Spotify Quietly Sells Two-Thirds of Its Distrokid Stake for $167 Million. Is This the End of Spotify’s ‘Disintermediation’ Dream?

DIstrokid + Spotify (Circa 2018) (Photo: Digital Music News)

DIstrokid + Spotify (Circa 2018) (Photo: Digital Music News)

It was the deal that had music distributors shaking in their boots. Now, three years later, Spotify is quietly dumping a majority of its stake in Distrokid — and ostensibly waving goodbye to its plans to ‘disintermediate’ the distribution game.

It was perhaps one of the more shocking and game-changing deals of the past few years — and that’s saying something for the music industry. As first reported by Digital Music News back in 2018, Spotify abruptly planted its flag in the distribution game with a “passive minority investment” in Distrokid. The companies had been cozy allies for years, but now, that relationship was about to become cozier.

The streaming music industry was about to change upstream and down — for distributors, streaming platforms, labels, and artists. It was all part of Spotify’s looming ‘disintermediation’ strategy that promised to revolutionize the traditional industry.

Or, maybe not.

Fast forward three years — i.e., this morning — and Spotify quietly revealed that it had dumped most of its stake in Distrokid. Buried on page 26 of its latest quarterly earnings filing with the SEC, Spotify shared the details of its divestiture.

“On October 1, 2021, the Group completed the sale of two thirds of its equity interest in DistroKid, realizing a gain of €132 million, which has been reflected as an unrealized increase in fair value as of September 30, 2021. Proceeds from the sale were €144 million.”

Distrokid isn’t publicly-traded, though its off-market value has skyrocketed recently — and that’s an understatement. Back in January of 2020, roughly one year after its initial investment, Spotify reported that its “long-term investments,” the “most significant of which is our equity investment in Kid Distro Holdings, LLC,” was valued at €16 million ($18.6 million at current conversions). That valuation surged to €29 million ($33.7 million) in just nine months, arriving at €205 million ($235.6 million) ahead of the October 1st sale.

Other things are mixed into that top-level valuation, though the valuations offer some proxy of Spotify’s Distrokid holding.

And if you think that’s meteoric, consider that Spotify’s initial acquisition price in late-2018 was probably substantially lower than the €16 million reported in early 2021. As noted above, Spotify reported a gain of €132 million, or $153 million at current exchange rates.

That’s enough to make any investor smoke a rare Cuban. But why is Distrokid worth so much these days?

The answer lies in a very heady investment in Distrokid by New York-based venture capital firm Insight Partners. That deal, which we first reported in mid-August of this year, valued the once-upstart Distrokid at $1.3 billion. Yes, the somewhat boring, backend chore of digital distribution is now a billion-dollar industry on its own — thanks to one company’s nosebleed valuation.

The splashy deal also revealed some more specifics about Distrokid’s size. At the time of the investment, Distrokid revealed a clientele of two million artists, with the company estimating “that it distributes more than a third of all new music globally.” Back in the day, Distrokid founder Phil Kaplan sent politely urgent emails to Digital Music News reminding us that his company was now head-to-head with legacy distribution stalwarts like CD Baby and Tunecore — if not ahead of them.

Fast-forward to 2021, and such emails would be akin to reminding people that “Los Angeles is actually a pretty large city.”

Clearly, Spotify invested in a winning horse. And if its strategic aims have veered from consolidated distribution and ‘disintermediation,’ then the sell-off makes imminent sense.

For starters, Spotify still needs to make money. At present, the company remains largely unprofitable with massive cash outlays for expansion. Case in point: the company recently dropped an estimated $100 million to acquire an exclusive deal with Joe Rogan, with speaks volumes on its shifted strategic direction.

Spotify’s empire has shifted course. And empires are very, very costly to build.

And with a continued competitive onslaught from the likes of Apple Music, Amazon Music Unlimited, and YouTube Music, Spotify’s divestiture makes sense if distribution isn’t the competitive wedge required to remain number one.

Perhaps the consolidated ‘distribution+platform’ play was a loser from the start. But it certainly looked menacing at the time.

Spotify was actually working on a direct-upload feature ahead of its Distrokid investment. Spotify for Artists, a platform designed to give artists more control over their songs and insights into their engagement on Spotify, was once slated to come with a special advantage: direct-upload distribution. The game-changing feature threatened to severely undercut the likes of CD Baby, Tunecore, and others by potentially offering uploads for free to the biggest streaming platform on Earth.

Spotify was also rumored to be pushing hard on disintermediation as part of a far broader strategy. According to the New York Times, Spotify was preparing to offer a bigger financial cut to certain artists alongside ownership of their recordings. The deals would also remain non-exclusive. This meant that not only would select artists and management companies receive a significant cash advance for signing with Spotify, they would also be able to license their songs on other streaming music platforms, including Apple Music and Amazon. With that sort of deal, who needs a label?

But even without a special advance, it would suddenly make less sense for artists to pay for a distribution platform when Spotify was offering the service for free. With the Spotify investment and close partnership, Distrokid’s Kaplan was about to change the music distribution game forever — potentially ‘disrupting’ the entire space by putting well-established players out of business and helping Spotify cement its lead forever.

But it never worked out like that.

By July of 2019, Spotify had abruptly shut down its direct-upload feature, giving artists 30 days to transition. The departure was as sudden as the arrival, with even less of an explanation.

But why the about-face? One possible reason is that Spotify simply isn’t the only game in town. Artists need to be everywhere to win, including the aforementioned Apple Music, Amazon Music Unlimited, and others like SoundCloud, TikTok, and YouTube. But if Spotify had enabled direct uploads via its exclusive Distrokid+Spotify pipeline peppered with exclusive deals, which was one iteration imagined, it could create problems with other platforms — not to mention competing distributors and emerging distribution+platform launches.

The repercussions were unknown — we’ll never know how things would have materialized if Spotify had soldiered on with this strategy. But a distribution war between the streaming giants sounded problematic and balkanizing — not just for artists, but for Spotify as well. Was this a war worth fighting? For artists, labels, and content owners, it seems far better to have a distributor that plays evenly with all platforms, instead of being owned by one.

There were also rumblings that Spotify was in over its head on the nuts-and-bolts of music distribution. One source relayed that Spotify was naively hoping to learn the distribution ropes in record time, something established players had more than a decade of experience refining. And learning had a steep cost, with Spotify’s employees making annual salaries in the $150,000 range.

Maybe just ‘figuring it out’ wasn’t a winning plan; it may have been a serious underestimation of the task at hand.

And for various reasons, exclusive deals surrounding recording artists never took off.

In the early days of streaming, Spotify experimented with exclusively-distributed artists (check out Spotify’s deal with Swedish EDMers Cazzette for some fun industry history). But long-term exclusives around artists — whether Ed Sheeran or an upstart indie — are mostly the exception these days.

These days, the exclusives are instead reserved for mega-podcast personalities like Joe Rogan (price tag: $100 million) and Meghan Markle and Prince Harry (price tag: $25 million). But even with heavyweights like Joe Rogan, there’s evidence that platform exclusives reduce overall audiences. For humble artists, who typically can’t attract multi-million dollar (or any) advances from streaming platforms, a Spotify-only deal may have limited upside — and could amount to career suicide on the downside.

Either way, Spotify’s disintermediation withered against a more diversified industry structure that still features multiple labels, multiple streaming platforms, plenty of IP-owning publishers, and lots of distribution options. And in that context, the sell-off of Distrokid makes perfect sense.

Ironically, artists aren’t being courted to exclusively join Spotify these days. Instead, they’re being charged for playlist promotion in a structure likened to old-school payola. But that’s another story entirely.

2 Responses