Spotify must watch its spending if it wants sympathy from the music biz

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MBW review-1Each week, The MBW Review gives our take on some of the biggest news stories of the previous seven days. This week, we delve further into Spotify’s 2015 financials, which showed revenues of $2.18bn but a net loss of $194m. The MBW Review is supported by FUGA.


At Napster’s piracy era height, 80m monthly users were swarming towards its platform.

It must have been particularly momentous for Sean Parker, then, to see Spotify surpass this milestone last year.

At the end of 2015, Spotify boasted 89m active users – 28m (or 31.5%) of which were paying customers.

Daniel Ek’s promise to take the scalp of illegal downloading has come good.

Yet there’s no getting away from the fact that Ek’s business now faces some harsh commercial hazards.

Nor that some of them appear to be self-inflicted.


Spotify’s global headcount reached 1,610 people in 2015 – representing a 19% year-on-year increase.

It’s not hard to make the case that this was a necessity: after all, Spotify’s paying subscriber base grew by 87% in the same period, up from 15m at the end of 2014.

No-one, least of all the major labels, can degenerate the importance of the income generated by this success.

However, Spotify’s annual salary bill hit $173m (€155.3m) in 2015, meaning its average employee was paid more than $107,000 a year.

That was 13% up on the same figure in 2014, and around 50% bigger than the last-stated average yearly wage at SoundCloud.

Add in related expenses such as social security, pensions and share-based compensation, and Spotify spent $271m (€243.4m) on personnel last year – a jump of 35% on 2014.

Gulp: that works out at an annual cost of more than $168,000 per employee.

Spotifyemployees Spotifyemployeecost


These numbers are especially notable because Spotify’s employment bill in 2015 ($271m) was significantly larger than its net loss ($194m).

Spotify told investors that this money helps “maintain Spotify’s culture as we grow”, ensuring that it doesn’t “lose the innovation, teamwork and focus that contribute crucially to our business”.

Spotifycosts

Of course, Spotify is a private company with private investors. (For the time being, anyway.)

If these investors are happy, and Daniel Ek’s happy, what right does anyone from the music biz have to question Spotify’s internal expenditure?

Especially when a back-breaking 77% of Spotify’s costs last year (see above) were allocated to getting rights-holders paid?

Well… none.

Yet.


SPOTIFY“Spotify will float. And then when they’re on the stock market and our entire business doesn’t have a hope of living without them, they’ll call up and say: ‘It’s 60% now.'”

The words of a senior US-based record business figure speaking in confidence to MBW earlier this year.

His comment was laced with a little paranoia – but logic, too.

Generally, Spotify says it ensures 70% of gross revenues make their way back to labels and artists in licensing fees.

That’s why the biggest drain on its 2015 balance sheet was ‘royalty, distribution and other costs’ – essentially payment to the music business, plus the mechanics of making it happen.

Setting the company back an eye-watering $1.83bn (€1.63bn), this category torched 84% of Spotify’s total $2.18bn revenues last year.

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On the flip side, Spotify handed over most of the $2bn paid to labels from all subscription services in 2015 – services now fast becoming the No.1 earner for the record business’s biggest players.

At some point, something is going to have to budge.

To our confidential exec’s point: if Spotify had been permitted to peg back the percentage of gross revenues it paid the music biz in 2015 from 70% to 60%, it would have saved $218m.

More than enough to make it a profitable operation.


DOUGSpotify’s recent billion-dollar funding will keep this royalty reduction conversation at bay for a while yet.

But, eventually, record labels are going to have to make a crucial call: are we willing to take a short-term downer in order to help Spotify un-break its business model?

Knowing major music companies as we do, this option will be naturally distasteful to the likes of Lucian Grainge and Doug Morris (pictured) – especially when they control the influence of equity stakes in Spotify.

You can therefore bet that Universal, Sony and others will meticulously mine Spotify’s balance sheet for  signs of problematic expenses before acquiescing to any pay cut themselves.

This may be mightily unfair, considering how many bonuses Spotify has single-handedly earned certain label execs (while fending off threats from Apple, Google and Amazon on a comparative pittance).

Yet the fact remains: to cement Spotify’s longevity after a golden period for music biz payouts, Daniel Ek may soon have some difficult explaining to do.

Spotify is bigger than Napster ever was.

But its ultimate fate is by no means secured.


Screen Shot 2016-04-04 at 13.35.51The MBW Review is supported by FUGA, the high-end technology partner for content owners and distributors. FUGA is the number one choice for some of the largest labels, management companies and distributors worldwide. With a broad array of services, its adaptable and flexible platform has been built, in conjunction with leading music partners, to provide seamless integration and meet rapidly evolving industry requirements. Learn more at www.fuga.comMusic Business Worldwide

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  • drk@dynamicrecording.com

    Open letter to CD Baby and the Music Industry:

    As you know, there is a lot of discussion regarding the fair payment

    of writers and performers of music

    that is being streamed – whether for a very small price per stream or for free.

    At Dynamic, where we have many, many recordings available on CD Baby,

    we feel that

    our income has been adversely affected by the policies in place right

    now. A look at our earnings (and therefore the earnings of CD Baby too!)

    demonstrates that through the first quarter of 2016, our revenues are

    only at 67% of the same quarter last year.

    2015 was down slightly from 2015, and I’m guessing that if we had not

    added additional titles during 2015, the difference

    may have been more significant. If this trend continues through

    2016, being down 33% in CD Baby income is not good.

    And we’re only one company on CD Baby – if other musicians, record

    companies, independent performers, etc. are seeing the

    same trend, it’s a serious loss in income to people who are not being

    compensated properly for streamed and free music.

    We believe CD Baby should unite with the others who have taken a

    stand to gain reasonable payment for artistic endeavors.

    Spotify payment to Dynamic Recording:

    63 streams – $.06 cents. This is a major rip off.

    Radio stations pay us 8.5 cents per play.

    cdBaby, iTunes, amazon all pay us well.

    Smart music buyers love the free music and do not purchase or download.

    Many top Artists have pulled there music from streaming, because their sales

    and downloads have dried up.

    Sincerely,

    Dave Kaspersin

    President

    Dynamic Recording Studio Independent Label

  • Andrew

    Erm, let us be clear: Spotify has NO business without the music. If you build your personal fortune and that of others off the back of others work with negligible input of an intellectual bent then the least you can do is to remunerate very well those who give you a business and a huge monetary fortune.

    • Kno

      You’re talking to the record label guys too, right?