Why Spotify Isn't Simply A Music Company [Cherie Hu]

22 In this piece Cherie Hu looks at how Spotify's major investments in third party licensing deals and original podcast development are validating investor predictions and causing it to become the Netflix of audio while potentially putting its brand at risk.


Guest post by Cherie Hu on Medium

On October 28, 2018, as I was on Spotify’s mobile app searching for a certain music playlist I had made for myself, I received the following, unsolicited push notification:

The notification was for Crimetown, a serial podcast produced by Gimlet Media that dives into the history of organized crime in American cities. Nearly one month before sending me this notification, Spotify had announced that it would be the exclusive distributor for the show’s second season.

At first I was perplexed, since I use Spotify first and foremost as a music fan. But upon doing further research, I realized that  Spotify has been pouring more and more money into both third-party licensing deals and original development for podcasts — potentially cannibalizing its own brand as a music service in the process.

Last year, the company signed exclusive podcast distribution deals with Joe Budden and Vice News, plus a landmark non-exclusive deal with the BBC. Original Spotify podcasts that have launched over the past six months alone include Amy Schumer’s comedy series 3 Girls, 1 Keith; the branded show Ebb & Flow, which features hip-hop entrepreneurs and is produced in partnership with New Amsterdam Vodka; Under Cover, which interviews artists who recorded covers as part of the Spotify Singles series; The Rewind with Guy Raz, in which veteran radio host Guy Raz interviews major artists like Kelly Clarkson and Wynton Marsalis; and Score Points, which talks about video game music and is produced in partnership with The Game Awards.

Importantly, Spotify isn’t just promoting podcasts within its mobile app: it’s also taking this narrative and self-cannibalization offline.

For instance, I recently spotted another Spotify ad for Crimetown, this time in my local subway station in Brooklyn, New York:

If you had never heard of Spotify before seeing this ad in the subway, you would have no idea that music comprised the vast majority of content (and revenue) on the platform. In fact, the ad seems intentionally designed to make Spotify blend in with Syfy’s Nightflyers TV ad on the right, and with the dozens of other subway ads for the latest TV shows and films.

Shortly after taking the above photo, I stumbled upon yet another Spotify subway ad, this time highlighting the ability to use the platform to listen to daily news podcasts from established media companies like NPR and the New York Times. Once again, no mention of music.

This recent obsession with crime and news content seems to contradict Spotify’s very own homepage, which displays the slogan “Music for everyone” at the top in bold font. Artists and record labels have also historically understood that Spotify’s key differentiating factor against big-tech rivals like YouTube, Apple Music and Amazon Music was precisely its singular focus on music — from superior, data-driven music recommendation features like Discover Weekly, Release Radar and Daily Mixes, to valuable tools for artists like Spotify for Artists and the Fans First initiative. In contrast, companies like Apple and Amazon have arguably invested in music only as a loss-leading marketing vehicle to drive sales in other core verticals like smartphones, voice-activated speakers and e-commerce.

But there is a deeper truth unraveling that artists and record labels are terrified to hear: Spotify is not, and never was, a music company.

Screenshot of Spotify’s homepage, as of January 10, 2019. What’s missing?

In fact, when the company’s CEO Daniel Ek declared to investors last February that he was on a mission to give “a million creative artists the opportunity to live off their art,” he wasn’t just talking about musicians. He was also referring to podcast hosts, audiobook narrators, news reporters, cultural critics, spoken-word poets and voiceover actors and actresses. By Spotify’s logic, anyone whose content could be consumable in an audio-streaming environment counts as an “artist.”

Moreover, Spotify arguably wants to be known as an original podcast producer first, and as a more democratic podcast aggregator second — a strategy that would be fundamentally at odds with its origins and reputation in the music sector. Unlike Apple Music and Tidal, Spotify never aggressively pursued exclusive windowing deals for music, prioritizing superior product and technology while welcoming any and all artists to distribute their music on the platform. But with podcasts and other non-music audio content, Spotify is taking the complete opposite approach, chasing after high-profile content acquisitions from the very beginning before it has the chance to flesh out a superior product for the consumer.

In other words, Spotify is betting on becoming the Netflix of audio — for better or for worse.

Why does it matter what Spotify wants to be?

To many, Spotify is the poster child of tech innovation — embracing sophisticated practices in   and data analysis, while playing a critical role in helping the music business transition from a model of ownership and physical purchases to one of access and monthly subscriptions.

But Spotify’s ambitions to grow into a more centralized content hub actually makes the company just another blip in a centuries-old pattern of consolidation and vertical integration in business.

