If you are a music fan, you probably use a music app on your smartphone. Stockholm-based Spotify Technology SA is the world’s most popular music streaming service, ahead of iPhone maker Apple Inc’s Apple Music, e-commerce giant Amazon.com’s Amazon Music and Alphabet’s YouTube Music. Over the past month, Spotify has faced an existential threat in the form of a boycott by the musicians and artistes it needs on its platform to survive. On Feb 2, Spotify reported that while it grew its user base and revenues in the last quarter, growth is clearly slowing. Wall Street punished the music streaming firm’s stock which plunged 20% and wiped out US$4.5 billion ($6 billion) in market value. Spotify shares are down 55% from their peak a year ago.
The hammering on Wall Street comes just as the music streaming pioneer is facing an identity crisis. Is it merely a platform which distributes recorded music and podcasts, or is it a media company in disguise? Why does it not police its own content creators and stop them from spreading lies about Covid-19, vaccines, climate change and other toxic commentary? How Spotify navigates out of the current crisis will determine whether it can carve a profitable future for itself.
Spotify, listed on since 2018, has never been profitable. Europe’s only own home grown large digital tech champion, stayed well ahead of Apple in music streaming because its superior user interface appealed to a younger audience. Through slick marketing, discounted plans, lower prices in smaller markets like India, tie-ups with telcos and internet access providers, and its ability to wring concessions from music firms such as Sony, Universal Music Group and Warner Music whom it pays about half of what Apple, Amazon.com and YouTube pay for the same music, Spotify built a formidable market share lead over its rivals.
Spotify has 31% share of the global streaming market, against Apple Music’s 16% and 13% for Amazon Music. But market share statistics do not tell the whole story. Spotify has an average revenue per paid subscriber of US$4.90 a month. Apple’s average revenue per music subscriber is more than twice that much. However, Spotify also makes money from advertising, which makes up about 14% of its revenues while subscriptions account for the rest. Apple Music does not carry any ads or has a free tier.
The Covid-19 pandemic drove digital media consumption to new heights, while traditional media stagnated. American adults spent more time on smartphones accessing digital music and podcasts and less time on devices like radio and linear television as well as other traditional media like newspapers and magazines. Music streaming was a key beneficiary of the pandemic’s digital boom.
US$100 million podcast deal
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Spotify’s latest woes emanate from its forays into podcasting. In 2020, at the height of the pandemic, it purchased the exclusive rights to YouTube podcaster Joe Rogan for an eye-popping US$100 million (Spotify also has a US$25 million podcast deal with Prince Harry and Meghan Markle). The Joe Rogan Experience is now the number one podcast on Spotify’s network.
Spotify needed to diversify its revenue base away from its traditional dependence on a low-margin, commodity music streaming service to differentiated content like podcasting. That is a tried and trusted model. Video streaming giant Netflix, which started out as a DVD distributor and pivoted to streaming old movies and TV serials, lost boatloads of money until it realised that viewers were actually willing to pay for premium differentiated content. That led to a hard pivot to Netflix producing its own movies, TV serials and other original content. This year, the video streaming pioneer will spend US$19 billion on original content, up from US$17 billion last year.
Let me put this in a proper context: Film and TV production firms are forecast to spend over US$100 billion this year on new content as they rush to produce more shows and films to feed the ever-growing video streaming services, according to MoffettNathanson, a Wall Street research firm. Netflix’s monthly subscription fees have risen from US$4.99 in 2008 to US$15.49 in the US. Netflix, which carries no advertising, now has 222 million subscribers worldwide, though subscriber growth has been slowing.
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Video and music streaming are as different as chalk and cheese. Netflix can make its own movies and TV shows because movies are a team effort. Stars like Taylor Swift and Ed Sheeran, Drake and Adele would rather make their own music and put it on several distribution platforms than sign a billion dollar exclusive deal with a single streaming service. More importantly, unlike Netflix — which almost tripled its subscription fees over 12 years — Spotify has no pricing power and just cannot afford to hike its subscription fees. Moreover, music streaming is a low margin business and there isn’t enough money for anyone to make a decent profit in a crowded market. Lots of middlemen like owners of music rights and music producers take their share and there is a limit to how much people are willing to pay for music.
In 2019, a year after its listing, Spotify pivoted to podcasts as a way to differentiate its content from Apple and Amazon. It paid US$230 million to buy podcasting firm Gimlet Media and nearly US$200 million for another podcast producer The Ringer. It has since bought other smaller podcast producers. Spotify now has 3.6 million podcasts on its platform and user engagement is growing 20% year on year. It remains the number two player in podcasts behind Apple even though it leads the iPhone maker in music streaming.
