OK, you’re going to have to bear with me on this one, but let me take you back to 2nd century Rome….
The Roman Empire was at the peak of its powers. Its borders stretched from Scotland down to Syria and across to Armenia, and across its dominions Rome spread its culture, language, administration and of course, military prowess. It brought innovations such as under floor heating, running water, astronomy and brain surgery but the consensus among many modern day historians is that the Roman Empire could have been much more. Rome was fundamentally a military, expansionist state. Its endless conquests produced a steady flow of captured people that fuelled Rome’s most important economic interest: the slave trade. By the mid 2nd century around 1 in 4 Romans were slaves. It was common for wealthy citizens to have 40 or more household slaves while the super-rich had hundreds.
The Importance Of Economic Surplus
The problem was that the over-supply of labour meant that wages were horrifically low for the masses while the rich over spent on slaves to keep up with the neighbours. The net result is that the Roman Empire was not able to create an economic surplus across its population, which meant that there was insufficient investment in learning, science and culture. If that surplus had been created, Rome would have spawned a generation of innovators, inventors and entrepreneurs that should have created an industrial revolution. This raises the tantalizing possibility of steam power and steel emerging before the middle ages, which in turn could have meant that today’s technology revolution might have happened hundreds of years ago by now.
Instead, the Roman Empire eventually crumbled with Europe forgetting most of Rome’s innovations, paved roads weeding over, aqueducts running dry and heated floors crumbling. We had to wait until the second half of the 18th century for the Industrial Revolution for the change, which crucially followed and overlapped with the Age of Enlightenment, a period of learning unprecedented since the Renaissance (when everyone busied themselves relearning Rome’s lost secrets) which was fuelled by Europe’s economies have developed sufficiently to create enough surplus for more than just the aristocracy to learn, invent and create.
So, Rome inadvertently held back human progress by half a millennium because of its obsession with slaves. But what does that mean for Spotify? The key lesson from the Roman experience is that being saddled with too large a cost base may not prevent you from becoming big but it will hold you back from fulfilling your potential and from building something truly lasting. You can probably tell now where I am heading with this. Spotify’s 70% rights cost base is Rome’s 1 in 4 are slaves.
Product Innovation Where Are You?
Spotify has made immense progress but it and the overall market have done too little to innovate product and user experience. There’s been business and commercial innovation for sure but looking back at the streaming market as a whole over the last 5 years, other than making playlists better through smart use of data and curation teams, where is the dial-moving innovation? Where are the new products and features that can change the entire focus of the market. Compare and contrast how much the likes of Google, Facebook and Amazon have changed their businesses and product offerings over that period. Streaming just got better playlists. Musical.ly shouldn’t have been a standalone company, it should have been a feature coming out of Spotify’s Stockholm engineering team. But instead of being able to think about streaming simply as an engine, Spotify has had to marshal its modest operating margins around ‘sustaining’ product development and marketing / customer acquisition.
Spotify will likely go public sometime next year as a consequence. But once public it will need to be delivering demonstrable progress towards profit with each and every quarterly SEC filing. Growth alone won’t cut it. Just ask Snap Inc. Spotify does not have a silver bullet but it does have a number of different switches it can flick that will each contribute percentages to net margin and that collectively can help Spotify become commercially viable and in turn enable it to invest in the product and experience innovation that the streaming sector so crucially lacks. Spotify hasn’t done these yet because most will antagonize rights partners but it will be left with little option.
Spotify The Music Company
To say that Spotify will become a label is too narrow a definition of what Spotify would become. Instead it would be a next generation music company, encompassing master rights, publishing, A+R, discovery, promotion, fan engagement and data, lots of data. If Spotify can get a couple of good quarters under its belt post-listing, and maintain a high stock price then it could go on an acquisition spree, acquiring assets for a combination of cash and stock. And the bigger and bolder the acquisition the more the stock price will rise, giving Spotify yet more ability to acquire. This is the model Yahoo used in the 2000s, with apparently over-priced acquisitions being so big as to impress Wall Street enough to ensure that the increase in market cap (ie the value of its shares) was greater than the purchase price. Spotify could use this tactic to acquire, for example, Kobalt, Believe Digital and Soundcloud to create an end-to-end, data-driven discovery, consumption and rights exploitation music power house.
What other ‘label’ could offer artists the end-to-end ability to be discovered, have your audience brought to you, promoted on the best playlists, given control of your rights and be provided with the most comprehensive data toolkit available in music? And of course, by acquiring a portion of the rights of its creators though not all (that’s where Kobalt / AWAL comes in) Spotify will be able to amortize some of its content costs like Netflix does, thus adding crucial percentages to its net margin. It will also be able to do Netflix’s other trick, namely using its algorithms to over index its own content, again adding crucial percentages to its margin.