Studies have shown that the vast majority of industries — banking, airlines, pharmaceutical drugs, fast food, you name it — follow a predictable consolidation cycle, resulting in the top three companies in a given industry controlling up to 70% of the market.

The music industry is no exception to this rule. Collectively, the world’s three largest record labels (Universal Music Group, Warner Music Group and Sony Music Entertainment) account for   of recorded-music revenue. The world’s two largest concert promoters (Live Nation, AEG), each with a reported market cap of around $10 billion, are continually buying up venues and festival properties left and right. SiriusXM’s $3.5 billion acquisition of Pandora last September confirmed that an inexorable wave of consolidation is now striking the shores of the streaming industry as well.

Big businesses, particularly publicly-traded corporations, love consolidation. Having a stake across multiple steps in the value chain of a given industry helps cut costs, improve productivity and diversify revenue streams, creating more economic value for shareholders in the process. Such corporations also bill consolidation as a net positive for consumers. In Spotify’s case, for instance, the argument in favor of consolidation would emphasize a more streamlined and convenient experience for their users, in terms of being able to access all of one’s audio needs on a single, centralized app (indeed, this is an added value proposition that many new podcast listeners on Spotify have cited).

But media and tech mergers often come with negative externalities, particularly for independent workers whose livelihoods are attached to the companies involved. In particular, platform consolidation has a potentially negative impact on creative economies by funneling artists into a one-size-fits-all approach to business models, rather than fostering more diversity and experimentation.

As Kevin Erickson, national organizing director at Future of Music Coalition, argued in a recent interview with Billboard, more consolidation and vertical integration would mean “less room for new entrants to come in and provide different models that are more remunerative to artists who are not necessarily well-served by the dominant business models, or whose needs are not lined up with what a [giant corporation] needs.” Merged corporations become gatekeepers not only to pricing, but also to the flow of information and culture through the channels they control.

In the past, Spotify executives frequently claimed that their mission was precisely to get rid of traditional gatekeepers in the music industry, focusing instead on democratizing exposure and success for independent artists. But by pivoting to the “Netflix of audio,” Spotify arguably demonstrates that it prioritizes cultural control and organizational efficiency as much as it professes wider artist empowerment. And with a close eye on its bottom line, the company is increasingly regulating which content wins on its platform — the very definition of gatekeeping.


Many investors have previously suggested that Spotify mimic Netflix to quell its financial woes. Even though Spotify is the global market leader in paid music streaming, with   as of Q3 2018, the Swedish service has yet to turn a profit — in part because the company has to give away 70% to 80% of its revenue to music rights holders in any given quarter.

Shareholders seem to be reacting accordingly. As of January 9, 2019, Spotify’s share price on the New York Stock Exchange was $122.69—a 37.5% decline from its peak of $196.28 in July 2018, and a 7% decline from its starting price of $132.00 in April. Major industry investors like Warner Music Group, Sony Music Entertainment and independent trade body Merlin sold off most or all of their shares in the platform in 2018.

Some analysts have suggested that Spotify expand into a record label in its own right, bypassing middlemen and signing copyright co-ownership deals directly with artists in order to reduce third-party licensing costs. Ek denied these ambitions during the company’s Q3 2018 earnings call, claiming that “licensing content does not make us a label, nor do we have any interest in becoming a label” — but Spotify is still carefully forging ahead in cultivating a public image as an alternative to a traditional record contract, ruffling some industry feathers. The company has struck direct licensing and distribution deals with independent artists like Noname, splitting their streaming revenue 50/50, and has even given advances to a handful of third-party distribution ventures like Human Re Sources.

Despite the fact that Spotify’s financial trajectory seems tightly tethered to paying musicians, it’s ultimately not in the music business; it’s in the streaming business. It’s also a publicly-traded tech corporation whose longevity rides on its ability to satisfy shareholders on metrics like customer acquisition costs, subscriber churn, average revenue per user and profit margins — and who arguably doesn’t need an allegiance to music as a core vehicle to get that job done.

Looking beyond music, the debate about whether Spotify plans to become a “label” in the realm of podcasting is already settled: the answer is yes.

Previously, with regards to music, Spotify had served as a content aggregator before trying to sign its own direct distribution deals. Netflix took a similar path, licensing streaming rights to third-party films and TV shows before shifting investment and promotion towards its own slate of original content. With podcasts, however, Spotify is prioritizing original production over wider aggregation from the very beginning, outpacing Netflix on its own growth strategy altogether.

