The New York Times Just Revealed Why Spotify Will Never Be Like Netflix

Spotify: the Chained Tiger
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Why isn’t Spotify moving more aggressively into content ownership?  Wall Street is gonna hate the answer to that question.

If you want to fix Spotify’s business model, you have to fix the cost of content.  Every business has costs, but Spotify’s costs are too extreme and too variable to work sustainably.  Even with renegotiated deals with Universal and Sony.

And Wall Street doesn’t like any of it.

Of course, the costs we’re talking about are music licensing costs.  Both for the recordings and publishing behind its millions of songs.  Depending on who you talk to, Spotify pays upwards of 75% of its revenues to the major labels.  Factor in juicy, upfront advertising inventory allocations and other perks, and maybe that percentage crawls towards 80%.

Debate the exact percentages.  Factor in this or don’t factor in that.  The result is always a monstrous and variable licensing cost.

Netflix started making their own content.  And voilà!  The business started transforming.  So why isn’t Spotify starting a fourth major label, developing its own music, and lowering its average cost of music content?

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

Call it ‘Spotify Records,’ call it whatever, but it’s a sorely needed strategic direction if this streaming platform wants to spark a serious IPO (not to mention construct a long-term, sustainable business model).

Netflix isn’t dumb.  So why isn’t Spotify being smart?

Well, it turns out the reason Spotify can’t move into controlling content is because their contracts prevent it.

We thought we had the skinny on these contracts.  We’ve even published them.  But here’s a paragraph buried in a New York Times article Monday morning that revealed something huge.  The topic is ‘fake artists,’ which outside of the moral outrage, actually represents a strategic move towards more controlled content costs.

Turns out Times’ reporter Ben Sisario has been sitting on a juicy contractual stipulation this whole time.  And I quote:

“As some in the business see it, the ‘fake’ controversy could endanger future deals, although many labels, big and small, have protections in their licensing contracts that forbid Spotify from owning content or deliberately driving customers to lower-cost songs.”

Amazing!  That would be like Warner Bros. telling Netflix that they can’t own House of Cards.  Even if they paid for its development.  And not only that: they can’t drive people to stuff they’ve developed.

So Rihanna, Drake, Ed Sheeran, and ‘fake artists’ Charles Bolt all have one thing in common.  Their rights aren’t owned by Spotify, and they can never be owned by Spotify.

At least according to the New York Times.

Any questions?


18 Responses

  1. Remi Swierczek

    They are ALL on wrong track!
    Ek’s & You Tube business models endorsed by UMG morons are shrinking $300B of MUSIC GOODWILL obvious to an idiot to at the best $25B od subs and ads in 2025!

    Music is the best MERCHANDISE FOR DIGITAL MONETIZATION – p e r i o d!

    It can be locked in virtual walls and GOOGLE GORILLA is the only entity holding it from #1 position in digital revenues!

    Today music is used as a FERTILIZER on advertizing and streaming farms.

    Just imagine potato farmer using COMPOSTED strawberries & cherries for fertilizer!

    Music business is beyond INSANITY!

    • Remi Fan Club

      Thank goodness for Remi! He will save us all.

    • The REAL Remi Swierczek

      Remi, are you up past your bed time again?! Please ignore him. He is sleep typing again. All praise goes to Spotify!

      • Remi Swierczek

        Whoever you are you’re clueless about music and music business!
        Inflation adjusted 1999 = today $60B

        Obama style music business butterflies get wet together with music media on $15B music streaming and advertising COMPOST!
        Music + internet = $300B/yr in revenues – UNLESS YOU ARE OBAMA style idiot!

        • Jim

          Dude, I bet I agree with you, but most of the time you simply don’t make a lot of sense.

          The music business is doing this all wrong. Is that what you’re saying?

          I’m pretty surprised that the music business has done so little to grab money from people.

          Whoever it is that controls the rockstar, whoever can turn money in the hands of the fans into money in the pocket of the rockstar should win.

          Rockstar used to sell CDs for $15 a piece and now that same rockstar is going to say “yeah, you’re right let’s stop trying to get $15 for a fan, let’s just take what spotify is giving, maybe a half a cent per stream.”

          What no one mentions is that focusing the most on what is being streamed the most often – not on what can bring in the most actual money – means that you’re gearing the music industry around people who don’t know much, around pre teen girls who will listen to the same song over and over again.

  2. G Man

    “Amazing! That would be like Warner Bros. telling Netflix that they can’t own House of Cards.”
    I don’t think you could compare the two.

    Netflix wasn’t getting all the content they wanted so they created their own to fill the void. If all the studios were delivering the content Netflix needed they wouldn’t had to create their own.
    Spotify has all content they need from third parties and if they are not careful and start pushing their own “factory” generated music and becoming a competing record label, majors could pull their catalogues.

    • Paul Resnikoff

      For starters, Spotify doesn’t have ‘everything’. They are still missing a lot (though getting Taylor Swift’s catalog helped). But moving forward, they will be receiving far less, as labels like UMG restrict access to newer stuff (to premium only subs).

      But Spotify lacks affordable, in-demand content. They cannot build a business around content that is largely created by three companies. So, the logical step would be to make some of it themselves — but alas… that’s what this article is all about.

