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When Bloomberg reported that Spotify would be upping the cost of its premium subscription from $9.99 to $10.99, and including 15 hours of audiobooks per month in the U.S., the change sounded like a win for songwriters and publishers. Higher subscription prices typically equate to a bump in U.S. mechanical royalties — but not this time.
By adding audiobooks into Spotify’s premium tier, the streaming service now claims it qualifies to pay a discounted “bundle” rate to songwriters for premium streams, given Spotify now has to pay licensing for both books and music from the same price tag — which will only be a dollar higher than when music was the only premium offering. Additionally, Spotify will reclassify its duo and family subscription plans as bundles as well.
To determine how great this loss in royalty value would be for the music business, Billboard calculated that songwriters and publishers will earn an estimated $150 million less in U.S. mechanical royalties from premium, duo and family plans for the first 12 months that this is in effect, compared to what they would have earned if these three subscriptions were never bundled. Notably, this change will not impact Spotify’s premium, duo or family pay outs for the first two months of 2024. Bundling kicks in starting in March, so this number refers to losses for the first 12 months after premium, family and duo is qualified as a bundle, not the calendar year of 2024.
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Billboard’s figure was calculated by determining how Spotify’s service revenue, payments to labels, performance royalty rates, and other factors that impact mechanical income are expected to rise each month throughout 2024. These 2024 projections are based on actual numbers pulled from the Mechanical Licensing Collective’s Spotify rate sheets for 2023. For premium specifically, the streamer will pay an estimated $100 million less in the first 12 months bundling is in effect, in comparison to what Spotify was projected to pay in the next 12 months had it never been reclassified.
To be more conservative with the premium-only estimate, if the lost royalty value was calculated purely based on actual 2023 numbers from the MLC, the losses would be around $80 million for the first 12 months, but given all of Spotify’s music service revenue grew by an average of 1.1% every month in 2023, according to Billboard’s calculations, $80 million is almost certainly a low-ball. (A representative for Spotify declined Billboard’s request for comment).
As Spotify grows, the chasm between what payments would have been to songwriters and publishers if premium was counted as a regular standalone service versus what it will be paid now as a bundle with books is expected to increase. According to Spotify’s latest earnings call, the company is growing steadily, up 14% year-over-year for premium subscribers and 20% year-over-year for premium revenue globally.
The lost royalty value for songwriters and publishers could become even larger if Spotify ups the cost of premium to $11.99, which a source close to the matter thinks is possible. It is also possible that this loss could be lessened by how many users change their subscription from premium, duo and family to Spotify’s forthcoming music-only tier, which will pay out in the way that premium did before it was bundled, but this is unlikely to make a significant impact in the estimate of first year losses, considering the tier has yet to be launched and users are automatically renewed on their current plans, even after bundling.
Given there are some unknowns still present, estimates range for lost mechanical royalty value for the first year. One source close to the matter agrees with Billboard’s estimate, also independently calculating that the lost royalty value will total at $150 million in U.S. mechanical royalties for premium, duo and family. Another source calculated somewhere between $140-150 million. A third source says their personal estimate totaled at around $120-130 million at minimum.
This change only impacts the United States, but there are fears that Spotify’s reclassification will have a domino effect worldwide, given other major markets like Australia, Canada, Ireland, U.K. and New Zealand also have audiobooks now included in Spotify premium. Roberto Neri, CEO of the U.K.-based songwriting organization The Ivors Academy told Billboard that “if Spotify gets away with this in the U.S., they will no doubt use it in their future negotiations with European, [Asian-Pacific] and other territories,” and that “what happens in one territory can impact others.”
The National Music Publishers’ Association, which represents U.S. music publishers, said that it would be “looking at all options” to fight back against Spotify’s changes to premium when it was first announced in March, and now that the fight between TikTok and UMG has concluded, it has turned its “full attention” to this issue.
“It appears Spotify has returned to attacking the very songwriters who make its business possible,” said David Israelite, the NMPA’s president and CEO, when the change to premium was first announced. “Spotify’s attempt to radically reduce songwriter payments by reclassifying their music service as an audiobook bundle is a cynical, and potentially unlawful, move that ends our period of relative peace. We will not stand for their perversion of the settlement we agreed upon in 2022.”
Phonorecords IV Settlement
So, how did we get here? It all goes back to the Copyright Royalty Board (CRB), the slate of judges that set the rates for U.S. streaming mechanicals, based on weighing the business interests of publishers, songwriters and services. Unlike the sound recording side of the music business, which decides on their streaming rates based on private, free market negotiations, the publishing mechanicals are highly regulated in the U.S.
Every five years, the NMPA, Nashville Songwriters Association International (NSAI) and members of the Digital Media Association (DiMA), such as Spotify and Apple Music, come together to discuss the rates for the next five-year period; and if no agreement can be reached, then the CRB judges make a determination after a rate trial. In 2022, the three organizations convened about the period of 2023-2027, called “Phonorecords IV” or “Phono IV,” and decided, in an effort to save time and money, to come to a voluntary settlement to present to the CRB judges.
