Spotify Has 4 Paths To Profitability, None Are Good For Labels, Artists

Spotify, which accounts for an estimated 17% of all major label revenue, has rejuvenated the music industry. But it's own revenue future is far murkier. Spotify, like its competitors, is loosing hundreds of millions each year. And while an eminent public stock listing will replenish reserves, eventually the streamer must become profitable.

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It is estimated that Spotify lost $400 million in 2016.  Ad revenue increased and royalties decreased slightly in 2017, but losses last year will still be measured in the hundreds of millions of dollars. 

How can Spotify ever become profitable?

Most analysts see only four paths forward:

1) Charge For Clout - Spotify can break artists.  What if they started charging to do it?  Sound far fetched.  Last year they began testing 'sponsored songs" on its free tier.

2) Charge For Data - Right now, Spotify offers mountains of data for free and its team are some of the best in the business at making sense of it.  Labels also use it to track activity and pick singles, Artists use it to choose where to tour. But Spotify has a lot more data available and they could start charging labels, brands and even artists for some or all of it.

3) Lower Royalties - Last year Spotify cut new deals that lowered the percentage of revenue it pays labels slightly.  But it could go down even more?  Labels could say no,  but it's also hard to imagine them letting Spotify go out of business. 

4) Become More Like A Record Label -  Industry analyst Matthew Ball told The Economist that he believes that Spotify will start cutting deals with artists where it pays an  advance but promises a percentage of streaming revenue much smaller than it pays labels.  It sounds a lot like TIDAL.  By cutting out the middleman the streamer can pay artists far more than they get now, while pay out far less than it does to the labels. 

"the ability to break artists is every label's raison d'etre"

Signing artists may not happen soon at Spotify. But with global distribution now available to everyone thanks to companies like CD Baby, Tunecore and DistoKid, the ability to break artists is every label's raison d'etre.  Spotify has the data find those 'next big things' early and the clout to help them grow. 

Spotify-as-a-label should excite some artists. But when options narrow - like they did when Top 40 and event Top 20 Radio was the only path to widespread success,  most artists suffer.

 

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