Spotify: ‘Owning’ discovery of music will lead to improved gross margin

Spotify wants to “own music discovery”.

That ambitious mission statement was revealed today (September 17) by Paul Vogel, Spotify’s Vice President and Head of Financial Planning & Analysis, Treasury and Investor Relations, during a wide-ranging Q&A at the Goldman Sachs 28th Annual Communacopia Conference in New York.

The somewhat varied interview covered everything from the company’s podcasting strategy, to the progress of the renegotiation of its deals with the majors.

But one thing made very clear during the interview is that Spotify cares a lot about how music fans discover new music, as explained by Vogel: “One thing that doesn’t get spoken a lot, which we focus on a lot, is discovery.

“If you think about what really changed in music and where our growth [came] from… people talk about how important it is to be on Spotify playlists and Discover Weekly and those types of things. What that was really about was creating discovery and owning discovery.

“When you own discovery, you own so much of the ecosystem; you own demand generation. [And], over time, you end up owning gross margin when you own discovery and demand generation.”

“Over time, you end up owning gross margin when you own discovery and demand generation.”

Paul Vogel (pictured)

In other words, if you can become the platform that controls how and where people discover new music, you can improve your profitability.

How? Vogel didn’t say, but it’s perhaps reasonable to assume that a platform which “owns demand generation” might have increased leverage when it comes to negotiating content costs with music rightsholders in future.

Spotify is, of course, currently negotiating those very same music rights. Echoing recent comments from Spotify CEO, Daniel Ek, Vogel reiterated that two out of the four “major labels” have inked fresh global deals with Spotify. (MBW understands these two majors do not include Universal or Warner.)

Said Vogel: “This is [Spotify’s] sixth round of negotiations in 13 years, so this [process] is not new for us at all. Historically, we’ve been pretty good about understanding what the terms are going to be and we’ve been historically pretty bad about knowing exactly when they are all going to get signed and that’s the case again right now. Some go quicker, some take longer.

“This process doesn’t feel any different than it did [in the last round]. There’s always nuances in what we are looking for and what the labels are looking for.”

“In the [label] negotiations two years ago, we were able to sort of change the economic dynamic [of the company] but that’s not something we expect to happen this round.”

He added: “From an economic standpoint, we don’t expect any change to the music side of the equation [this time round]. We got much improved terms in our last round of negotiations.

“If people look at how our gross margins have expanded over the last couple of years, you will see that from the negotiations two years ago, we were able to sort of change the economic dynamic [of the company] but that’s not something we expect to happen this round.

“This round is really about enabling [Spotify’s] marketplace services. It’s working with the labels to understand what those marketplace services will be and getting [relevant] clauses into the contracts, as well as building out the non-audio side and the podcasting side as well.”

Vogel also reiterated an aspiration previously shared by Daniel Ek, that Spotify’s goal is to have 1 million artists able to live off their streams on the service.

At the end of the interview, a member of the audience questioned how close Spotify actually is to achieving that million milestone, to which Vogel responded: “We haven’t actually broken it out yet, but it’s much smaller [laughs].”

Pressed further by the audience member, Vogel went on to explain that Spotify is working on increasing the number of artists earning a comfortable living from the platform.

Said Vogel: “The issue in the music world is you have your [superstars] and they make a lot of money from the streaming services.

“And then it’s [about] how you broaden out that reach. One of the things we have talked about is the top 10% of artists – the artists that [account] for the majority of streams on Spotify – which was about 18,000 when we went public and that’s gone up to 30,000 now.

“One of the things we have been able to do is widen out the head-end of that content distribution [so]… a wider array of artists are being heard and it’s [about] continuing to do those types of things to broaden out the usage.”

Elsewhere, Vogel was also asked what labels think about Spotify’s expansion into podcasts – and specifically if they see the move as a threat to the value of music on the platform.

According to Vogel, “anything that is potentially going to dilute their share, [is] probably not what they want, no mater what it is”.

He continued: “The opportunity to grow the overall audio space, to grow the number subscribers, to grow the number of users on the platform will benefit everybody.

“The more differentiation that we have, from a product standpoint, from a content standpoint, the more engaged our users are. the more engaged users are, the longer they stay on the platform. The higher the attention the lower the churn, the more users we have, the more subs we have.

“The more users we have, the more subs we have, the better it is going to be for everyone in the ecosystem, the labels included.

“What we are building out is a platform that could service 1 billion users at some point in time. With that you have a tremendous opportunity for monetization across both music as well as podcasts.”Music Business Worldwide