Even though the Phono IV settlement included changes to the way bundling worked (which was considered a concession to streaming services), many in the music business called the settlement as an overall win, especially because the previous five-year rate (Phono III) was fought over for about five years, causing confusion over rates in the interim. When it was announced, the NMPA touted the Phono IV settlement as delivering the “highest rates in the history of digital streaming,” because of its win for a larger headline rate, and many felt it signaled a new era of cooperation between streaming services and the music business. Israelite says now in his statement that Spotify’s latest move to bundle audiobooks “ends our period of relative peace.”
How Bundling Affects Mechanical Revenue
Even though the price of Spotify premium is rising, that additional revenue does not benefit songwriters and publishers. Now that premium is considered a bundled service with audiobooks, some of the subscription price is owed to book publishers and authors to license their works, too.
Mechanical revenue for bundles is calculated by seeing what audiobooks are valued at as a standalone offering ($9.99) and weighing that against the price of the premium bundle offering ($10.99), according to Phono IV. The value of music is found by dividing the total premium price ($10.99) by the two services (audiobooks only and premium) together ($21), which results in music being valued at about 52% of the total bundle, or around $5.70 per subscriber.
How Bundling Affects the Total Content Cost
The first step in calculating the mechanical royalty rate a streaming service owes to songwriters and publishers is to find the “all-in pool.” Streaming generates two forms of royalties for music publishing — performance and mechanical — so this “all-in pool” includes both types. (Performance royalties are determined by a separate, but also U.S. government regulated, process).
The all-in pool is the greater of either the headline rate (which ranges from 15.1% for 2023, 15.2% for 2024, 15.25% for 2025, 15.3% for 2026, and 15.35% for 2027) of Spotify’s music revenue (which is now lowered to around $5.70 per subscriber because of bundling) or the percentage of total content cost (TCC), a.k.a. what royalty Spotify pays to labels.
Previously, Spotify premium qualified for the full rate of the lesser of 26.2% of TCC for the period (or $1.10 per subscriber). Now, after deciding to change its premium offering to include audiobooks, Spotify argues it qualifies as a “bundled subscription offering,” which moves its rate down to 24.5% of TCC for the accounting period.
Regardless of whether the CRB mechanical formula determines all-in royalty pool based on the percentage of TCC or the headline rate, both options are negatively affected by Spotify reclassifying premium as a bundle. According to Billboard’s calculations, every month of 2023 used the headline rate of music revenue as the all-in pool for premium, but after bundling, the next 12 months will use the percentage of TCC as this pool.
After that, the final mechanical royalty pool is determined by subtracting out the performance monies from the all-in pool. This number is weighed against a calculated royalty floor. Whichever is the larger number is the final amount owed to publishers and songwriters for U.S. mechanical royalties.
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Source: Bernard Smalls / @PhotosByBeanz
Kendrick Lamar is contention for the Rap MVP of 2024 award. He has just surpassed Drake’s Spotify streaming record with “Not Like Us”.
As reported by Digital Music News the Compton, California native is putting numbers on the board like never before. The streaming service recorded that his diss track going at the 6 God has broken the single-day streaming record on Spotify with 10.986 million plays in the United States. Ironically this moment just makes their Rap war that much more ironic as the song that previously held the record was Drake’s “Girls Want Girls” featuring Lil Baby.
While their beef has been strictly lyrical it has unfortunately turned physical. The Toronto Sun reports that Drake’s bodyguard was shot outside of his mansion on Tuesday, May 7. Local police say a drive by shooting occurred outside the property that left the 48-year-old with serious injuries as one of the bullets hit him in the upper chest. The unidentified man was immediately rushed to Sunnybrook Hospital to be treated. Toronto Police Inspector Paul Krawczyk, of the Integrated Gun and Gang Task Force, says that security cameras did capture footage of the crime but investigators are “dealing with video quality issues.” Drake has yet to comment on the matter.
You can listen to Kendrick Lamar’s “Not Like Us” below.
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In March, a Spotify account named Lucky Socks uploaded a sped-up version of Mark Ambor’s “Belong Together” to the platform. More than six weeks later, this jaunty take on the folksy original is still earning around 350,000 streams a day, and various high-speed versions of “Belong Together” have been used in more than 400,000 TikTok videos to date.
This is just the latest sign that sped-up remixes — often made at home by amateurs — drive both music discovery and streaming activity. “A big percentage of the population is engaging with music in this way,” says Ben Klein, president of Ambor’s label, Hundred Days Records. “If you’re an audio platform, you need to start allowing people to tap into that.”
That’s exactly what the platforms are doing. At the end of 2023, the streaming service Audiomack quietly rolled out Audiomod, a new set of tools that allow users to fiddle with tracks by changing the tempo, modifying the pitch, or swaddling them in reverb. In March, the company Hook announced that it had raised $3.5 million to further develop a platform that will help artists “monetize the use of fan-generated remixes on social media.” And in April, The Wall Street Journal reported that Spotify plans to introduce its own remixing tools.
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These initiatives signal a growing awareness that user remixes cannot be prevented — kids can make them easily on their phones. Since almost all of these reworks are unauthorized, labels and publishers will stand to gain if fans make and listen to remixes on streaming platforms where these can be paid out like a normal track. (“The next big forefront will be how we get paid for UGC,” Warner Chappell CEO/co-chair Guy Moot recently told Billboard, noting “the real challenge” of identifying all “those really sketchy sped-up versions.”)
