How to Fix Spotify’s Business Model and Save the Music Industry

A light bulb. What's the revolutionary idea that will save Spotify's business?

Wall Street doesn’t care that Spotify isn’t profitable.  They care that Spotify doesn’t have a realistic plan to become profitable.

That’s a big difference.

So how can Spotify become wildly profitable, for decades to come?

The answer is to change their relationship with the major content owners: Universal Music Group, Warner Music Group, and Sony Music Entertainment.  Those are the three major labels, and all of them are resolutely focused on their own profitability.  And drowning Spotify in debt and over-leveraged investments in the process.

That’s capitalism.  Go figure.

But what if Spotify started its own label?  Yesterday, I jokingly called this ‘Spotify Records’.  But whatever it’s called, it could become the world’s fourth major record label.  And pretty quickly, it could start attracting the world’s greatest artists, while offering the best deals in the world.

How great would these deals be?

Imagine signing the next Drake, but giving him full control over his copyrights, for life.  The major labels demand a cut of everything: recordings, publishing, touring, advertising, your first born.  Whatever your genius mind devises, they get a cut.

But Spotify wouldn’t demand any of that.

The only catch?  You have to license your music for free to Spotify, as long as they exist.  And in return, you’ll even get a cut of the streaming revenues generated on their platform.

But Apple Music’s royalties?  You get to keep those.  In fact, Spotify Records will gladly help you negotiate your royalties with Apple.  Just like the pros at Universal Music Group, Sony Music Entertainment, and Warner Music Group.

So Apple’s paying for your music, while Spotify isn’t.

Spotify Records can promote their own music, by pushing it to the top of their coveted playlists.  And they can hire the best a&r and marketing executives to build a stable of newer superstars.

Who’d you rather sign with?

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Sure, Spotify would still be saddled by the overbearing royalty rates demanded by Universal Music Group, Sony Music Group, and Warner Music Group.  But over time, their little label venture would grow to become as big as the majors.  Which means the aggregate cost of content starts to decrease.

Which also  means that over time, revenues start to grow faster than licensing costs.  And profitability becomes a real factor.

See where this is going?

But this isn’t just an idle brainstorm.  Already, the streaming giant is making moves to develop their own artists.  Josh Constine of TechCrunch found that out yesterday.  “If Spotify owns the rights to the music it streams, it’s who earns the royalty payouts,” Constine shared.  “That’s why two sources tell TechCrunch that Spotify has discussed traditional record label-style deals with artists.”

Let’s advance this scenario a few years forward, shall we?

The world has four major labels.  ‘Spotify Records’ is ranked third.  They’ve gone public, because Wall Street sees a successful plan for future profitability.

Fresh with IPO cash, the world’s biggest streaming music company decides to buy one of the other major labels.  And suddenly they have 40% label market share.  With a possibility to reach 50%.

Apple’s paying through the nose.  Tidal’s out of business.  Amazon’s too busy building a drone delivery infrastructure to focus on its music platform.  And Spotify has 400 million paying subscribers.

But now, the numbers make sense, because royalty overhead has been slashed in half.  In fact, they’re wildly profitable.

And the best part?

The artists who are signed to Spotify Records are getting something more than control over their copyrights.  They’re getting paid.  From music fans who are paying them.  No more non-payments and crooked accounting.

Netflix is making their own content.  So why can’t Spotify?  Welcome to the real future of the music industry.

You’re welcome.


16 Responses

  1. music sowaway

    Any content distribution Internet channel can do likewise.. Spotify isn’t the only kid on the block.. but sure, they do have lot’s of fans who gravitate there..

    Thing is, the recording business isn’t really like the movie or TV business..
    music is cheap to make and fast to market..

    If Spotify Records started to fill up the popular playlists with their own label content
    then it may come off as a bit of a racket and put music consumers off..

    Reply
  2. BPH

    There is no saving the music industry for two reasons:

    Recorded music is an antiquated product, there is no value to it due to oversaturation, it is easily consumed and has low value.

