The Record Label of The Future is No Label At All
Spotify’s acquisitions of Gimlet and Anchor signal ambitious plans to disintermediate the music industry.
Spotify’s announcement of Anchor and Gimlet seemed inevitable given the companies quest to dominate all things audio. In his blog post on the acquisition, Audio-First, Daniel Ek stated:
“Gimlet and Anchor will position us to become the leading platform for podcast creators around the world and the leading producer of podcasts”
Spotify has been doubling down on the podcast space long before this acquisition by signing exclusive deals with podcasts (i.e The Joe Budden Podcast, Amy Schumer’s 3 Girls, 1 Keith) and by being vocal about the increased time podcast listeners spend on the app. Looking deeper, the Gimlet and Anchor acquisition reveals Spotify’s long term strategy to own the audio supply chain (production, distribution, and optimization). Once they nail this for podcasting, Spotify can replicate this strategy for music, their core business. Spotify is using podcasts to validate their ability to use technology to disintermediate the process of producing, distributing, and optimizing music in a way that is cost effective and provides the least points of friction given their current reliance on record labels.
Spotify’s Catch 22
Spotify’s strongest value proposition is the ability to seamlessly access a huge music catologue. This convenience is made possible by Spotify navigating a very delicate relationship with the three major record labels (Universal, Sony, and Warner). The success of Spotify’s business model is predicated on its ability to maintain favorable royalty terms when streaming music. Spotify’s main bargaining chip is that music streaming has reinserted profits back into an industry whose profits have been on the decline for the last decade. In 2017, the growth of streaming was responsible for the industry’s most profitable year since 2006. The company’s recent focus on empowering artists without intermediaries strained its relationship with the major labels as speculation (and panic) grows over whether their end game is to become a record label. Its non-advantageous deals with record labels are the thorn in Spotify’s business model. As they continue to make bets in self-distribution and quicker artist payments, it is apparent they are actively working towards eliminating the middle man. Spotify’s ambitions are far larger than morphing into a tech enabled record label. The larger play is to centralize the fragmented intermediaries creating bottlenecks in the music industry and become the sole gatekeepers to talent.
Spotify’s market dominance provides no advantage as it works to increase its defensibility. Music is a commodity which forces steaming services to compete on price, exclusive content, and effective curation. Listening to a song sounds the same on Tidal as it does on Spotify as it does on Apple Music. The players that have the largest market share outside of Spotify(Apple Music and Amazon) can afford to lose money when it comes to streaming because it is not their core business. Unfortunately Spotify does not share the same luxury, accelerating their urgency to remove the all intermediaries between artists so that they capture more revenue quickly. FTo continue to grow, Spotify needs to lower the money it is paying out in royalties while simultaneously differentiating the platform to increase and retain users. The average artist signed to a record label only earns 12% of the money generated by their likeness, presenting a unique opportunity for Spotify to influence an artist’s perception of the necessity of a record label as an intermediary.
To remove artist intermediaries, Spotify needs to be able to offer a full stack solution that empowers artists to go direct to streaming while providing them with the infrastructure that they need to record and produce music. Once they master this, they can leverage their data to tackle other aspects of the music industry facing multiple bottlenecks (i.e touring).
The challenge for Spotify is deciding how to navigate their long term goal of decreasing record label payouts without affecting their bottom line in the short term. Podcasts are the perfect adjacent medium to master recording (Anchor) and production (Gimlet) without appearing overly aggressive to record labels, a move that could spark labels to negotiate larger payouts. Using the guise of podcasting, Spotify can iterate on how to build a comprehensive music creation and product platform for artists laying down the initial infrastructure for their long term play. Once ready, they can build out everything in house or replicate the playbook more swiftly through acquisitions. The best part is if that if Spotify decides to reconsider their long term play, their acquisitions in the space still strategically position them to become a more competitive streaming platform.
The most interesting market shift that will play in Spotify’s favor as they double down on podcasts is the evolution of fandom. Thanks to social media, artist saturation and the increased desire to feel connected to an artist, the concept of a “fan” has drastically changed. Artists are not just evaluated on the basis of their music but holistically with everything from their personal lives (who they’re married to), business dealings (checks over stripes), and political stances (bizarre visits to the White House) being taken into account when deciding whether or not to stream music. A dedicated fan is a tool in an artists arsenal , which has completely changed how music is consumed. The average U.S consumer spends more money annually on music than they ever did in the past and as a result they are financially empowered to positively or negatively affect an artist’s bottom line. Spotify has acknowledged this growing shift in consumer behavior by announcing that they will be adding a feature for users to be able to block and mute artists.
As artists deal with increased pressure to control their narrative and directly connect with their fans the popularity of podcasts as a medium let them do so on their own terms. In the last year we have seen an emergence of artists producing their own shows in order to control how they interact with their fans (i.e Nicki Minaj — Queen Radio and Drake — OVOSound). Spotify listed the success of The Joe Budden Podcast in their 10K the same quarter that Pusha T went on the show to address his grievances with Drake. Spotify is perfectly poised to benefit from the artist upside of an entertaining or controversial podcast, increased streams of their music.
Never Split the Difference
How record labels maneuver Spotify’s increasing dominance in podcasting will forecast the nature of their relationship moving forward. Whether they like it or not, both sides need to acknowledge their symbiotic relationship as they figure out how to innovate their current offerings for artists and consumers. Record labels can approach this with the glass half full by viewing this additional distribution medium as advantageous when shaping their ever evolving artist marketing strategy. Labels can work with artists to develop their own podcasts around topics of interest which would pay dividends in increased fan loyalty, artist likeness, and maintaining relevance. Utilizing methods like this would help decrease record labels reliance on radio which continues to remain a powerful intermediary. Alternatively, labels can view this with the glass half empty by looking at podcasting as a medium that can add increased volatility to their already vulnerable investment (artist).These are valid concerns for labels as cancel culture has encouraged potential listeners to weaponize their influence against any artist they deem should be “cancelled”.
Spotify’s success would revolutionize how artists create, distribute, and optimize their art. An artist could use Spotify’s studios to record and mix songs and then distribute using Distrokid (Spotify already owns a minority stake) on all of the major streaming platforms at once. The artist could then study the data provided by Spotify for Artists to learn more about their listeners and shape a strategy to acquire “1,000” true fans. By having a better understanding of their fan base, the artist could offer adjacent content relevant to their fans, i.e Lil Yachty having a podcast on gaming. The artist could consistently interact with their current fans and gain new ones without saturating the market simply to stay relevant. As the artist grows in popularity and begins to get courted by record labels, Spotify could remove the financial pressure that faces most artist when choosing to sign to a record label, the cash advance. By replacing the advance that record labels tempt artists with they could alleviate the financial distress that plagues many artists at the time of negotiations. Using the streaming history collected on the artist they coud develop a formula to determine how much they could offer an artist as an advance (I’m looking at you Stripe). Artists still get to keep their masters and gain a reliable stream of income and Spotify can pay out a lower royalty rate because they have removed the intermediary.
Spotify will emerge stronger the next time it negotiates with labels by being able to point to increased user listening time, a growing global presence as they enter more emerging markets, and their continued dominance in music streaming. To shape their long term strategy, they can use this favorable position to make riskier more aggressive bets until they ultimately embrace being a full stack platform for the creation, production, and distribution of audio with a core focus on business. With record labels being reliant on the platform to distribute their product and sizably contribute to their revenue they will have no choice but to let it happen. Only time will tell if these acquisitions will be the beginning of the end for traditional record labels.
“When labels ask me to sign tell them my name don’t exist.” — Noname