And platforms can also benefit if new audio manipulation tools increase engagement or even attract additional users. “We think it can be a way to encourage more users to subscribe,” says Audiomack co-founder Dave Macli.
Audiomack Quarterly Uploads of Manipulated Songs
Courtesy of Audiomack
Creating new remixing capabilities will require the music industry to become comfortable with more flexible licensing agreements that legitimize what was previously a black-market activity — for fans, creating a remix at home without permission is fun; for labels, it’s technically copyright infringement. It remains unclear how artists will feel about labels sanctioning random reworks of their work, and whether listeners will connect with these homemade remixes when they’re not attached to addictive videos on TikTok or Instagram Reels.
While user remixes and edits are not a new phenomenon, there is a sense around the industry that this behavior — pushing a song’s tempo recklessly fast, or slathering the track in distortion — is especially dear to a new generation which sees altering music as a way of expressing fandom. Audiomack has found that “modders,” who alter more than 100 songs a month, are 50% more likely to be under the age of 20 relative to the average platform user.
“The younger users want to have some control over the sound on their own: ‘hey, what if we f—ed with this a little?’” says Tyler Blatchley, co-founder of the label Black 17 Media.
As a result, artists and labels often encourage fan remixing because it can be an effective promotional tool. At the same time, they frequently take down the unauthorized reworks that they find on major streaming services, because those divert money from artists’ pockets. Some acts release their own official sped-up or slowed versions to try to capitalize on the popularity of the form. (Audiomack data shows this trend really accelerated at the end of 2022.)
For the music industry, this patchwork system remains unsatisfactory. “There’s little visibility into what people are doing with the music, the artists don’t get to play a role in how their fans engage, and often they’re not getting paid for [the] consumption” of unofficial remixes, says Gaurav Sharma, the CEO of Hook.
Hook’s app, which recently launched a private beta, offers a more controlled environment for remixing activity, where users can select pre-cleared songs to manipulate and mash together. If a fan creates a new version they love — and, crucially, rightsholders have given permission — they will theoretically be allowed to export that alternate to other platforms when the app launches publicly later this year. In other words, a fully licensed and track-able remix or mash-up could be created on Hook and then go viral on a short-form video platform or in a video game.
While Audiomod allows users to play with tempo, distortion, and more, they cannot mash one song up with another or export their beloved remix to other platforms. They can share their preferred settings with friends, though, so pals can easily replicate their favorite mix. Plays of an altered version of a song on Audiomack will be paid out the same as plays of official recordings.
Audiomack has Merlin — the global digital licensing agency for the independent music industry — “signed up for this,” says co-founder Dave Macli. “We are in talks with the majors.”
At the moment, Spotify appears mostly to have a plan to create some remixing tools in the future. (A rep for the service declined to comment.) The company has been interested in figuring out ways to let users “play with and manipulate music” for years in contexts like a DJ set, according to a former executive. On top of that, “Spotify is trying to seize a lot of creator engagement moments, because TikTok is much more of an engagement platform.”
While The Wall Street Journal reported that Spotify does not yet have licensing agreements in place for remixing tools, the former exec believes labels “will be all-in for anything that increases plays and gets them a bigger share of the royalty pool.”
And labels do appear more open to sanctioning user manipulation of their audio recently. In December, for example, the video game Fortnite introduced a new musical experience called “Jam Stage,” which allows gamers to play music with their friends — but every person can be noodling on a different song, creating a strange, cacophonous mash-up in real (virtual) time.
The former Spotify exec believes the real obstacle to getting official remixing tools in place will come from artists being protective of their work. “What are [labels] permitted to do in their contracts with artists, and how will artists feel about it?” he asks.
At Audiomack, Macli says “we respect an artist’s decision if they don’t want to be a part of [allowing users to remix their songs]. But I think in a way you’re fighting the tide.”
Once platforms and labels sort out licensing, one big question remains: will users make and listen to sped-up remixes on streaming services without the enticement of a compelling visual trend or the possibility of going viral?
Audiomack users already appear to like sending around the tracks they pitch up or alter in other ways. “Over 9% of all shares on the platform are modifications of songs,” according to Macli.
Though Klein agrees that “there is an appetite for listening to sped-up stuff,” he believes “there’s a much smaller use case in that context.” “Sped-up sounds are really breaking through on audiovisual platforms” — especially TikTok, which has had a fraught relationship with the music business lately.
Still, Macli says, “the industry is going to have to lean into this one way or the other. They should lean into it as a tech problem that the DSPs should solve.”
Don Passman had been teaching a course on music law at USC for several years when he realized his class notes were the outline of a book. “Because musicians are oriented to their ears,” he says, there was an opportunity to write “an easy-to-read overview of the business for people who don’t like to read.” Think “big print, lots of pictures, analogies, simple language.” When the first edition of All You Need to Know About the Music Business came out in 1991 — the 11th edition arrived this past October — “there was only one book on the music business at the time that was of any consequence,” Passman recalls. “And it was a bit difficult to read.”
