When Spotify announced a multi-year, global licensing deal with Universal Music Group in July, the streaming platform boldly referred to UMG in an official press release as “music’s most innovative company” – a claim that raised a few eyebrows in the other two thirds of Major Label Land.
It was explained in that press release that, as part of the agreement, UMG would “deepen its leading role as an early adopter of future products and provide valuable feedback to Spotify’s development team”.
Spotify Chairman & CEO Daniel Ek said at the time that “from [UMG’s] early experimentation with Marquee, to testing new experiences like Canvas, Universal Music Group has been an important partner in helping to shape the development of our marketing tools.”
The definition of “marketing tools” here is all important. Marquee, for example, is a feature that enables labels to promote new releases via paid-for marketing pop-ups on the platform.
Spotify boasts that 20% of its users who see a Marquee ad subsequently stream the release that ad is promoting within two weeks.
It could be argued, therefore, that in the hotly-contested world of major (and large indie) labels, spending money on Spotify Marquee ads could directly help a company boost their streaming volume, and therefore, their streaming market share.
And obviously the more aggressively those labels spend, the bigger the market share gains they’re likely to see.
Conversely, it could also therefore be argued that those labels who don’t splash the cash aggressively on Spotify’s ad formats stand to lose out on market share.
Earlier this month Spotify introduced another “marketing tool” in the firm’s so-called “two-sided marketplace” strategy – ‘Discovery Mode’ – which allows record labels to flag tracks that are a particular priority for them.
This flagging then influences the selection of songs that Spotify’s algorithm picks out for listeners’ personalized Autoplay and Radio feeds.
Artists and labels aren’t required to pay anything upfront for this, but by opting in, they agree to being paid a lower recording royalty rate for streams played in those personalized sessions (in Radio and Autoplay).
Once again, by agreeing to monetarily benefit Spotify (in this case via lower royalties), labels can arguably buy their way to greater streaming volumes (so long as consumers actually like the music they’re pushing).
This all leads to an interesting comment put forth by Spotify CFO, Paul Vogel, yesterday (November 17) at the RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference.
Vogel was quizzed by RBC research analyst Mark Mahaney about Spotify’s “two-sided marketplace” strategy. Mahaney pointed out details from that UMG deal announcement, while asking “what’s preventing other labels from participating” more strongly in Spotify’s B2B marketing tools alongside Universal.
Vogel answered that “there’s nothing preventing the other labels from [participating]”. He then explained: “The fact that we explicitly called out Universal doesn’t mean we haven’t at times worked with the other labels and experimented with them as well.”
“The unique thing about Universal is that because they’re willing to lean in more aggressively, they’re in the room working with us more to help figure out which products are working and which things they really want to lean into from a product and a growth standpoint… Our hope and expectation will be that other labels, both the big ones [and] small ones will lean in more aggressively over time.”
Paul Vogel, Spotify
Vogel then added: “The unique thing about Universal is that because they’re willing to lean in more aggressively, they’re in the room working with us more to help figure out which products are working and which things they really want to lean into from a product and a growth standpoint.
“We think that the tools that we have will be additive to everyone in the ecosystem. It’ll take some time for some folks understand exactly what that means, how it can benefit them and we’ll move forward.
“So, we’re super excited that Universal has leaned in. Our hope and expectation will be that other labels, both the big ones [and] small ones will lean in more aggressively over time. And we’ve had successes both at the major labels and the independents. That’s where that one stands.”
Elsewhere in the interview, Mahaney asked Vogel about Spotify’s subscription gross margins and where he thinks they “can go long-term”.
Said Vogel: “We think about gross margins [on] a consolidated basis. As a lot of people know, the entire cost of the podcasting business, the brunt of that is impacting the advertising gross margin and not the premium gross margin.
“There’s obviously a benefit from a retention standpoint and a conversion standpoint on the premium business, even though from a financial perspective, we account for all in advertising.”
Vogel noted that on a consolidated basis, Spotify’s gross margin currently sits at somewhere around 25%.
“We’re optimistic about the two-sided marketplace and the opportunities there from a monetization standpoint and its benefit to gross margin.”
He continued: “The question is how are we going to get it higher? We have a couple of avenues to do it. Advertising growth in general is one. Both on podcasting in general where as I said earlier, the model could be a little different.
He added: “Two, advertising [in] some markets where we really are under-monetize… we actually take a little margin hit in some markets where we don’t generate enough advertising. So, just growing advertising in some of those markets would really benefit gross margin.”
He continued: “We’re optimistic about the two-sided marketplace and the opportunities there from a monetization standpoint and its benefit to gross margin.”
Vogel was also asked about how Spotify monetizes its podcast usage. He discussed how SPOT’s recent $235 million Megaphone deal will help the company better monetize podcast usage going forward.
Vogel explained that “the more podcasts grow, the more ad inventory there is to sell across podcasts. From a business perspective over the long-term, it’s a lot more fixed price content, which is great for us”.
He continued: “As we grow it, we’ll have the ability to grow advertising on top of a different type of cost structure, which is really interesting to us. It’s really about, from one side, what’s the overall bucket of cost we’re going to spend and what is the advertising revenue? That’s the obvious side.
“The second side is…what does it actually do for a user growth? What does it do for subscriber growth? How does it help with retention? How does it help with engagement? Those are all the things that we’re working to track right now, and to understand the value of each piece of content we put on the platform.”
Music Business Worldwide