Big Music Myth #2: Spotify can’t make a profit [Chris Castle]
The common industry myth is that Spotify can’t make a profit, but its billion-dollar valuation tells another story, writes Chris Castle. He explores how the streaming giant’s revenue narrative contrasts with its cash flow reality, leaving artists and songwriters shortchanged.
In case you missed it: Big Music Myth #1: Streamers are in the music business [Chris Castle]
by Chris Castle from Music Tech Policy
There are five key assumptions that support the streamer narrative and we will look at them each in turn. I introduced assumption #1: Streamers are not in the music business, they are in the data business. That shouldn’t be a controversial thought. Today we’ll assess assumption #2–streamers like Spotify can’t make a profit.
Assumption #2: Spotify can’t make a profit.
Spotify commonly tells you that they pay 70% of their “revenue” to “the music business” in the “big pool” royalty method. The assumption they want you to make is that they pay billions and if it doesn’t trickle down to artists and songwriters, it’s not their fault.
Remember The Trichordist Streaming Price Bible? If you recall, the abysmal per-stream rates that made headlines were derived by “a mid-sized indie label with an approximately 350+ album catalog now generating over 1.5b streams annually.” Those penny rates were not the artist share, they were derived at the label level. The artist share had to be even worse. And those rates were in 2020–we’ve since had five years of the expansion of the denominator without an offsetting increase in revenues.
Streamers will avoid discussing penny rates like the plague because the rates are just so awful and paupering. They do this by gaslighting–not only artists and songwriters, but also gaslighting regulators. They will tell you that they pay billions “to the music industry” and don’t pay on a per-stream basis so nothing to see here. But they omit the fact that even if they make a lump sum payment to labels or distributors, those labels or distributors have to break down that lump sum to per stream rates in order to account to their artists. So even if the streamers don’t account on a per-stream basis, there is an implied per-stream rate that is simple to derive. Which brings us full-circle to the Streaming Price Bible no matter how they gaslight that supposed 70% revenue share.
And then there’s a remaining 30% because the “revenue” share would have to sum to 100%, right?. That’s true if you assume that the company’s actual revenue is defined the same way as the “revenue” they share with “the music business”. Is it? I think not. I think the actual revenue is higher, and perhaps much higher than the “revenue” as defined in Spotify’s licensing agreements.
Crucially, Spotify’s cash benefits exceed the “revenue” definition on which they account if you don’t ignore the stock market valuation that has made Daniel Ek a billionaire and many Spotify employees into millionaires. Spotify throws off an awful lot of cash for millionaires and billionaires for a company that can’t make a profit.
Good thing that artists and songwriters got compensated for the value their music added to Spotify’s market capitalization and the monetization of all the fans they send to Spotify, right?
Oh yeah. They don’t.