    You have unqualified, moronic blowhard running the show.

    Reply
    • Remi Swierczek

      Sorry but you are confused just like the top brass at the labels!

      Internet is made for music and $300B music business 2030 is a no brainer.
      Lets unite all forces and show BIG FINGER to Daniel Ek’s streaming DOPE and Google/YouTube ADS.

      Music is much bigger than digital ads and SHOULD NOT BE USED as fertilizer on streaming and advertising farms.

      Let’s FARM & HARVEST MUSIC – superb crop to ads and subs!

      Reply
  3. PaulGetYourShitTogether

    Why do you keep speaking about Wall Street when the company isn’t public, and never filled to become public anyway?

    Reply
  4. DavidB

    I haven’t checked out DMN for a while, but see that its penchant for Spotify puffery (look it up) has not diminished. ‘No more crooked accounting’. Really? From a company that domiciles itself in a country with virtually no public accounting requirements?
    ‘The only catch?  You have to license your music for free to Spotify, as long as they exist.  And in return, you’ll even get a cut of the streaming revenues generated on their platform.’ Does this even make sense? You license your music for free, but you get a cut of revenues? That’s a nice square circle you’ve got there.
    And the article seems to assume that Spotify can play the role of a record company without any of the same costs. Nice trick if you can manage it.
    The only advantage Spotify has is that as a near-monopoly supplier of streaming services it has the power to make or break artists through its ability to promote their records (or not). Why anyone should think this would be to the advantage of artists in general I can’t imagine. The nearest parallel I can think of is Simon Cowell’s SyCo, and presumably no-one would see this as a desirable model to follow.

    Reply
    • Humanity

      these were my thoughts almost exactly as I was reading this article, sentence by sentence…I thought there must be something I’m missing…some industry-insider calculation bits…guess not.

      Reply
  5. jr

    A “Spotify” “Amazon” or even “Alphabet” label in the sense that they provide a platform for artists, has been discussed by all of the above. The problem is less about distribution than promotion. The shiny instastars or crown jewels in our business will invariably belong to the folks who have the deepest pockets to promote an act to fame and $ellebrity and that will come at a price. The majors are more powerful today than ever and they have unprecedented global reach. These same labels are not stupid, they know the risks and if you read the Sony internal memo on the value associated with catalog vs new releases https://wikileaks.org/sony/emails/emailid/130395 they get it as well but have chosen to ignore long term value for short term gains. Which leaves 20 million lousy tracks that no one wants to hear, artists that have not been polished enough to be anything other than flashes in the pan and the majors who will bleed everyone dry. The only way a Spotify label can work is if they take on the actual duties of a label which requires actual investment into talent and coming from the tech world that is unlikely to happen or happen properly, kinda like Microsoft thinking they knew about making games since they knew how to make gaming consoles, that was a disaster and I think these major tech giants will not want to invest money for the long terms required to nurture an artist, not when the hedge funds need to move money daily.

    Reply
  6. the fool

    great article paul, sounds like the answer the music industry has been waiting for.
    unleash the independants.

    Reply
  7. the fool

    and great book Ari.. a massive help. thank you. got it from audible. i have been reading everything you and Paul have on the web over the past week.

    Reply
  8. Billy

    Poor research. You forget to mention that 18% of Spotify is owned by the big record labels. And, that to get the licenses to stream music Spotify (and all others) have to contractually commit that they will NOT compete with the record labels. That they will NOT start a record label. — Failed plan. Try again.

    Reply
  9. Jim

    What’s your solution? More oligopoly?

    Nope, just a better website that pays artists big, – a whole nickel!?! – and directly.

    The artists will all leave and go to the new website.

    Bands that will make more money, overall, by selling their streams directly to the consumer instead of giving them to spotify or youtube to stream, will use the new website. (Those would typically be the popular ones with fans). Those who would make more money from spotify (those with very few people willing to pay) would stay with spotify.

    The better more popular acts would be putting high value / high money content on the pay per use website, and the generic acts without high fans would fill spotify and youtube.

    Reply

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