Recently, however, music business education appears to be an increasingly hot topic. Thanks to technological advances, the number of aspiring artists releasing songs with little-to-no understanding of the music industry has ballooned. Many of these acts start releasing tracks in their early teens, long before they might get the chance to take a college-level course on the music business, much less master the nuances of copyright law. And they often hire a similarly-inexperienced friend to serve as a “manager,” ensuring that even their closest advisors lack experience in navigating the industry.
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As a result, there is a dire need for quality, accessible music business education. Many of the platforms that allow artists to create, listen to, or distribute music today see educational initiatives as a way to foster loyalty and community — which will in turn help them stand out in the neverending battle for users and attention — and possibly as an additional revenue stream as well.
Some of these educational efforts are in their early stages: Spotify started testing video learning courses in the U.K. in March, for example, while TIDAL has said education will be a cornerstone of its new era as it works to build financial tools for artists. (It was acquired by Block in 2021.)
The company Creative Intell is further along — it has raised money from around the music business and created an animated series to teach young artists the inner workings of the industry, from record deals to publishing. And the platform Bandlab, which allows its 100-million-plus users to create songs on their phones, has been releasing a steady stream of free tutorials and blog posts.
Helping aspiring artists grasp the intricacies of the music industry is “something that we’re investing a lot in,” says Krevin Breuner, Bandlab’s head of artist development and education. “The industry is more complex than ever, and understanding the business from day one is not just an advantage; it’s essential. Bandlab has such a young audience, it’s growing, and we want those artists to feel like they have a partner — somebody they can trust.”
Austen Smart agrees: The DJ, who co-founded the U.K. music-education company PLAYvirtuoso in 2020 with his brother, sees “huge potential in this space.” “I look at it like, there will be one in eight people, at least, learning at home,” he says, and a portion of those will be interested in the music industry.
Creative Intell co-founder Steven Ship divides the music education field into three buckets — how to create music, how to market music and the business of music. While YouTube alone is littered with free videos on the first two topics — not to mention all the Reddit threads, blog posts and TikTok tutorials — finding reliable and accessible information on the third is more challenging. “The business of music is probably the most important; it has to be the most accurate, and it’s often ignored,” Ship says.
If an aspiring artist produces a track poorly or markets it clumsily, that song probably won’t do well — a temporary setback. In contrast, if they don’t understand how the industry works, the consequences can be far more damaging: They could sign a contract with a manager, label, or publisher that cedes control of their output for decades. “Artists were horribly taken advantage of in the early days of the music business, because they just didn’t know what they were doing,” Passman says. And today, “the industry is changing so fast,” Breuner adds, making it even harder to “know what’s important and what’s not.”
When Smart signed a major label deal with his brother — just “two hungry young artists living in London” — he admits the pair “didn’t have the knowledge and the understanding of what we were ultimately signing.” An attorney would have helped, but they didn’t have the cash “to engage with lawyers who could help us interpret it.”
Contracts are often “murky and complicated,” Smart continues. “You get offered a relatively big advance; it’s quite a big number when you’re 25 and 22. What does it actually mean? What does it mean ten years later?”
If he could rewind the clock, he imagines going through the process again — but this time, “we’ve got that course on understanding label deals” available. And if necessary, he could “book a one-on-one session with someone for 30 pounds” to help provide extra context. This is part of the reason that one of PLAYvirtuoso’s “three pillars” of educational material centers on understanding the music industry.
PLAYvirtuoso is one of four companies that partnered with Spotify initially to provide courses on a variety of topics. The streaming service’s decision to test new education materials came about because it saw data indicating that some users were eager to acquire more knowledge.
“If I take you 10 years back, most of the people that came to Spotify came with a single intent: listening to music,” says Mohit Jitani, a product director at Spotify. “But in the last few years, as we brought on podcasts and audiobooks, people started to come to Spotify to listen to an interview or learn leadership and finance.”
Currently Spotify’s courses are offered via a freemium model: Users are able to access the first few lessons for free, but they must pay to complete a full course.
While Spotify’s exploratory foray into education stemmed from the fact that “people started coming to [us] for casual learning,” as Jitani puts it — and it potentially offers the platform another new revenue stream — TIDAL’s recent drive to help artists raise their business IQ is driven in part by its new owner, the payments company Block.
“Building tools and services for business owners, we saw that the moment that you get a little traction outside of your friends and family, the world becomes a lot more complicated,” says Agustina Sacerdote, the TIDAL’s global head of product. “You have to start to understand your numbers to understand where the next big opportunity is going to come from.”
The same principle applies to artists. Understandably, they tend to focus on the art. But as Ship notes, “The moment you release a song, you’re in business” — whether you like it or not. So TIDAL has started offering webinars and rolled out a new product called Circles, which Sacerdote likens to “a very curated version of Reddit, where we have the topics that we believe most artists have questions about,” including touring and merchandise.
For now, TIDAL’s products are free. “Once an artist does get a really good piece of advice that they would have never gotten [elsewhere] on Circles, then we’ll start to think about, how do we monetize?” Sacerdote says.
Creative Intell’s materials on the music business are currently far more comprehensive than TIDAL’s or Spotify’s: The company has created 18 animated courses to help aspiring artists — the vast majority of whom don’t have a manager or lawyer — “understand what they’re signing, learn how to monetize themselves better and learn how to protect themselves,” Ship says.
