The world's most popular music streaming service, Spotify, went public today. Shares were expected to start trading around $130 each, but ranges for<\/b>
\nThe world’s most popular music streaming service, Spotify, went public today. Shares were expected to start trading around $130 each, but ranges for the opening price went as high as $169, and at the time of this writing its stocks were trading at $155, making the company worth about $27.4 billion. (You could safely expect these figures to fluctuate widely over the coming hours, days, weeks and months.)
Spotify brings in almost $5 billion a year, but it pays out 79 percent of that to record labels, producers, songwriters and artists. David Pakman, a venture capitalist who has run several digital music companies including eMusic and Apple’s Music Group, says there’s just not enough left over to make a profit.
\u00ab\u00a0It’s a business that’s never made money \u2014 and I think it’s unlikely to ever make money, which is a shame because it’s an incredible service,\u00a0\u00bb Pakman tells NPR. He says the problem is that much of recorded music is controlled by just a handful of companies. \u00ab\u00a0They are at the mercy of the record labels, who are really in control of Spotify’s long-term economic success.\u00a0\u00bb
Last summer, Spotify renegotiated with the record labels in an effort to reduce what it pays in royalties. The labels agreed, provided they could keep certain albums behind paywalls and as long as Spotify met certain benchmarks.
The main point of contention with the recording industry, though, is how few Spotify users actually pay for the service. Nearly two-thirds of listeners use the free version, which is supported by ad revenue, but advertising only contributes 10 percent of Spotify’s revenue.
Richard Burgess, head of the American Association of Independent Music, says \u00ab\u00a0when you look at the revenue from the ad-supported section of the service, it pales into insignificance compared to the subscription payments.\u00a0\u00bb
In a public dispute, singer Taylor Swift pulled her music from Spotify because \u00ab\u00a0music should not be free,\u00a0\u00bb she wrote. Spotify CEO Daniel Ek told CBS that he went on a campaign to convince her to rejoin Spotify, which she eventually did.
This is the chicken-and-the-egg problem. Spotify can’t grow unless it offers a free version, but that doesn’t generate enough cash for the labels or Spotify. The record labels, on the other hand, don’t like to give away music, but very much need a music streaming service like Spotify to succeed.
Skeptics, like Pakman, call this \u00ab\u00a0an unhealthy co-dependency.\u00a0\u00bb But Burgess and others in the industry are optimistic Spotify can be profitable eventually.
\u00ab\u00a0We need to find that sweet spot, between a price that still works for the labels but that doesn’t crush the streaming services and does encourage them to grow,\u00a0\u00bb Burgess says.
For competing services like Apple Music or Amazon Music (36 million paid subscribers) or Amazon Music ( \u00ab\u00a0tens of millions\u00a0\u00bb paid subscribers), not making profit on music is okay, because they have plenty of other profitable products. Spotify doesn’t. The company has tried to branch out into video and podcasts, but the real profit might lie somewhere else \u2014 like replacing the record labels.
\u00ab\u00a0Record labels used to decide what we listened to. They would decide what songs ended up on the radio and the TV and got released when,\u00a0\u00bb Mark Mulligan, an industry analysts for the investment research firm MIDiA, says. \u00ab\u00a0All of that is changing. Spotify is dismembering the albums, if you like. Taking the best bits, cherry-picking the killer tracks, putting them onto playlists, deciding what goes where, using data to help inform those decisions. And that use of soft power is really terrifying for the record labels.\u00a0\u00bb
Spotify has invested heavily in artificial intelligence. The company says almost a third of all listening is chosen not by users but by Spotify and its algorithms. It’s a significant change that undermines the role record labels have traditionally played. However, Mulligan says the new business model opens the doors for new investments into the industry. Those doors have been shut for the last twenty years since people first started pirating music on the internet.
\u00ab\u00a0Now is the time when we find out whether the rest of the marketplace feels as confident of the music business as the music business does itself,\u00a0\u00bb Mulligan says.
It will likely take at least a few months for Spotify’s stock price to stabilize. Once it does, the major record companies will have to decide how to position themselves \u2014 and what to do with the roughly 16 percent stake they took in Spotify in exchange for more favorable licensing terms. The companies have said they will share the windfall with the artists, but there’s nothing in the standard contracts that says how much, if at all. Billboard reports that the industry is wrestling with those questions now.
Songwriters and publishers are also wondering, what about them? They have sued Spotify over miscalculations in their royalty payments. Spotify has settled one suit, but more are pending.
All of this over a company that hasn’t yet made a profit.<\/p>\n

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