Spotify – Crown jewels

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Spotify keeps the crown jewels to itself.

• In striking a deal with Universal, Spotify has traded much better than I thought it would giving the label two concessions that I think will end up being pretty worthless.
• Spotify has signed a licence with Universal that has three main aspects:
  • First: Universal artists will have the option to release their music to premium users only for two weeks before it is available to all users.
  • Second: It looks like Spotify will cut the share that pays to Universal from 55% to 52%.
  • Third: Spotify will provide Universal with the data that its music generates thereby enabling the label and its artists to gain better insights into how its music is being consumed.
• On the surface, it looks like two of these points benefit the labels but when I take into consideration how the music industry is evolving, I think the winner from this deal is Spotify.
• This is because Spotify has managed to increase its gross margins on Universal music by 300bp and has cleared one major hurdle towards its road to an IPO.
• Sony and Warner are the two remaining hurdles which, now that a precedent has been set, may be easier to overcome.
• That is what Spotify has gained from this deal but what has it given up in return?
• Not much in my opinion.
  • First: I do not think that delaying releases to the free tier for two weeks will have much, if any, impact on the appeal of the free tier.
  • I have long believed that the free tier is far more valuable to Spotify than anyone thinks that it is (see here) and I think that its desire to protect the user experience of this segment has been a major sticking point in striking a new deal with the labels.
  • Time shifting media releases is how music and films have been released for years but I think that this is changing.
  • Spotify knows what it users listen to and what they like and I think that in the future, users will be increasingly made aware of new music when the streaming services recommend them rather than when the artist or label releases them.
  • Hence, many users might not even notice a two-week delay meaning that Spotify has received something for nothing.
  • Second: Spotify is giving Universal access to its fire hose of data but I have doubts whether it will be able to make much sense of it.
  • This is because it will only have access to the data which is just a raw material.
  • To make something useful out of it, trained algorithms are required to parse that data and draw meaningful conclusions from it.
  • These algorithms are Spotify’s crown jewels and I am pretty sure that they will be staying safely under lock and key.
  • After all, they are the reason why Spotify’s service is better than Apple’s and are the key to its ability to eventually replace the labels entirely (see here).
  • Furthermore, Universal will only have access to its own data which compared to the entire catalog that Spotify has, is a small subset.
  • Hence, even if it could make sense of the data, it wont be able to draw many meaningful conclusions from it as it will be looking at an incomplete picture of user activity.
• The net result is that I think Spotify has dealt much better than I thought it would as I was concerned that the pressure to make it to IPO in 2017 would force it to give too much away to the labels (see here).
• In fact, I think that the reverse has happened putting Spotify in a good position to IPO without having to give much, if anything, away.