So far, all the money Spotify has thrown on podcasts has not helped put it on a clear pathway to profitability. The global podcasting market was worth US$11.46 billion in 2020 and is forecast to grow at over 30% per year over the next five years. That includes all the money in the ecosystem — creating podcasts, subscriptions, distribution and advertising. At least 35% of Americans listened to at least one podcast over the past year. The podcast advertising market in North America alone was worth over US$1 billion last year and estimated to exceed US$1.3 billion this year. Analysts expect podcast advertising revenues in North America to grow 25% annually over the next five years. Both Apple and Spotify now have premium subscription-based podcasts, though most of their podcasts are free to download.
Controversial Rogan
In late December, Spotify’s star podcaster Rogan hosted a show with Dr Robert Malone, a virologist who touts himself as one of the architects of mRNA, a type of vaccine that uses a copy of a molecule called messenger RNA to produce an immune response. Malone had been banned from Twitter for promoting Covid-19 and vaccine misinformation, and had been making the rounds on conservative media like Fox News undermining the efficacy of vaccines. Among other things, he said young healthy adults did not need vaccines and was critical of masks. Rogan did not correct his guest. Indeed, he helped him fan conspiracy theories and lies. As word of Rogan’s Dec 30 podcast spread, musicians such as Neil Young, whose songs include Heart of Gold and Harvest Moon, and Joni Mitchell — who sang Amelia and A Case of You — urged Spotify to pull their music. Other musicians followed in calling for the removal of their songs from Spotify.
Who is Rogan and how did he become one of the most influential people in America? He is a former comedian who built a strong fan base and parleyed it for one of the earliest podcasts over a decade ago, getting a first-mover advantage. Long before Spotify came calling, Rogan had the biggest following in America for a podcaster. In September 2018, electric vehicle pioneer Tesla’s CEO Elon Musk famously smoked marijuana on one of his YouTube podcasts. But it is not just right-wing libertarian types or eccentric billionaires whom he has interviewed in his podcasts over the years. Left-wing Senator Bernie Sanders was on his show three years ago.
Rogan still calls himself “a comedian who is just asking questions” rather than a journalist interviewing well-known figures on his podcasts. But he is nothing if not controversial. Indeed, controversy is a key part of Brand Rogan. The more controversial he is, the more listeners he brings to the Spotify platform and the more money he and Spotify make from new subscribers and advertisers. Over the years, he has been accused of providing a megaphone for a range of right-wing figures and conspiracy theorists and spreading misinformation of all sorts, more recently on Covid-19 and vaccines.
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Rogan does not need Spotify or the mega bucks that it is paying him. As a controversial broadcaster with a huge fan base, he could join former President Donald Trump’s new social media platform Truth Social, which is expected to launch over the next few weeks, and command twice as much. Trump Media and Technology Group, which is merging with a special purpose acquisition company (spac) called Digital World Acquisition Corp. DWAC is recruiting people whose audience and reach could help relaunch Trump’s planned return to the White House. Spotify, for its part, cannot afford to lose Rogan because without him, its advertising platform just will not work.
Spotify waited nearly two weeks before it stepped in to mollify its angry users and musicians on its platform. It said that it will force podcasters to adhere to its rules. Ironically, until now, Spotify’s podcasters have been unaware that there were rules. Any company that is paying US$100 million to a podcaster, even one that claims it is a merely a platform rather than a media company, has the responsibility to fact check all its podcasters as well as their guests and reprimand anyone who claims young adults do not need vaccines or that a pandemic like Covid can be cured by taking Ivermectin, an anti-parasitic drug.
So far, none of the big music stars have spoken out against Spotify, but privately many are critical of Spotify for paying them less than other streamers. Fans are more critical of Spotify’s sound quality compared to its peers. According to one recent US poll, 19% of Spotify users say they have cancelled, or plan to cancel their subscription, over Rogan uproar though most angry customers do not normally follow through once the controversy has blown over. For its part, Spotify says it is too early to say what impact the controversy will have on subscriber renewals.
If the Rogan controversy has revealed anything, it is that Spotify’s Achilles heel are the musicians whose music it distributes and who control its fate. “We believe we have a critical role to play in supporting creator expression while balancing it with the safety of our users,” Spotify CEO Daniel Ek said recently. But Rogan’s podcasts have put the spotlight squarely on Spotify. The music streamer needs to have greater editorial oversight. That means hiring people who listen to every word that is uttered on the 3.6 million podcasts in its library before the next musician boycott begins or the next lawsuit is filed.
It also means taking responsibility for all the content that its podcasters produce. Monitoring podcasts for toxic content will cost money and distract management’s attention from the more immediate task of finding a sustainable path to profits. It will also make advertisers think twice before putting an ad on a platform that hosts podcasters like Rogan and his ilk. Spotify clearly has its work cut out.
Assif Shameen is a technology and business writer based in North America
Photo: Bloomberg
