That seems ok, but here’s where it all goes down hill
This all sounds amazing, right? Any other SaaS company would kill for those kind of unit economics. Yet, even though Spotify is estimated to balloon to almost a billion dollars in revenue this year, they face two seemingly insurmountable problems: the music industry and our generation's perception of music.
Imagine the Government Levying a 70% Tax on Every Dollar You Made
Spotify is being absolutely crushed by an entertainment industry who’s grasping at every tenth of a percent they can get for the 1% of artists that actually “make it.” Sure, the Internet is democratizing music distribution, but when you mix in the negotiating reality of the major entertainment labels and the RIAA, one of America’s most powerful lobbying groups, you have an in industry that’s crumbling at a glacial pace in the context of a tech company growing at a breakneck speed. Something’s gotta give, and I doubt it’ll be LA Reid, Metallica, and their friends.
Sounds melodramatic? Well let’s look at some numbers and see the major issue of how cash is divided in streaming music. Spotify’s cost structure is absolutely insane, because 70% of every dollar goes to rights holders, leaving 30% for Spotify’s operations and expenses, clearly leaving nothing for profit. Spotify got into this mess because they negotiated with the big three labels (Sony, Universal, and Warner) for use of their entire catalogs, which was great for avoiding per song costs and users could access all the music in the world, but awful because for this access Spotify agreed to fork over $200 million or 75% of their total revenue - whichever is greater.
This means if Spotify does make $1 billion this year, $750 million will go to the big three (tweet this). Sure, Spotify is trying to renegotiate this deal, but as we explained above, the traditional music industry is crumbling, so why would these labels ever compromise to the point that they aren’t taking a crippling chunk.
We’re the only generation that won’t pay for music
To make matters worse, we are the only generation that refuses to pay market value for music. The pre-digital generation sat entrenched in the age of vinyl, cassettes, and compact discs. The generation after us is so accustomed to digital currency and goods that Apple and company has little to do, but just keep the cash cow going with the music industry’s help.
That leaves us. The generation that came of age in the peer to peer connections of file sharing. Napster was our Moses and bittorrent our wildfire. It’s not that we think artists shouldn't be paid, but a penchant for choice and openness, plus a resentment of a Metallica lead witchhunt against thrifty teens and soccer moms, left a taste in our mouth that no amount of sugary, sweet pop can cure.
Hope came swiftly upon our rhythm horizons with services like Pandora, Grooveshark, and Spotify that gave us access to Petabytes full of any lyric we ever wanted to hear - all for a measly couple of bucks a month.
Not to hit you over the head with this, but let’s make this cyrstal clear: You have access to basically every song ever recorded for free (with occasional ads) or for less than $10/month (tweet this). All the music for basically nothing. All music. Basically for free.
Spotify’s business model needs to change.