Creative Intell releases some materials for free and charges for access to everything ($29.99 a month). It’s also aiming to work with distributors like Vydia as marketing partners. Vydia is not the only company looking to provide this type of resource — Songtrust, for example, has built out its own materials to help songwriters understand how to collect their money from around the world.
“Other industries have all kinds of corporate resources for training and the music industry is lacking those,” Ship says. “We’re trying to fill that void.”
HYBE was rocked by controversy this week after an audit of one of its subsidiary labels, ADOR, allegedly revealed that the label’s CEO, Min Hee-jin, “deliberately led the plan to take over management control of the subsidiary,” according to a statement sent by the company on Thursday (April 25).
Shares of HYBE fell 7.8% on Monday (April 22) and ended the week down 12.6% to 201,500 won ($146.22). HYBE later reported Min, who owns an 18% stake in ADOR, to the police for “breach of trust and other allegations” and asked her to step down, it said in the April 25 statement. The dispute added to HYBE’s losses at a time when most music stocks are faring well. HYBE shares have fallen 13.7% year to date and 25.4% over the last year.
HYBE was the biggest loser in a week most music companies’ stocks were up. In fact, five music companies’ stocks posted double-digit gains this week and only 7 of the 20 stocks in the Billboard Global Music Index were losers. The index gained 3.2% to 1,756.98, breaking a two-week losing streak and bringing its year-to-date increase to 14.5%.
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The week’s greatest gainer was streaming company LiveOne, which increased 14.5% to $1.90 after it provided two updates to upcoming earnings releases. On Monday, the company announced that it expects fiscal 2024 revenue of $118.5 million, up 19% from $99.5 million the previous year, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $14.4 million — about 32% above $10.9 million of EBITDA in the prior year. On Wednesday (April 24), LiveOne announced that PodcastOne expects revenue of $11.7 million in the fiscal fourth quarter 2024, up 32% year over year. LiveOne spun off PodcastOne in 2023 and retained an 81% stake.
Two of the weeks’ best-performing stocks also reached their highest levels in years. Reservoir Media improved 13.8% to $9.10, its highest closing price since the stock closed at $9.20 on May 4, 2022. Chinese music streamer Tencent Music Entertainment gained 13.5% to $12.88, its best closing price since it closed at $13.02 on July 13, 2021.
Hipgnosis Songs Fund (HSF) gained 12.9% to 1.038 pounds ($1.30) as Concord and Blackstone vie for control of the company’s share equity and 65,000-song portfolio. Notably, Friday’s closing price was 5 cents, or 4%, above Concord’s high bid of $1.25 per share, suggesting that some investors expect the bidding process to continue. As the HSF board weighs its options amidst a strategic review and building strife with its investment advisor, Hipgnosis Song Management, a sale seems inevitable. “I think investors have been through such a roller coaster most of them just want their money back,” Round Hill Music CEO Josh Gruss told Billboard this week.
Spotify’s stock closed Friday up 5.0% to $289.59 after an up-and-down week. Shares rose 11.5% on Tuesday — and posted an intraday gain of 19.2% — following the release of the company’s first-quarter earnings report but gave back nearly all the gains over the next two days by falling 6.8% and 2.3% on Wednesday and Thursday, respectively.
Tuesday’s (April 23) intraday high of $319.30 was Spotify’s highest share price in over three years. The last time Spotify traded above $319.30 was Mar. 8, 2021, when shares reached $323.04. The stock dropped below $100, to $96.67, on Apr. 27, 2022, and fell as far as $69.29 on Nov. 4, 2022. Since that low point a year and a half ago, as Spotify has cut its workforce and focused on improving margins, its share price has risen 218%.
Indexes around the world posted gains this week. In the United States, the Nasdaq was up 4.2% to 15,927.90 and the S&P 500 improved 2.7% to 5,099.96. Both indexes were helped by Alphabet, which rose 10% to $173.69 on Friday after releasing first-quarter earnings and announcing a $70 billion buyback program. In the United Kingdom, the FTSE 100 rose 3.1% to 8,139.83. South Korea’s KOSPI composite index gained 2.5% to 2,656.33. China’s Shanghai Composite Index rose 0.8% to 3,088.64.
What began as a music-only streaming platform evolved into a broader audio platform that included podcasts and audiobooks. Now, Spotify is venturing into video — in both snippets and long-form content, although the latter is only in an experimental phase.
During Tuesday’s Q2 earnings call, CEO Daniel Ek and interim CFO Ben Kung repeatedly referred to “the Spotify Machine” when explaining the company’s expansion beyond music. As Ek explained, the term means the company “isn’t just a sort of one-trick pony anymore, but it’s actually multiple verticals working together” to create more choice for consumers and drive more engagement.
“Because you may come for the music and stay for the audiobooks,” Ek said. “Some customers may come for the podcast and stay for the audiobooks.”
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The term makes sense: Spotify is an increasingly complex product with multiple moving parts, numerous audio and video formats, and a variety of paid tiers. Each new component to the machine is meant to make the company more valuable as a whole. Similarly, concert promoter and ticketing company Live Nation uses the term “flywheel” to describe how its various products and business segments provide momentum for the larger entity. But “the machine” has a better ring to it.