      • Anonymous

        And they ARE making some in both audio and video. Given the aggressiveness with which Spotify is having artists record songs within its walls and at events, it stands to reason that they pay substantially less for those songs.

    • Jim

      if the majors pull their content, where are the majors going to go?

      Does there really need to be one .com, one app that has everything and it’s super cheap? sounds good for consumers, but bad for the bands. They aren’t getting much money. Nobody wants to spend money on music any more, all of a sudden? I don’t think so. People will give money to the acts they want to give money to and the acts (or somebody else) need to figure out how to make money. And figure out the technology. I have plenty of detailed ideas on this.

      The major labels aren’t going to pull out unless they have somewhere else to go.

      The entire music industry should likely be restructured. The laws we currently have are creating dysfunction, and consolidation towards increasingly bad outcomes.

      It seems like the part of the music industry that is focused on recorded music wants to reward almost exclusively the makers of current pop hits beloved by pre teen girls who will not want to actually spend money on those acts ever. When the money is getting pushed in one direction (hit bonuses!) (NYC radio pays less per listener) you have outcomes favorable to those who the money is being pushed to. when you have people singing at open mics, they aren’t singing current top 40 hits, but the songwriters of the current hits are the ones getting paid. Money that should go to Van Morrison for Brown Eyed Girl is going instead to songwriter of Top 40 dreck that no one really likes and no one would go see live in large numbers in 5 years. But that Top 40 songwriter has money to push his next songs, through the legal bribery method. Apparently it costs $500K to push on song on Top 40, and who has that kind of money? The songwriters who have already been on the Top 40. So more and more money goes to push music that nobody really cares about, that doesn’t help live at all. But bands that people already like, who they already see live, on Top 40, and the future of live music will be strengthened. Go through all the laws, figure out what laws are creating which dysfunctions and poor outcomes, and fix the laws. It seems that the process of writing a song and recording a song has so many different parties that need to be paid, it seems quite complicated. Songwriters, publishers, labels, all the various specialty organizations that were founded maybe 100 years ago when sheet music was printed up by publishers. That doesn’t happen any more but publishers still exist. We have the internet now. These things should be streamlined. There should be a great database, a great website, a great something, where all the songs are and all the songs are linked to a songwriter and a bank account on the site. All venues should be adding the data for all the songs that are played and the number of people that are there. all radio stations report their data. youtube, spotify, all the rest, they’re putting their data in there. Songwriters and performers should probably all be paid the same for everything. There should be a baseline at least where you could negotiate up from. But it would be great if regular people can look at real time charts for everything. we have / mediabase that has that data now, pollstar has data. All the data should be right there, the money should go right to where it should go, instantaneously. Spotify has to pay the performers and the songwriters, Spotify has an account with this great all encompassing accurate music website, Spotify adds money periodically to the account, and money is deducted from the account in fractions of a cent and sent to the accounts of various performers and songwriters. A venue does the same thing. A radio station does the same thing. Perhaps it’s Spotify’s database if they can actually do a good job. You could have people paying for music in the same way that venue, radio, and streaming sites do. Prepay, and pay for what you use. the user is paying a varied amount. The songwriter gets paid the same under all conditions and the amount the performer makes varies, not to go under a certain amount. Songwriters don’t have the pull that the acts do to drive their fans to a website. People generally want to give money to performers, not songwriters. Performers have the power to get their fans to pay more for something, if they know that the money is going straight to the performer.

      If you make it known or make it a law that there’s this huge database being formed that every songwriter really needs to get right on right away, they’ll all be there on top of their songs. They’ll set up an account to take that money that will be coming in right away. I mean, all the radio money, all the venue money, all of that would be coming in through this database/website, there’s a lot of money there.

      Apparently, Spotify has a problem with mystery songwriters? Somehow they just don’t have the proper info in the database to send the money to the songwriters? Perhaps the music could remain in the database, and the information that is there is in the database, but the song couldn’t be played until the full information is obtained, enough to get the songwriter paid. An account set up, the song properly linked to a functional account, and then the song can be played. The radio can play the song with the mystery songwriter, that money can sit in the account indefinitely if no one shows up to pick it up and the same with the venues, but the song wouldn’t play without the ability to pay the songwriter.

      It really shouldn’t be difficult to create this great database.

      • Remi Swierczek

        Majors can go to 100,000 Radio stations, five million public places and seven STUPID streamers on UMG suicide binge converted to simple music stores!

        All will play brilliant music for particular audience, ad and sub free, and charge for addition to personal play list.

  3. Will Buckley

    Yes, I have a question. If true, is there a clause in the contracts with all the streaming services that prohibits them from producing their own music?

    That would explain a great deal.

  4. Cheers

    G Man has a good point about Spotify having all of the content it needs, but I would also add that Spotify IS creating content with its live recordings (SXSW, Spotify NYC, etc.) and who’s to say that it won’t continue. Plus, as more artists go direct to market, Spotify won’t have to work with labels for every artist and therefore won’t have to create its own label either. Lastly, to address the fake artist comments, these were limited to more classical music and instrumental playlists. Spotify is NOT creating bands like Matelica, Jae-Zee, and Kanye East. As usual with DMN blog posts, you have to read the comments for the real story (or lack thereof).