The “Netflix of audio” analogy makes sense given that independent podcast producers are already comparing themselves to major film studios. For instance, Matt Lieber, co-founder and president of Gimlet Media (the company behind Crimetown, as well as other popular podcasts like StartUpand Reply All), said in an interview last year that he aspired for his company to become the “HBO of audio.” Extending that comparison, a podcast studio like Gimlet could very well view Spotify the same way a company like HBO or Disney treats Netflix: as a potentially lucrative licensor with a solid, trusted approach to content recommendation and access to dozens of millions of consumers globally.

But if Gimlet truly sees itself as akin to HBO, there will also likely be points of tension with Spotify, from the vantage points of original content, platform independence and ownership over audiences and data — the exact same axes on which HBO is competing neck-and-neck not just with Netflix, but also with Disney, Hulu, YouTube, CBS and any other purveyor of streamable video. It also remains to be seen just how meaningful Spotify is for audience development across the podcast spectrum. Some smaller podcasts report that Spotify accounts for 50% of their traffic, while some bigger publishers like Adweek that distribute their podcasts non-exclusively to Spotify are getting less than 5% of their listens from the platform.

What is equally as interesting as these content wars is how Spotify is trying to change its product features to reflect the fact that it is no longer “just” a music company. In early October, Spotify launched a new data analytics tool for podcasters, analogous to the already-existing Spotify for Artists data dashboard. Shortly thereafter, the company posted openings for two podcast product-management positions in New York and London, as well as a Research Scientist to help the internal podcast team quantify and understand “how people, data and machines talk to each other about music and podcasts.”

Weaving music and spoken audio content into a single playlist has been on Spotify’s mind at least since 2016 — the year the company launched two radio-like playlist franchises, AM/PM and Secret Genius, that alternated contextual commentary from artists and songwriters with songs that they wrote, performed and/or curated. AM/PM stopped production in summer 2017, while Secret Genius has spun off the spoken-word component of its playlists into an entirely separate podcast.

But Spotify still has so much faith in the hybrid music-podcast format that the company is fully automating it. The service recently launched a new algorithmic playlist format called Your Daily Car Mix that comes across as a more personalized version of a typical in-car terrestrial-radio experience, toggling among news, music, talk shows and other forms of audio entertainment.

For instance, my Daily Car Mix on January 10 opened with a five-minute segment from NPR News, followed by a series of automatically-curated songs by four artists I listen to on a regular basis, then a quick, minute-long news update from the BBC (pictured below), and repeat:

Importantly, Spotify is not the only tech company jockeying for a slice of the podcast industry’s future. Last November, Pandora (now owned by SiriusXM) launched its Podcast Genome Project, with the aim to build a market-leading podcast recommendation system in the spirit of its pioneering Music Genome. Google Podcasts is partnering with audio-production nonprofit PRX to incubate the next wave of podcast creators of color (Spotify has a similar initiative with its Sound Up bootcamps for female podcasters of color). Amazon, whose suite of Echo devices dominates the global smart-speaker market, has already signed deals with networks like Syfy to debut narrative podcasts exclusively through Alexa. And according to a recent report from Libsyn, nearly two-thirds of all podcast plays still happen through Apple’s Podcasts app.

But none of the above corporations seem to have any interest in creating original podcast content in-house for their respective distribution platforms, and hence are not adopting an explicit “Netflix-for-audio” strategy to compete with Spotify.

Perhaps the most important question to ask is how Spotify’s slow, steady transition away from its brand as a music company will impact the artists and labels who depend so heavily on the platform for revenue. There are only so many hours in a day, and more time spent listening to podcasts inherently means not only less time spent streaming songs, but also lower royalties paid to the artists and rights holders who created them.

To mitigate this competition, major labels are developing their own music podcasts, focused on highlighting their extensive back catalog of classic albums. Some commentators also predict that more artists will start podcasts of their own in 2019, to provide more context around their upcoming projects and to own the narrative around their brand.

But unlike artists and labels, Spotify is not necessarily creating and aggregating more podcast content in order to attract more music fans to its platform. Millions of dollars in the red, Spotify is scrambling to solidify its future stability as an audio experience company — as an automated radio network that intends to provide a sonic backdrop to every moment in our lives, from Crimetown drama to the daily news. Music is necessary, but insufficient, to make that vision come true.

To read more of my thoughts on music, creativity, technology and business, you can follow me on Twitter and/or sign up for my biweekly newsletter, Water & Music.

Cheri Hu: Music-tech writer and analyst for Billboard, Forbes, Music Business Worldwide and many others. Subscribe to my newsletter for updates: bit.ly/WaterAndMusic

[Author: Guest Post]

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