Record Labels vs Spotify: Who Needs Who More?

On one side you have Spotify – an unprofitable company that needs to lower its cost of the content from three dominate players.  On the other side, you have three major music groups that increasingly rely on income from streaming.  When it comes right down to it, who – the Record Labels vs Spotify – needs who more?   

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By Zach Fuller of MIDiA Research

Following Spotify’s DPO earlier this week, much of the financial commentary around the listing emphasised the company’s loss-making status. Those familiar with Spotify’s business model know this is attributable to the sizeable fees the company pays out to rights holders—the gatekeepers to the very content that allows Spotify to exist. Try launching a streaming service without even just one of the major labels/publishers.

How to remedy this issue and reach profitability remains a topic of debate. Some believe that greater fragmentation in rights through music services disruptions (Kobalt etc.) chipping away at major label influence will change the dynamics to the point where Spotify relies less on a few key players. Others foresee Spotify taking a leaf out of Apple’s book and begin acting more like a label and/or purchase labels themselves. However, Spotify is not yet too big to fail; labels could still decide that having the streaming service operating in their territory (copyright, artist development and marketing), given its scale and data capabilities, may be too risky and pull their catalogue from the service. However, with streaming becoming a significant part of the recorded music industry’s revenue, at what point would Spotify become indispensable to their bottom line, that moves into their territory would mean they could not bring themselves to remove catalogue.

In the short-term, moving into this territory would represent a substantial risk. However, it allows the company to aggressively discuss expansion of its ad-supported offerings, which takes Spotify into radio territory as this industry holds limited influence over the company, unlike the recorded music industry.

In the short-term, moving into this territory would represent a substantial risk. However, it allows the company to aggressively discuss expansion of its ad-supported offerings, which takes Spotify into radio territory as this industry holds limited influence over the company, unlike the recorded music industry.

The eternal conflict between suppliers and retailers is not a new issue in any market. In 2015, streaming was 22% of the total recorded music market. That now nearly doubled to 42% by the end of 2017. Additionally, streaming makes up the following percentages of total recorded music revenue for each respective company below:

• 46% of WMG
• 44% of Universal
• 43% of Sony
• 37% of the Independent sector.

This would suggest the independent sector is at present more resilient to a streaming collapse than the major labels.

Distinctions in the online video vs music industry: Streaming in online video and music are often compared, and yet the landscapes they operate in are distinct. Netflix can divide and rule within the TV industry as there are so many companies; Spotify plays in an industry with three major players (WMG, Universal and Sony) controlling the majority of the market. These companies still exert considerable influence on how Spotify pays for their content. Otherwise – Spotify does not have a business.

Soft power versus hard power: Spotify in many ways has already won the war in terms of its cultural influence. Go into any major label marketing department focusing on emerging artists, and you will find the focus has changed to emphasise playlist placements over radio spots. With the passage of time, fewer artists from the pre-streaming era will be relied upon to make up the numbers via monetising an older and wealthier audience.

Spotify’s DPO is a milestone, but we have still not reached the end destination with streaming. With Facebook and YouTube expanding heavily into the ad-supported tier of the market, expect a few more twists and turns in the coming years.