giant,” reported The New York Times.

Perhaps the clearest indication of the Spotify’s awkward status came from Randall Stephenson, the chief executive of AT&T. “Mr. Stephenson has been fighting to acquire Time Warner since November 2016 in an attempt to cobble together some combination of content libraries, mobile networks and advertising tech that is big enough to survive a battle with the Googles and Amazons of the world.”

This is a defining moment for Spotify and big tech. If content it to survive meaningfully, IP rights need businesses, executives and shareholders to step up and look beyond quarterly earnings.

When a $200 billion business like AT&T is jockeying for leverage against Netflix, Google, Apple, and others, how is a university start-up, independent inventor or musician going to compete?
Not easily. 

Yet to be Determined

Despite its subscriber base and public offering, Spotify is far from a financial success. Some believe that to do so it must turn against artists and song writers. That will do little more than make its competitors, especially Apple, look good. Microsoft is among the few players who are big and smart enough to acquire the streaming giant at the right price.

Like AT&T, Spotify’s ability to compete depends on how it fares against much larger, more powerful companies, some with only a passing regard for IP rights.

Leading technology businesses set the tone for how licensing is conducted and how creators are treated, and so far – as far as copyrights and patents are concerned – it has not been a very harmonious one.

Image source: spotify.com; statista.com; economist.com

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