A company that closed its first day of trading with a valuation of $27bn, making it one of the largest technology company public offerings in the history of the New York Stock Exchange. The market leader by a country mile, with more than double the number of subscribers of its nearest rival. The primary reason the recording industry is, after 14 painful years, slowly rolling into the recovery position. A miracle worker.
The frothing coverage of Spotify’s (SPOT) direct listing on Tuesday has been almost exclusively about what it means for Spotify, its employees and the assorted investors who have held their nerve despite the company racking up losses that run into the billions. But there was little talk of what it means for the musicians and songwriters increasingly reliant on the service for their income.
In short, unless they were prescient enough to invest or get shares several years ago, it will mean nothing, yet. Artists will not be paid any more than they already are, and users will continue to pay what they always paid to subscribe, or be forced to keep navigating the various listening restrictions on the free tier.
Yet within this “business as usual – but even more so” storyline is where the problems lie. There are a great many things that Spotify needs to change, row back on or recalibrate – but this direct listing is not about that. So they will not be addressed until they have to be.
As it stands, the direct listing will allow those holding shares in Spotify to sell them if they want to. These are primarily employees and investors. Unlike in an initial public offering (IPO), no new shares will be issued and so Spotify will not, for now, find itself drowning in fresh capital that it could share out among labels, publishers and artists.
If Spotify does go for a full IPO, there could be a windfall for all three major labels and the independents, via rights body Merlin, who have an equity stake in the company. They have all promised that the artists will share in the upside when the IPO happens. Back in , for example, Sony Music – in a convoluted piece of legalese – said that “net proceeds realised by Sony Music from the monetisation of equity interests… will be shared with our artists on a basis consistent with our breakage policy”. What this means is that, yes, artists will get a cut of whatever it makes – but the label stopped short of saying exactly how much. The other majors have made similarly vague promises. But because the immediate focus is on a direct listing, this is all academic anyway.
Spotify is instead looking at its growth projections. Presentation documents ahead of this listing stated that it could be closing in on 100m paying subscribers by the end of the year. The direct listing is simply another springboard to get it there, keeping Spotify as the most visible of all the streaming services, and the default name that financial analysts and the media reach for.
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Like the Amazon model, the focus at Spotify appears to be on accelerating growth at all costs, and worrying about profitability further down the line. The Amazon model was about creating a monopoly in all but name, by becoming so important for producers of everything from books to dental floss that they would have to accept the retailer’s terms and conditions. And the more powerful Amazon becomes, the more power its suppliers cede in setting dealer prices.
As it stands, Spotify pays around 70% of its revenues to rights owners – an estimated 55-60% to record labels and the remaining 10-15% to music publishers. It is unlikely to willingly increase what it pays out, so artists are not going to be paid more. If anything, given its moves in the US with regard to the $1.6bn lawsuit it is currently facing from Wixen Music over allegations of unpaid mechanical royalties, it is arguably trying to assert the case that it should be paying out less. The more the music industry centre of gravity is jolted towards Spotify, the more powerful the streaming site becomes in dictating its terms back to the music business and artists.
The only way it can theoretically pay more to labels and publishers – who then pay it to creators – is by upping the ad rates on its free tier and increasing the cost of a monthly subscription. The former risks spooking the advertisers that Spotify has always found an uphill struggle to attract, while the latter risks slowing its growth curve – one of the key metrics in determining its market valuation. The moment that growth starts to stall or plateau is the moment Spotify fears the most, so it has to prolong the upward trajectory for as long as it can.
In a letter included in the filing ahead of the direct listing, co-founder Daniel Ek said that “the old model favoured certain gatekeepers”, but this was coming to an end in a large part because of Spotify. He elaborated by saying that the way it used to work was that acts had to be signed by a label, get access to a proper studio and be lucky enough to be played on radio to break through; but now “Spotify empowers them to break through”. The reality, though, is not quite as egalitarian as he would have us believe.
Spotify is little more than an intricate and interconnected series of gates – those gates being playlists. And the biggest playlists on Spotify are, unsurprisingly, all the ones it owns and controls, pushing own-branded creations such as Who We Be, RapCaviar and Peaceful Piano while being less effusive about the many third-party playlists left to splash around in the shallow end, including those run by major labels like Universal (Digster), Warner (Topsify) and Sony (Filtr).
Record labels will talk about how fantastic and supportive Spotify is – but off the record they will bellyache about how it all threatens to become a dictatorship by stealth. If Spotify does not include your music on its own-brand curated playlists, as far as having hits is concerned, you might as well not exist. Playlists are Spotify’s world – the rest of the music industry just lives and dies by them.
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In his letter to investors, Ek explained that Spotify’s mission was to give “a million creative artists the opportunity to live off their art” as well as “billions of fans the opportunity to enjoy and be inspired by it”. Noble intentions, no doubt, but the Spotify model is one where the biggest hits and the biggest acts take the biggest share of the pot.
The top 1% enjoy the most spoils, the stretched middle can just about keep above water and the great masses at the bottom – those millions of small and niche acts – are left crossing their fingers that they will be anointed by the playlist gods. The odds of this happening are slim, and the more music Spotify adds each week to its sprawling catalogue, the slimmer they will become. If Spotify is a game of scale, as the big get bigger, so must the small get smaller.
As it roars into its direct listing, by claiming to have purged the bad old ways of yesterday’s music industry gatekeepers, Spotify is actually doing little more than strategic virtual signalling.