The machine is integral to becoming a sustainable, profitable company. As Spotify detailed in its 2022 investor day presentation, branching out from music will help improve its gross margins and become the profitable company it has long aspired to be. Music margins are roughly 30% of revenue — the remaining 70% goes to rights holders — and will top out at 35%, the company has said. At that 2022 presentation, Spotify said podcast margins can reach 40-50% gross margin and overall gross margin can get to 40% (gross margin rose to 27.6% in Q1 from 25.2% a year earlier).
The machine helps increase engagement. Spotify is more valuable if people spend more time using it. When engagement increases, churn decreases, which in turn reduces the expense involved in bringing those lapsed customers back. When engagement increases, free users are more likely to become paid subscribers. The last thing a streaming service wants is an infrequent customer who doesn’t enjoy the features or delve deep into its content. Audiobooks are a good example of keeping people hooked: Ek said that in the markets where audiobooks are available, 25% of users are listening to them. What’s more, in the first two weeks a Spotify user listens to audiobooks, Spotify sees “over two and a half hours of incremental usage on the audiobook side,” he said.
The machine gives users greater freedom of choice. Ek confirmed Spotify will have an audiobook-only subscription tier along with a music-only tier; the standard subscription tier offers both music and audiobooks. Over the years, Spotify has given consumers multiple options to choose from: an individual plan, a two-person plan called Duo, a multi-user family plan, and, in certain markets, the ability to purchase one day at a time. Spotify wants to provide “as much flexibility as possible in this next stage of Spotify” to convert more users to paid subscribers, Ek explained.
The machine is built to maximize value. Ek and Kung frequently mentioned a particular internal metric, a value-to-price ratio, that Spotify uses as a North Star these days. By adding podcasts, audiobooks and education, as well as features such as Wrapped — Spotify’s personalized year-end recap — Spotify delivers more value than it provided when it was a simpler, music-only service. Ek singled out the videos that Spotify has added in “11 or 12” markets and built anticipation for video clips that will allow artists to tell stories about their new releases. Such videos are one way Spotify is “focused on winning discovery” to make the platform a better listening experience, Ek said. Spotify’s recent foray into educational video courses in the U.K. is another stab at adding value.
The machine ultimately gives Spotify the ability to raise prices. When Spotify adds products and features, EK explained, it increases its value-to-price ratio. That, in turn, allows it to occasionally raise prices to capture the value it created. “The way you should think about this as investors is the better we can improve the product, the more people engage with our product, and the more value we ultimately create,” Ek said. “And the more value we create, the more ability we will have to then capture some of that value by price increases.” After more than a decade of value creation and stagnant prices, Spotify raised rates in July 2023. In April, it again hiked rates in select markets — including the United Kingdom and Australia — and is expected to expand those increases to additional markets.
The machine also requires a feat of engineering. “It’s a fairly complex machine,” Kung said, because Spotify has both variable-cost models, such as revenue sharing and per-hour royalties, and fixed-cost models — some in-house and licensed podcast content, perhaps. Ek added that “the machine takes care of all the complexity on the back end to deal with what was historically a very difficult problem to solve, which is multiple business models in one consumer experience.” Spotify’s engineering challenge is incorporating additional verticals into a seamless user experience without getting clunky — a criticism often launched at iTunes, which started as a music store and added videos, books, apps, podcasts and iTunes U, a place for educational materials. “Simplicity is hard,” a former Apple product designer once wrote. “Very hard. But when you get it, it’s beautiful.”
The machine might take some getting used to. As Spotify branches out to non-music verticals, it has stakeholders other than the music rights holders, artists and songwriters it has served for more than a decade. Now, Spotify also supports podcasters, authors and — although in the early stages — educators. That has already created some tension between music publishers and Spotify following news that Spotify considers its music-audiobook subscription offering to be a bundle under the Phonorecords IV mechanical rate structure in the United States. Subscription bundles allow Spotify to pay a slightly lower royalty rate. But really, is anybody surprised that the machine is trying to save a little money?
Spotify’s stock jumped as much as 17.3% on Tuesday (April 23) following the company’s first-quarter earnings report showed the company is starting to deliver better profits and margins. The share price closed at $303.49, up 11.5%, after reaching a new 52-week high of $319.30 earlier in the day.
Investors’ expectations for future quarters often drive large swings in stock prices when a company delivers results for past quarters. For Spotify, cost-cutting and newfound financial discipline are expected to produce tangible results next quarter. The company’s guidance for second quarter operating income of 250 million euros ($268 million) was well ahead of Guggenheim analysts’ estimate of 179 million euros ($192 million) and JP Morgan’s estimate of 199 million euros ($213 million), and was a vast improvement from the 247 million euro ($264 million) operating loss in the second quarter of 2023. Gross margin guidance of 28.1% far exceeded Guggenheim’s estimate of 26.6% and JP Morgan’s estimate of 26.9% and would be nearly four percentage points above the prior year period’s 24.3% gross margin.
First-quarter results often exceeded Spotify’s guidance from three months ago. Revenue of 3.63 billion euros ($3.9 billion) slightly topped the high end of guidance of 3.6 billion euros. Gross margin of 27.6% was more than a percentage point above guidance of 26.4%, although operating income of 168 million euros ($180 million) was under guidance of 180 million euros ($192 million).
