Spotify must benefit from a music revolution

Music is important to the wider economy. It was one of the first industries to be disrupted by the internet, and the first to repackage itself as all you can eat rather than all you can steal. The status quo has been the norm for some time: Napster was liquidated two decades ago, arch-nemesis Metallica embraced streaming platforms over a decade ago, and Spotify Technology SA’s subscription prices are hovered around $9.99 (around Rs 800) for years.

It is time to reflect on the potential for radical change. On the one hand, if this is game over for music, that would be a sad situation. The streaming economy is terribly uneven. It’s great for consumers and for labels and rights holders who have identified ways to live off royalties, as well as for top-listening artists like Taylor Swift and Ed Sheeran. It was less good for the musicians at the bottom of the scale.

It has also not been good for shareholders of Spotify or similar standalone music streaming platforms like Deezer SA, with fierce competition in a saturated market threatening their positioning as high-growth tech games. Platforms also have limited bargaining power with record labels and rights holders who want to maximize the value of their hit songs and star artists. Spotify has never made an annual profit; it appears to be in “perennial startup mode,” as music royalty expert Phil Bird recently put it.

With inflation and the economic slowdown eating away at growth – MIDiA Research analyst Mark Mulligan estimates that global streaming revenues in 2022 may have grown by just 7% – and with Spotify’s profits likely to be elusive for a few more years as it funnels more money into podcasts and audiobooks, what are the options for getting out of startup mode?

One is to raise prices, as Apple recently did. Music is very good value for money – paying $10 (about 800 rupees) a month is a few cents an hour. Former Spotify economist Will Page noted in 2021 that the price of a glass of Malbec wine had doubled since 2009 despite no significant improvements for consumers, while songs cost the same despite a explosion of music library depth, personalization and algorithmic curation.

Higher prices would certainly increase the overall economic pie. It could even create incentives to change the uneven way subscription fees are paid into an overall pot that favors the biggest artists, regardless of what individual subscribers choose to play.

But Spotify’s share price halving last year indicates the move is fraught with risk. No one can predict the effect of price increases on demand in a fragile economy. We are close to saturation, with platforms only being able to add subscribers by stealing from others. Spotify is up against big tech companies that view music as a loss leader, bundled with other services.

Spotify appears to be taking an alternative route, disrupting its own core product by pandering to a new kind of tech offering touted as the “Spotify machine” to investors. Co-founder Daniel Ek’s vision is to create a platform for everything audio, from music to podcasts to audiobooks. More products would lock in more users at a higher subscription price, along with increased ad revenue and more sophisticated payment algorithms and mechanisms to tie it all together. The plan has some frowning targets, including an annual revenue of $100 billion (about Rs. 8,13,780 crore) over the next decade, which would put it in the same league as Citigroup or Walmart.

Yet again, the risks are high. The story of different audio streams converging and increasing profit margins is slow to materialize; Jefferies analysts expect Spotify’s gross margins to be below 2021 levels through 2024. The podcasting bubble has also deflated, with no guarantee that Spotify’s move into spoken word will be profitable. This year. Audiobooks are like another long-term journey. The idea that these investments won’t eat away at the appetite for music is also debatable: the potential for surprises when a platform hosts both Neil Young and Joe Rogan has become apparent.

There’s something even bigger potentially on the way: artificial intelligence. ChatGPT and similar tools are already treated the same way Napster was treated by Metallica, with lawsuits and boycotts. It’s only a matter of time before AI-generated music starts to take over music platforms – you can already listen to AI-assisted music on Spotify – and the The rise of self-tuning vocals and drum loops in pop music made humans easier for machines to use. imitate.

Of all the changes on the horizon, AI could derail all sorts of long-term plans. Record labels are already accusing Spotify and others of filling their platforms with wrecks and jetsams, diluting star artists’ market share (and by extension their bargaining power) by accepting all kinds of independently distributed music. . AI-generated music, especially if it didn’t require payments to artists or labels, would disrupt the industry.

That probably wasn’t what the architects of the post-Napster revolution had in mind. This means governments and regulators will have to keep a close eye on what happens to the music industry; given that one in three music jobs have been lost during the pandemic in the UK, another wave of disruption would hurt. As Spotify kicks into high gear and techies turn to the literal Metal Machine Music, things are going to get rowdy.

© 2023 Bloomberg LP​

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