by Camden Cassels
The past two years, Spotify has posted staggering losses that would make even the most optimistic of investors flinch. Making moves in the podcast lane, Spotify has built up an impressive lineup of original content and exclusive shows to counteract the bleeding. What makes podcasts so lucrative to the music streaming titan? How can podcasts help break the chains tightened by major labels? Here’s what you need to know:
Last year, the United States’ top music streaming giant, Spotify, posted a loss of $1.4 billion dollars. They are on track to again lose over a billion dollars in 2018. Losses of this magnitude may be a shock given Spotify’s domination of the streaming business and their 80+ million paying customers.
However, while Spotify has massive revenues, the company is contractually obligated to pay the majority of their earnings to record companies for streaming rights. These payouts pile on top of marketing costs, infrastructure, paid sponsorships, advertising, marketing campaigns, and other heavy expenses.
With back to back billion dollar loss years, Spotify must make changes to stay afloat. One senior level executive at a major label said, “No company can survive those losses over and over. Spotify ultimately has two options: Sell up or try to do a Netflix.”
The Netflix example refers to the strategy of creating original content with paid partners. Netflix now produces a wide selection of their own TV shows, movies, and comedy specials. The company owns the original content, reaping the rewards without paying another party for the copyrights. They essentially cut out the middleman, saving hundreds of millions.
The music industry version of Netflix’s strategy would be for Spotify to create a label and sign their own artists. This would save Spotify the fees paid to outside record companies for their artists’ music. This strategy bears monumental risk. The major labels still retain the rights to their signed artists’ music. If these labels sense that Spotify is undercutting their ability to make a profit, companies like Universal or Warner Music could pull all of their music from Spotify’s platform, completely crushing the service. Major labels distributed 87% of Spotify’s total music last year. If any of them pull their music from the platform, Spotify could take a nosedive.
This fear explains Spotify’s recent love affair with the podcasting industry. Just last month Spotify launched “Spotify for Podcasters,” the podcasting equivalent to “Spotify for Artists.” This new feature allows podcasters to directly upload their show to Spotify without going through an outside RSS feed distributor. Spotify now also provides valuable analytics tools to podcast creators, allowing them to see the numbers behind where people are listening, how long they listen, and when they tune in.
“Spotify for Podcasters” arrives at the tail end of a year where Spotify made a clear effort to increase their focus on podcasts. They signed a deal with Amy Schumer believed to be worth more than a million dollars. Spotify also signed an exclusive deal with rap legend, Joe Budden, who now hosts one of the world’s top hip-hop podcasts. The streaming giant senses the opportunity to become a leader in a relatively open market.
For example, no major labels exist for podcasters. There is no Warner Music or Sony Music equivalent for the podcasting world. This means that when someone uploads a podcast to Spotify, Spotify does not have to pay any royalties to an outside company for that content. Spotify is currently paying out $288 million per month in royalties to rights holders of music.
Podcasts allow Spotify to drastically increase the amount of time users spend within the platform (and listening to ads), without having to pay out huge royalty fees. Podcasts are becoming increasingly popular, as shown by the market almost doubling in 2017.
With this growth, Spotify can seize an opportunity for massive advertising revenues and the chance to establish themselves as a podcasting powerhouse. Spotify may currently already be the world leader in music streaming, but they’re losing massive amounts of money each month to major label royalty payments. Ironically, the savior to Spotify’s seat atop the music industry may be...podcasts.