Streaming Is The Engine Not The Vehicle
The way to think about Spotify right now, and indeed streaming as a whole, is that we have built a great engine. But that’s it. We do not have the car. Streaming is not a product, it is a technology for getting music onto our devices and it is a proto-business model. While rights holders can point to areas where Spotify is arguably over spending, fixing those will not be enough on their own, they need to accompany bolder change. Once that change comes Spotify can start to fulfil its potential, to become the butterfly that is currently locked in its cocoon. While rights holders we be understandably anxious and may even cry foul, they have to shoulder much of the blame. Spotify simply doesn’t have anywhere else to go. Unless of course it wants to end up like Rome did….overrun by barbarians, or whatever the music industry equivalent is…
Just send Daniel Ek to mandatory apprenticeship at Alma Ata bazaar.
To be less harsh we can do jus 60 days at 12 hours a day at randomly chosen stand at Istanbul Grand Bazaar.
Common sense is over due in music anti business commotions originated and endorsed by UMG team.
Have you not considered the opposite- that Rome is a triumvirate of majors actually and Spotify one of the slaves? 😉
Perhaps Spotify hasn’t invested in rights since:
1/ 100pct of its margin must go in customer growth for the next 5 years
2/ it solves little since back catalogues for sale are a fraction of what’s listened and therefor of Spotify’s costs
3/ Spotify’s contract with labels might actually prevent it. If not they may simply lose acces to the majors’ catalogue and therefore, which then means Spotify out of business. You’d say that majors lose Spotify sales? Perhaps for 1-3minths, ie the time that Spotify’s base migrate to Apple or Deezer. There’s probably nothing better to expect for Apple or Deezer than a Spotify move into content..
Finally, you might considet that Spotify is not just a pure loss-making business because of the rights. Adjust for their high customer acquisition costs which are exceptional due to the nascent market by nature.
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Side-note, the Roman aqueducts used lead in their aqueducts, possibly causing widespread lead poisoning and societal degeneration caused by the illness’ acute mental effects
Your piece is well-written (kudos!). I found myself shaking my head throughout.
You see, I think many people have a misplaced focus regarding Spotify…
Most folks I’ve read on the subject are much as yourself, speaking to the fiduciary component of Spotify and its potential IPO, direct listing, etc.
And I believe you’re right about Spotify pivoting into being more hands-on with artists’ careers, not to a “record label” extent, but being important in their development.
While the major artists are complaining about their cheese being moved, independent artists are gaining immense traction, especially those who are students of today’s music business.
Where you write about a lack of innovation, I look at Spotify’s innovation from an artist’s perspective:
1. Spotify works with artists to secure their own personal artist pages.
2. Spotify responds to and corresponds with artists in a timely basis (many emails are answered within the hour), considering the number of artists connected to the platform.
3. Spotify directs artists to the best ways to grow their Spotify fanbase.
4. Spotify recently released an app for artists which provides data and analytics.
And all of these things are free of charge.
They needed the record labels to become partners for their catalogs, the “cover songs” that satiate the masses.
But here and there, they insert an original or two, to see what people think. What resonates gets moved up the ladder to a playlist, and one day, maybe, it breaks into the mainstream consciousness, and the next thing you know, that original is the song everyone is singing at Bonnaroo.
Spotify is the new radio. And they are working to empower artists and put them back in control.
Where we belong.
I don’t understand the Roman comparison. Mark Mulligan seems to be arguing that the Roman economy failed because it depended on slaves, and slaves were too expensive, so the economy was ‘saddled with too large a cost base’. Really? This implies that using slaves was more expensive than hiring free labour. This is highly unlikely. It is more common to see the opposite argument, that the Romans failed to develop industrial technology because slave labour was so cheap. A similar argument is used in the case of China and Japan in the early modern period, when the availability of abundant cheap peasant labour (not strictly slave labour, but not far short of it) meant there was no incentive to develop mechanisation, as there was in the West. I’m not personally convinced by any of these single-factor explanations.
As for Spotify, their biggest problem is that under their present business model they are largely an advertising company (since on the free tier their customers are the advertisers, not the listeners), and all advertising companies are competing with Google and Facebook. Good luck with that!
I had to seriously modify my own approach to my local music participation due to technological advances. I believe these new services make more elements of the music industry more accessible to young people who are tech-savvy. But could or have these advances created obstacles for seasoned artists? I think, probably. The good thing is, I have found that the prices of hiring web design help are getting better. For help online and via phone are about $400-500 once then $20 per month after that or for hosting through a local webmaster, the range is about $400/500 &/or $70/month for hosting and personal site help.
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