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Gross margin was 243 basis points — 2.43 percentage points — better than the 25.2% gross margin in the prior year period. Spotify said the improvement came from improved music and podcast profitability that was partially offset by costs from its growing audiobooks business. Operating income was impacted by 82 million euros ($89 million) in social charges and was helped by lower personnel costs and marketing spending.
“We consider this a real trend” rather than the result of one-off events, said interim CFO Ben Kung during Tuesday’s earnings call when asked by an analyst what to expect from margin growth for the remainder of 2024.
Although Spotify didn’t surpass forecasts for subscriber growth, it met expectations and generated more revenue, on average, from each paid customer. Average revenue per user improved 5% to 4.55 euros ($4.94) thanks to price increases in July 2023. Total monthly active users of 615 million was slightly below Spotify’s guidance of 618 million, but the 239 million subscribers matched the company’s forecasts.
“It is really a new Spotify, and we are being relentless resourceful in all of our costs,” CEO Daniel Ek said during Tuesday’s earnings call. Second-quarter margins were helped by decreases in streaming delivery costs and other costs of revenue, Ek explained. The podcast segment, which was a drag on profitability in 2023, is expected to be profitable in 2024, he added.
The longtime knock against Spotify was it had a great product but wasn’t a great business. The economic demands of music streaming, which require Spotify to pay music rights holders most of its revenue, left little for R&D, marketing, salaries, and general and administrative expenses. Although the company has amassed more than 600 million monthly users — 239 million of them paid subscribers — it has been perpetually unprofitable.
Spotify’s fortunes began to change in 2023 after the company knuckled down, laid off 17% of its global workforce in December and jettisoned many high-priced, celebrity podcast deals — namely parting ways with Price Harry and Meghan Markle’s Archewell Studio and striking a non-exclusive deal with the previously exclusive-to-Spotify The Joe Rogan Experience.
Spotify reported on Tuesday that first quarter revenue jumped 20% and gross profit topped 1 billion euros ($1.08 billion), returning the now 18-year-old streaming company to profitability and putting it on track to meet its 2024 growth target.
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Spotify reported 3.6 billion euros ($3.9 billion) in first quarter revenue, up from 3.04 billion euros ($3.3 billion) a year ago, and gross profit rose 31% to 1.004 billion euros ($1.08 million) from 766 million euros ($833 million), according to filings.
Spotify chief executive Daniel Ek said that revenue growth accelerated and the company had record-high profits in the quarter, while total monthly active users grew 19% to 615 million and premium subscribers increased by 14% to 239 million — both compared to last year’s first quarter.
“As an adult company we are now consistently profitable, which is great news,” Ek said in a video posted to LinkedIn.
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Spotify raised prices by $1 — to $10.99 a month for individuals, $16.99 a month for families — in the U.S., one of its largest markets, last year for the first time, and it is reportedly considering increasing prices again later this year, Bloomberg reports. The initial round of new price hikes — $1 a month for individuals, $2 a month for duos and families — will hit the U.K., Australia, and Pakistan, among others, according to Bloomberg.
Those price increases helped Spotify reach profitability in the third quarter of last year. But in the fourth quarter it reported an operating loss of 75 million euros ($82.7 million). In the first quarter earnings reported on Tuesday, Spotify was again profitable with 168 million euros ($181 million) in operating income.
While revenue from premium subscribers of 3.247 billion euros ($3.5 billion) grew by 20% compared to the first quarter last year, it inched up just 2% from the fourth quarter. Ad-supported of 389 million euros ($419.8) revenue rose 18% from the first quarter last year, but it declined by 22% from the fourth quarter.
Monthly active users of 615 million for the quarter was up 19% from a year ago and up 2% from the prior quarter but missed the company’s target of 618 million in the quarter.
Total Revenue grew 21% year over year, or 20% to €3.6 billion on a constant currency basis.
Premium ARPU grew 7% year over year on a constant currency basis.
Gross margin was up 27.6%, and gross profit surpassed €1 billion for the first time in Spotify’s history.
Operating Income finished at a record high of €168 million (a 4.6% margin)
Monthly active users grew 19% year over year to 615 million on annual and quarterly growth in all regions.
Premium subscribers grew 14% to 239 million, led by growth in the streaming giant’s bundles–Family and Duo plans.
Taylor Swift‘s The Tortured Poets Department continues to break records on Spotify. On Friday (April 19), the pop superstar’s latest release became the first album in the streaming service’s history to have more than 300 million streams in a single day. As previously reported, in less than 12 hours after its release, The Tortured Poets […]
Last week, Bloomberg reported that Spotify will be raising prices for its premium subscription in five markets later this month and do the same in the United States at an unspecified time later this year. For about $1 to $2 extra per month, depending on the market, premium users will receive audiobooks alongside podcasts and ad-free music listening in their subscription — but the change will have a knock-on effect for mechanical royalty rates for songwriters and publishers.
