It’s a not a secret that musicians are struggling to make money from music streaming services. Recent estimates suggest that an artist needs over 3,000 plays on Spotify just to make the equivalent of the £8.72 hourly minimum wage in the UK. Meaning the hourly wage for . . . one hour. Split that between band mates and, potentially, a manager and the amount of plays required to reach this measly amount can easily slide into five figures.
It’s a problem, as we’ve covered before, that has no easy solutions. But you might not know that, reading an article published in The Week on Friday titled “The case for music.gov”. The author’s novel solution to the streaming conundrum? For America to nationalise Spotify.
Apart from the obvious — and arguably insurmountable — geopolitical ramifications of the US federal government buying and then nationalising a Swedish company for the benefit of its own citizens, the article gets in a total muddle over its core proposition: that Spotify is a monopoly, and needs to be regulated as such. Let us explain.
Here’s the key paragraph from the piece, which lays out the case:
Where to start? Well, first, there’s the problematic framing of Spotify as a “natural monopoly” because, as the author points out, it has several competitors including Amazon, Apple Music, Tidal and YouTube Premium. If it were a monopoly, you’d expect the competition — if there even were any — to be both scant and struggling.
That’s not all. In a monopolistic business where the structural interplay of the market lends itself to a dominant player, you’d expect that player to be able to leverage its position to make supernormal profits. Yet with Spotify, the opposite is true: the company has struggled to make a profit throughout its operating history.
Don’t believe us? Here’s its operating profit margin since early 2017. Yep, largely in the red (not actually literally red on this chart, but we are talking about the stuff below that grey line there):
One of the issues has been pricing — Spotify Premium still costs $9.99 per month in the US — the same price as when the service launched Stateside in 2011. At the very least, you’d expect Spotify to be able to raise prices at an above-inflation rate if it had monopolistic power. But the opposite seems to be true here.
Perhaps, you might posit, it’s making up for its generous pricing by paying its suppliers — those suffering artists — less? Again though this would be wrong. FT Alphaville has argued this point before, but it bears repeating: Spotify’s structural problem has always been that it’s overly dependent on its content providers — majors Sony, Warner and Universal, plus indie-network Merlin — for content. In 2020, according to its annual report, these four suppliers accounted for 78 per cent of all Spotify’s streams. Such dependence, of course, brings economic power to the majors. So the Swedish company simply cannot afford to squeeze these suppliers — if it did it would risk being cut off from the catalogues it needs constant access to. A recent stand-off between Spotify and K-Pop label Kakao Entertainment Corp, in which the Korean media company pulled its pop tunes from Spotify’s library, gives us a taste of how these relationships could play out if the Swedish business played hardball.
This lopsided power dynamic has expressed itself in a few ways. Of course, there’s Spotify’s gross margin, which has remained rather un-tech-like at around 25 per cent for the best part of three years, despite year-on-year revenue growth of 30 per cent over the same period. Compared with other subscription businesses like Netflix, Microsoft and Adobe, this is rather anaemic:
Then, of course, there’s Spotify’s recent pivot to becoming, in founder Daniel Ek’s words, the “world’s number one audio platform”. Since 2019, it has invested nearly $1bn in various podcasting initiatives. If Spotify were able to exercise monopoly power in music streaming, why would it explicitly pivot from its core offering? Or even bother to spending the $837m on research and development as it did in 2020? (The majority of which, according to a recent tweet by Ek, has been spent on machine learning, podcasts and creator tools.) The reason Spotify is guiding its product away from music streaming is not because it has monopoly power, but because it doesn’t.
Look, there’s little doubt that the current settlement for artists is problematic. Part of it, of course, is supply. Spotify recently revealed 60,000 songs are uploaded to the site every day, up from 40,000 two years ago. If you’re wondering how that compares to by-gone years, just 6,000 albums were released in the whole of 1985. In short: there’s never been more choice, meaning the royalty payments due to its suppliers are being spread increasingly thin.
Then there’s the way royalties are divvied up. Currently, they’re paid out as an artist’s percentage of the total number of streams, rather than relative to what each user listens to. (Ie if you only listen to Metallica on Spotify, Drake will still get some of your money.) SoundCloud recently moved to an alternative “user-centric” model, but it’s unclear if Spotify could do the same, given the current pro-rata arrangement is more favourable for large artists, and therefore its suppliers the major labels.
To suggest nationalising Spotify would in any way solve these deep structural issues is ludicrous, if you ask us. If you’re going to suggest a solution, then it helps to understand the problem.
Related Links:The MP3 and the T-Rex: Part 1 — FT AlphavilleThe MP3 and the T-Rex: Part 2 — FT Alphaville