Spotify and Ek’s Parlay (Part II)
Spotify’s experiment with direct licenses is a glass half-empty
In case you missed it, Spotify has started licensing music directly from nascent artists and their managers — without record labels’ involvement. In short order, this is the realization of the analysis I published in Part I if this series last month, which now calls for a followup.
Without further ado, here are the details from Billboard’s scoop:
“Spotify has offered advances to a number of managers and indie acts in exchange for licensing their music directly to the streaming service… management firms can receive several hundred thousand dollars as an advance fee for agreeing to license a certain number of tracks by their independent acts directly to Spotify. Then, in at least some cases, the managers and acts stand to earn 50 percent of the revenue per stream on those songs on Spotify. That’s slightly less than the 54 percent of revenue the major record labels in the U.S. get per stream, on average, according to Billboard’s calculations, but major-label artists and their managers typically receive only 20 percent to 50 percent of the label’s share, depending on an act’s individual royalty rates, and don’t usually get to own their master recordings.
“Spotify isn’t buying the copyrights that form the core of labels’ businesses, and the advances Spotify is offering are significantly smaller than the $1 million-plus sums that labels and independent distributors have been dangling lately to sign promising new acts…
“…the deals permit artists and managers to license the same works to other platforms [e.g. Apple Music, Pandora, and Amazon Prime Music] under separate agreements, while retaining full revenue from any such outside deals…
“Such direct deals could help Spotify reduce its costs…
“Spotify’s current licensing agreements with the major record labels explicitly prevent the streaming company from competing in a substantial or meaningful way with labels’ main businesses. Spotify isn’t supposed to buy catalog or musical recordings, for example… There’s some question as to what qualifies as meaningful competition. One major-label source said that Spotify signing a few no-name acts to label-type deals would likely not be considered a breach of contract, but signing an established superstar artist could be a violation…”
Sorry for the long excerpt, but everything you need to know is in there. While this could be nothing more than a trial balloon, here are the consequences were Spotify to ramp-up activity in this new business line…
Not enough cake to go around
Preexisting record labels annuitize their catalogues perpetually — a la LTV. In contrast, with this move, Spotify is just increasing its gross margins — more like simple unit economics. These are two very different objectives — exponential vs linear, amortizing vs transactional — that can theoretically coexist with one another.
However, it’s incontrovertible that record labels would eventually feel the burn of this lost revenue, given the size of Spotify’s marketshare. While it’s not exactly a zero-sum game, you can’t paper this over with a “growing the pie” argument. In other words, a dollar for Spotify isn’t necessarily a whole dollar less for a label, but Spotify won’t be able to grow the music industry enough to displace the labels’ lost revenue attributable to this direct licensing.
Throwing-away the Netflix playbook
Part of the reason for this followup article (“Part II”) is that Spotify’s move into direct licensing is generally consistent with the playbook I set-forth over the past few months, which culminated with the thesis set forth in Part I. However, crucially, in contrast to that strategic analysis, Spotify has…
- …left a lot more money on the table for labels to continue as a going concern (which was wise of Spotify to be as amicable as possible, despite ultimately usurping some of incumbents’ revenue);
- …acted a lot quicker than I thought prudent (the idea of “Ek’s parlay” was for Spotify to try and enhance the labels first, then resort to direct funding/licensing if the labels rebuffed them)
While it might not be the maximum landgrab that Spotify’s capable of, they’re still appropriating some of incumbent labels’ revenue. That’s good, right? Isn’t it better to be half-pregnant? In this case, no, no it’s not.
The point of “Ek’s parlay” (#2 above) was to at least show an effort to help labels first — rather than hurt them as an opening salvo. The way this direct licensing experiment is structured, it’s a lose-lose-lose: Spotify leaves money-on-the-table, pisses-off labels, and adds contractual complexity for artists, who now have to spend more time/money working on their business (negotiating multilateral licensing with little aggregate upside) as opposed to in their business (making music and branding).
Are you frustrated with the way you experience news and research?
Annotote is a better way for you to get informed and inform others, so we’re inviting people to help test what we’re working on.
If you’re interested, sign up here!