Once the price increases are launched, all premium subscribers will automatically be subject to the new offering unless they manually change their subscription tier. While the increased price will result in Spotify getting increased revenue, a representative for Spotify believes it also qualifies the popular premium tier for a discount on its royalty rate on U.S. mechanicals because it is now considered a “bundle,” similar to how Amazon bundles Prime and Amazon Music and Apple bundles Apple Music and Apple News.
“Spotify is on track to pay publishers and societies more in 2024 than in 2023,” a Spotify rep said, citing the company’s Loud and Clear report that says the streamer has paid nearly $4 billion to publishers, PROs and collection societies in the last two years.
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“As our industry partners are aware, changes in our product portfolio mean that we are paying out in different ways based on terms agreed to by both streaming services and publishers. Multiple DSPs have long paid a lower rate for bundles versus a standalone music subscription, and our approach is consistent,” the company added. Though Spotify premium users have already gotten access to audiobooks on the service since October for no additional charge, the company clarified to Billboard that its re-classification of the tier as a “bundle” is not retroactive to when it began testing audiobooks but only begins when the subscription price increases.
Music publishers have made it clear they are not going to accept the change without a fight. David Israelite, president/CEO of the National Music Publishers’ Association (NMPA), called out the service for the move, saying that “it appears Spotify has returned to attacking the very songwriters who make its business possible.” He went on to add that the company’s attempt to “radically reduce payments” to publishers and songwriters is “a cynical and potentially unlawful move.” If it is determined that Spotify’s move is not properly categorized as a bundle, the trade organization says it will consider “all options,” including the MLC or publishers taking Spotify to court or before the Copyright Royalty Board (CRB), the entity that sets mechanical royalty rates for streaming in the United States. “We will not stand for their perversion of the settlement we agreed upon in 2022,” he warned.
Nashville Songwriters Association International (NSAI) took to Instagram, urging their followers to cancel their subscriptions: “NSAI, along with the the @nmpaorg, is contemplating our next steps to fight this move. Stay tuned, but in the meantime remember they are doing all this in the worst possible show of disrespect to the songwriters who make them billions.”
Songwriters of North America CEO Michelle Lewis shared the perspective of songwriters, telling Billboard, “We are disappointed, but not surprised, to see Spotify once again on the forefront of finding ways to pay songwriters less. This reclassification, which we see as a deliberate misclassification, dangerously undermines the good faith of the last CRB settlement. It’s also duly noted that it is always the same company leading in this way.”
Phonorecords IV Settlement
Every five years, the CRB reconsiders the royalty rate for mechanicals in the United States. It is a complex, multi-pronged formula, setting the rate that each streaming service must pay to publishers and songwriters based on a number of contingent factors, including the subscription price, the amount the service pays to record labels and more. There are other caveats to consider when setting the rate based on how the user is subscribed with their streaming service, including whether the music was streamed on a free, ad-supported tier or on a paid, premium tier and whether the user is subscribed to the service through a bundle of other products.
In late 2022, NMPA, NSAI and Digital Media Association (DiMA) jointly announced that they had come to a voluntary settlement about what the U.S. mechanical royalty rate would be for the period of 2023-2027 (also called Phonorecords IV or “Phono IV”).
Even though the changes to the way bundling worked were considered a concession to streaming services, many in the music business celebrated the Phono IV settlement as an overall win, especially because the previous five-year rate (Phono III) was fought over for years, causing confusion over rates in the interim. When it was announced, the NMPA touted the Phono IV settlement as delivering the “highest rates in the history of digital streaming,” and many felt it signaled a new era of cooperation between streaming services and the music business. Israelite says now in his statement that Spotify’s latest move to bundle audiobooks “ends our period of relative peace.”
How Bundling Affects Mechanical Revenue
Even though the price of Spotify premium is rising, that additional revenue does not benefit songwriters and publishers. Now that premium is considered a bundled service with audiobooks, some of the subscription price is owed to book publishers and authors to license their works, too.
Mechanical revenue for bundles is calculated by seeing what audiobooks are valued at as a standalone offering ($9.99) and weighing that against the price of the premium bundle offering ($10.99), according to Phonorecords IV. The value of music is found by dividing the total premium price ($10.99) by the two services (audiobooks only and premium) together ($21), which results in music being valued at about 52% of the total bundle, or around $5.70 per subscriber.
How Bundling Affects the Total Content Cost
The first step in calculating the mechanical royalty rate a streaming service owes to songwriters and publishers is to find the “all-in pool.” This is the greater of either the headline rate (which ranges from 15.1% for 2023, 15.2% for 2024, 15.25% for 2025, 15.3% for 2026, and 15.35% for 2027) of Spotify’s revenue (which is now lowered to around $5.70 per subscriber) or the percentage of total content cost (TCC), a.k.a. what royalty Spotify pays to labels.
Previously, Spotify premium qualified for the full rate of the lesser of 26.2% of TCC for the period or $1.10 per subscriber. Now, after deciding to change its premium offering to include audiobooks, Spotify argues it qualifies as a “bundled subscription offering,” which moves its rate down to 24.5% of TCC for the accounting period.
Regardless of whether Spotify calculates its royalties due to songwriters and publishers based on the percentage of TCC or the headline rate, both options are affected by Spotify reclassifying premium as a bundle. One source close to the matter tells Billboard that Spotify has been paying based on the TCC recently.