Playing music is part of civilized humanity.
Music is so important to us humans and has been for
thousands of years, the last 20 of which have seen an
incredible shift; online streaming music.
What started out as music piracy became an 11 billion
dollar industry, making up 56 percent of global music
industry revenues in 2019.
And one company has become the clear winner globally in
terms of paid subscribers.
Spotify is where everyone is at.
Taking on bohemoths like Apple, Amazon and Google, Spotify
has dominated the streaming music industry with about 130
million premium subscribers worldwide, despite being number
two behind Apple in the U.S., according to data from 2019.
Spotify has been on a winning streak recently with the
acquisition of Joe Rogan's incredibly popular podcast,
along with exclusive deals with Kim Kardashian and DC
Comics, all in an attempt to broaden its scope from music
streaming to audio giant.
The companies that we bought and the talent that we have
brought onto the platform will help us become the number
one audio platform in the world.
And the devastating global pandemic has also contributed to
Spotify's recent financial gains.
Boom. Look at this stock verse three two hundred for first
time and it just keeps surging.
Linear radio is moving to on demand.
We're talking about something that has billions of
consumers around the world that are now moving their
behaviors online.
Something like the Covid will likely accelerate that trend.
But Spotify had an uphill battle from music rights to
artists demanding fair pay.
This is the story of how a small Swedish startup came to
define the way we listen to music in the digital age and
what we can expect in the future.
The podcast is moving to Spotify.
The Internet has changed so many aspects of media
consumption, but few have had a more tumultuous
relationship with these changes than the music industry.
I don't believe we're talking about streaming music if it's
not for Napster and Sean and everything they did.
CDs became the standard medium in the 1990s.
At the same time, home computers were becoming more
commonplace. Many with disk drives built in, allowing users
to take their favorite CDs and rip them on to their devices
as MP3 files.
This made way for peer to peer music sharing or music
piracy through platforms like Napster and LimeWire.
If you look at Napster and of course other competitors that
followed, it really disenfranchised the industry.
Apple, having had great success with iTunes and the iPod,
decided to start selling music digitally on iTunes in 2003
as a way to charge into the music industry and combat music
piracy. It's not stealing anymore.
It's good karma. iTunes was the first legal attempt of
saying, OK, what Napster is doing is piracy and it is the
wild, wild west. How can we start to look at digital
downloads? Would people pay 99 cents for a song to be able
to have access to it?
And it succeeded.
It was all about downloads.
It's all about iTunes.
iTunes was the driving force.
It in turn, destroyed other music selling businesses,
knocking out Tower Records and almost every other music
store. This was a tough pill to swallow for the music
industry as a whole.
During the 90s, the money was still flowing.
The advances I would get, they would spend a million
dollars on the promotion of my singles.
Me. Like, someone who doesn't even write mainstream stuff.
Then the Internet put a stop to that.
The industry was so used to big margins.
To sell a CD for 20 bucks and it only cost one dollars to
manufacture. So the margins were huge.
And then go from that to OK, now albums are 9.99 at iTunes,
those margins started to depleat.
And for music lovers who wanted their music for free, radio
was still a resource they cherished.
Online radio company Pandora claimed some of that market
when it launched in 2000 and 10 years later, it had 48
million subscribers.
I remember when everyone I know was trying to tweet their
Pandora stations.
I had it on my phone all the time, was like, oh, like this
station becomes this, and it was cool.
But pirating was still an issue.
A 2007 study concluded that twelve point five billion
dollars in total output was lost in the U.S.
annually because of music piracy.
And radio was great, but users wanted to choose their
music. That left the market open for a small Swedish
company to make its way in.
We want music to be like water, everywhere.
Spotify was founded in 2006 and made its way to the U.S.
in 2011.
It started with an invite only beta program for the free
tier and quickly garnered favorable reviews.
But it faced an uphill battle to the top.
It was getting the rights.
It was convincing subscribers to get onto the platform.
These were extremely difficult times for Spotify to make
sure that they were able to nab the content, especially at
that time. One reason for the company's delayed entry into
the U.S. market was because of music rights.
It's a complicated business that costs Spotify nine point
eight billion dollars between its launch in 2018.
They made that risky bet at the time.
They're like, look. We know we're going to lose money, but
that's what we're going to need to do, if our investors
support it, for music rights, given the price, given
content. Once we acquire that content, it's the carrot and
stick approach in terms of subscribers would come.
Clearly, the company was onto something and that piqued the
curiosity of some major brands.
