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Flanking Position

Spotify, the music industry, and competition

This past Tuesday’s newsletter is a slightly uncommon one these days, in that it featured nary a Spotify mention. The aspiring all-consuming audio platform has been engaged in a healthy press release blitz lately — heavy on partnership announcements, distributed at steady pace — so I figured it’s probably prudent to take a beat on just running those incremental jams, waiting out the storm, and then revisit the headlines as a collective at some point in the future. The way I see it, at this point in the game, there’s only so much each individual announcement can tell you. (With the exception, perhaps, of the Obamas.)

But I did miss this Fortune feature from Monday, which I found fairly interesting and an opportunity to sketch out a larger picture. Though the framing of the piece is a little too fluffy for my tastes — headline: “Spotify Saved the Music Industry. Now What?” — it does contain some chewable big-picture discussion, most notably the following data point-slash-claim: “Since the year of Swift’s Spotify defection, the global recorded music industry has seen overall sales grow every year—from $14.3 billion in 2014 to $18.1 billion in 2018. That’s predominantly thanks to paid streaming, according to the International Federation of the Phonographic Industry, or IFPI.”

Anyway, the piece also offered up some useful additions to whatever mental model of the company’s position in podcasting that I’ve been building in my head. In particular, it provides an update to the fundamental problem that Spotify has long grappled with on the music streaming side, and how that presumably stands as a strong motivator informing the company’s push towards diversification in general and podcasts in specific.

To back up a bit: Spotify’s historical operating position leans heavily on the state of its royalty rates and payout stances, which in turn is dependent on the state of its oft-prickly relationship with music labels. Yeah, I know, it’s a no-duh statement, particularly if you’ve been following any of these post-Napster music streaming platforms at any point in the past few years, but that doesn’t take anything from the fact that the company, as long as it’s principally defined within the music streaming context, persists in a profoundly sticky operating situation. Sure, the broader arc of the platform-label relationship seems to have somewhat normalized out over the past few years — by which I mean, from the outside looking in, it does feel like the labels are assuming these platforms, which they do not control, are going to be around for a while, and so business is conducted accordingly — but the whole situation remains competitive in the manner of a slow burn. Any small meaningful change to the variables, and someone’s going to pounce real hard.

And as the Fortune piece illustrates, the variables are shifting around. It highlights how Spotify is currently negotiating with the labels for the next two-year deal, and how it’s doing so against the backdrop of two contextual developments: an increasingly skittish interpretation by Wall Street (as the piece notes: “with more than one analyst arguing that the company needs to lower royalty rates to justify its market value”), and increasing music streaming competition from fellow tech giants Apple and Amazon, both of which are diversified entities that can balance out their music streaming positions in ways that Spotify cannot.

Which brings us to podcast bit. Over the past calendar year, my thinking on the whole Spotify-podcast thing has generally gone along these lines: Spotify’s value narrative as a music streaming platform is fairly constrained, given the strength of the music labels and the general age/public-ness of the music streaming conversation. Podcasting — by virtue of its newness,  its inherently different economics, and its relatively under-developed public narrative — offers Spotify an opportunity to redefine its value narrative, and on a material level, it offers the company a growth pathway that’s completely separate from the fate of its talks with the music industry. (Plus, the content ownership will probably come into play at some point: Spotify being able to own its own material opens up several new pathways forward. But it is on this front, as well, where potential publisher pushback may, and perhaps should, happen, particularly as it pertains to this past Tuesday’s discussion on contracts.)

Among other things, the Fortune piece also offers up how the music industry are responding to that approach… or at least, how they’re trying to sound in response to the approach. Not surprisingly, given the competitive relationship, the response is heavy on the skepticism. Two quotes in the piece on that front:

  • “The shift to podcasting—we understand what’s going on there,” says a second music industry executive, who requested anonymity, citing his employer’s business relationship with Spotify.”
  • “Being really great at podcasting does not solve all the issues with respect to [Spotify’s] position in the music business,” the executive says. “It’s an interesting opportunity; I understand why they’re going after it. But it’s not a game-changer. The jury’s out.”

At this point in time, I’m inclined to relate: the jury’s still out, definitely, but mostly because it’s still way too early. Year One of post-acquisition Spotify Podcasting has been defined by pure potential energy: expressions of intent, partnership announcements, coalition building. But as we drift intoYear Two, we’re going to have to start seeing some numbers on the board. (Put another way: Lebron and AD looked great on paper over the summer, but now they have actually play some damn games.)

Specifically, I’ll be looking for: movements in listening activity for both Spotify-owned and third-party podcast on-platform, the differences in the splits between Spotify-owned and third-party listening, actual growth in Spotify’s overall user base — and, eventually, revenue, whether advertising-based or premium subscription-based — as a result of this service diversification, and more amorphously, the creation of “hits” in whatever squishy cultural sense you can think of.

Okay, so. Let’s take a beat, take a few steps back, and flip this around: we should start anticipating some system-wide reaction from music labels against Spotify’s flanking moves here, and the possibility that they become increasingly motivated to get their hands dirty with podcasting as well. We’re already seeing this to some extent, of course. After all, Sony Music has already formed a joint venture with Adam Davidson and Laura Mayer, and this morning it announced another similar venture with the UK-based producer Renay Richardson to form Broccoli Content.

However, individual joint ventures and collaborations are discrete instances. They tell us no more about the future of music labels and podcasts than individual Spotify partnership announcements tell us about the fate of Spotify’s podcasting gambit. In the months to come, I’ll be looking out for signs of more comprehensive system-wide strategy: something around licensing, perhaps, or distribution or marketing. A move only something music labels can pull, whatever that might be.

Other notes:

  • Don’t miss the chunk in the Fortune piece about Spotify’s push into international markets. Lots baked into that, and lots to chew on there.
  • At this point, I’d like to acknowledge that the bulk of discussions around streaming music royalty rates appear to cluster around how it impacts the top-tier of the music industry. My impression is that life is really hard for everyone else; my impression is also that it’s really hard before and after streaming platforms, though in different ways. Feel free to disabuse me of this notion.
  • There’s a question that I frequently get from certain kinds of readers: “Should I trust Spotify?” And my answer to these things are pretty much the same across the board, whether it’s Spotify or an ad sales agency, or a publisher looking to sign your show. Trust them to the extent that they’re able to actually help you, but also trust that, come crunch time, everyone will ultimately make decisions based on the structural incentives they’re situated within.

Meanwhile, I like trolling job boards for clues these days, and here are three Spotify listings that should stir your pot: a Global Head of Podcast Business Affairs based in LA; an Exclusives Lead based in LA; and, intriguingly, an Associate Director of Podcasts based in London (!).