Beep boop - this is a robot. A new show has been posted to TWiT…
What are your thoughts about today’s show? We’d love to hear from you!
Listening to the episode now. Only 26 min in, but just wanted to reiterate how great it is to have Amy Webb as a panelist. Her and Paris Martineau are dang near a perfect panel team.
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I enjoyed when she said Amungus
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I also appreciated the two guest-hosts.
With regard to Spotify:
Streaming music is a terrible business. Spotify lost money in 2021. Only €34 million this time, but still a loss.
The biggest reason is due to the insane music royalty structures in the United States. It is estimated that 65-75% of Spotify’s revenue in the United States goes directly to record labels, songwriters, and performers. Songwriter royalties are decreed by the US government as a percentage of revenue (elevating from 11.4% to 14.9% over the latest 5 year term). Performance royalties are also believed to be about 7% of revenue. And Spotify claims its payments to labels are set by complex formulas, including their ratio of premium to free subscribers.
Essentially nothing in business is set as a percentage of revenue. IMO it is set up to prevent profitability, because there is no lever Spotify executives can use to create profits. If they sell more ads? They pay higher royalties. If they convert more customers to premium? They pay higher royalties. If they raise the price of premium? Yep, higher royalties.
You’re not making any sense. Most companies make more products to make more revenue but spend more money on raw materials (or raw material extraction.) The income is directly related to the expenses to produce that income. McDonald’s needs to buy more fries to sell more fries.
Spotify’s music distribution business does not produce a music product… they basically resell someone else’s music product. Accordingly, the more of it they distribute, the more it should cost to acquire the rights to distribute it. Artists don’t make music to give away for free (in general) they expect to be paid by the companies that distribute their music. (The fairness of their agreements with their label is a different, and unrelated, issue.)
Spending (by the numbers you mentioned) roughly 25% of their income as costs to the music labels still means they should have 75% to spend on their business (including paying profits.) That doesn’t seem so bad to me.
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You’re not making any sense.
My poor explanation is probably a reflection of how crazy the royalty system is.
Most companies make more products to make more revenue but spend more money on raw materials (or raw material extraction.) The income is directly related to the expenses to produce that income. McDonald’s needs to buy more fries to sell more fries.
The cost of goods for an ordinary retailer is a negotiated dollar amount. When McDonalds buys fries, they pay $0.20 per pound (or w/e). There are also bulk discounts, so maybe they pay $0.19 if they exceed a threshold per month.
McDonalds do not pay 14% of their revenue to their fry manufacturer (regardless of sales price), and they are definitely not mandated by the government to pay 14% of their revenue for fries.
Accordingly, the more of it they distribute, the more it should cost to acquire the rights to distribute it.
Yes. If I stream 40 hours of music in a month, there should be more royalties due than if I stream 10 hours. However, if Spotify were to raise their price from $10/mo to $20/mo, the royalty should not double automatically.
Artists don’t make music to give away for free (in general) they expect to be paid by the companies that distribute their music.
Yes, absolutely. And they should be paid a rate per play, perhaps with some tiering. I’m not qualified to guess at what the rate should be. It should not be the case that only Apple and Google can afford to offer music services by operating them as loss leaders.
Spending (by the numbers you mentioned) roughly 25% of their income as costs to the music labels still means they should have 75% to spend on their business (including paying profits.)
You read it backwards. Around 70% of spotify’s revenue is committed to royalties (roughly 50% to labels, 14% to songwriters, 6% to performers), leaving only 30% for actually running their business.
Fry manufacturers have not yet (as far as I’m aware) created a copyright system which maintains that selling fries cut in a particular fashion deserves a royalty payment, which I guess is what you’re getting at. The very notion of copyright is vague, and I think many people understand that it’s a racket.
At the same time, that would require coming up with some number that is the “fair market price” of listening to audio for some length of time, a concept which is weird. Music isn’t a potato which can be “owned” regardless of what the copyright lawyers will argue.
Also in this example, Spotify’s revenue also doubles, assuming no attrition. See below for some other thoughts on their model.
At the risk of sounding more contentious than I intend, is 30% too low for Spotify? They have people to pay, sure. But almost all the value they provide is in maintaining an app/website and providing curation and recommender systems. It doesn’t look to me like their business model is much different than the label: sit as the middle man that all the customers approach and collect rents. Is it too low because it’s not split 40-40 with the labels?
I just looked up because I was curious: a more fair comparison to a physical goods company would not be to McDonald’s, which fundamentally alters the good in order to add value. It would be to a clothing reseller like Ross, which purchases products and gets them to customers. Interestingly, the “Cost of Revenue” metric represents around 80% of total revenue for that company. Spotify seems to have a better deal in comparison to another reseller.
At the risk of sounding more contentious than I intend, is 30% too low for Spotify? … Is it too low because it’s not split 40-40 with the labels?
That’s a fair question. I say this primarily because Spotify and its competitors have been consistent money-losers, which usually means the business model is broken.
Interestingly, the “Cost of Revenue” metric represents around 80% of total revenue for that company
I think that is 2020 data, when the stores were closed for a period. I’m seeing Ross Stores at 28%-29% gross margin, except for 2020.
30-40% gross margin is common in apparel retail.
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Yeah, it’s definitely tough. People just don’t want to pay for media even though the copyright system places a huge value on it. If we could solve DMCA and the copyright system, I’d have way more to be happy about than Spotify’s financials!
That’s fair. I’m certainly not very knowledgeable in retail. Ross Investors website, for the interested lurkers.
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