Now it seems every major tech player has its own music
streaming platform. Apple dropped iTunes and created Apple
Music. Amazon created Amazon Music.
Google created Google Play Music and then YouTube Music.
Jay-Z even formed his own service called Tidal, which
focused on professional sound quality.
But Spotify kept its spot at the top thanks to its freemium
model, where users can listen for free with ads or pay for
a subscription without ads.
We believe in a true free service.
We believe in something where the user knows that they can
go back month and month and month, month again and have
access to your music.
By the end of 2019, Apple Music had 60 million paid
subscribers worldwide.
Amazon Music had 55 million subscribers worldwide, nearly
all of which were paying subscribers.
Chinese company Tencent had thirty nine point nine million
paying subscribers, while Spotify had one hundred and
twenty four million paying subscribers.
It was about free going premium.
Conversion was key, and I think Spotify was really the one
that started that.
Platforms like Apple Music are more exclusionary, forcing
customers to pay after their free trial is up.
Apple even tried to kill Spotify's free version back when
Apple Music launched.
Free just makes sense for customers, which is a major
reason why Spotify is so popular today.
But free isn't so great for musicians.
The ad dollars are actually less than the premium
subscriptions. But Apple Music, Tidal, those platforms, you
get your free trial, but you have to pay.
So it's a hard pill to swallow when you're looking at your
statement saying, dang, Apple Music.
Should I focus my energy on Apple Music because this is
where the money is? Or do I still go with Spotify because
that's where the users are?
Spotify gained popularity, artists started to wonder why
they weren't seeing the financial gains they were used to
with CD sales and downloads.
Taylor Swift boycotted Spotify in 2014, pulling all of her
music off the service and saying she and other artists
weren't being paid enough for each stream.
Adele followed suit in 2015, announcing her album 25 would
not be released on Spotify or Apple Music.
The term windowing became popular, where artists would only
release an album on a certain platform or would not stream
an album at all for a certain amount of time.
So a lot of artists window the records where it wasn't on
Spotify, say, for a certain period of time but on Apple
Music. Kanye West was known for this with Tidal.
Taylor Swift and Adele both released their albums on Spotify
eventually, but it opened streaming services up to
questions about how much they were paying their artists per
stream. Spotify and Apple both don't release exactly how
much they pay distributors per stream, but it has been
reported that Spotify pays around 70 percent of the revenue
made on a stream.
I mean, people listen to my music on Spotify.
That makes me happy.
Now, I know there people aren't getting paid for that, and
that makes me sad.
But I think that that's a systemic, technological,
capitalistic, human issue.
And you have to go back 300 years and look at how a
musician was making their living for their intellectual
property in 1901.
In 2019, Spotify announced it was moving its music focus to
a more general audio focus to broaden its offerings and
widen its global lead on competitors.
It acquired the Joe Rogan Experience early in 2020 and
penned exclusive podcast deals with Kim Kardashian and DC
Comics. The company's stock jumped eight percent at the
announcement of the Joe Rogan acquisition alone.
A year ago, when I was on the show last time, I introduced
the shifts in our strategy from music to audio.
At that time, we were a very small player in audio, but
growing fast.
Now, where the number one player in more than 20 markets
around the world and quickly catching up in the markets
where we're not number one.
That's where Spotify is taking the future right now, and
analysts believe it can ride that wave for a bit.
Ninety percent of our monetization is on the subscription
side. But 10 percent is on the ad side, and we do think
that there is real growth opportunity for us in the ad
space, particularly with podcasts.
Just after these podcast deals were penned, the global
pandemic started taking its toll on the economy.
But Spotify was one of the few companies that weathered the
storm. In fact, Spotify stock increased 70 percent from the
beginning of January 2020 to the end of June 2020.
They benefited from Covid because the lockdown's forced
people to stop listening to radio and they discovered
Spotify while stuck at home.
Of course, yes. If your Spotify, you'd much rather make
money from the podcast acquisitions and that then having to
pay 60 to 70 cents for every dollar to Universal or Sony.
But in order to stay at the top, Spotify is going to have to
stay nimble and quick.
Competitors like Tencent are already adding features like
karaoke to their streaming music platforms.
Tencent, at least, is on that path from a gamification
perspective. So I do think that that is an opportunity for
Spotify to keep in mind, like, yes, it's great that you got
Joe Rogan. It's great that you've got Bill Simmons.
But look at those opportunities as well.
Even though it's a different market, I think there's a big
opportunity there. Nevertheless, Spotify is still very much
a success story.
Today, they're sitting there thinking their cappuccino
laughing as they see this success.