Spotify Saved the Music Industry. Now What?

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Imagine, for a moment, that Taylor Swift was wrong. The reigning queen of country-tinged pop shocked fans in 2014 by abruptly and publicly breaking up with a prominent suitor: Spotify. Mere days after the October release of her album 1989, Swift yanked her entire back catalog from the leading music-streaming service—and made a compelling case why Spotify was a threat to her industry.

“I’m not willing to contribute my life’s work to an experiment that I don’t feel fairly compensates the writers, producers, artists, and creators of this music,” Swift said at the time, taking a swipe at Spotify’s so-called freemium business model. “And I just don’t agree with perpetuating the perception that music has no value and should be free.” 

Swift’s bold move won her acclaim from recording artists around the world who believed that streaming music services were cutting into their already meager bottom lines. After all, revenues for recorded music had been falling for a decade and a half thanks to plummeting CD sales. Spotify cofounder and CEO Daniel Ek countered by publishing a lengthy essay defending his company. (“All the talk swirling around lately about how Spotify is making money on the backs of artists upsets me big-time,” he wrote.) And Swift’s scheme proved to be a triumph once the receipts rolled in. Named America’s highest-earning musician that year by Billboard, Swift went on to sell a million copies a week of her album for three weeks straight—the first such recording artist to do so, according to Nielsen SoundScan—without the work ever landing on Spotify servers.

Swift 1, Spotify 0.

But while Taylor may have won the day, Spotify hardly suffered in the long run. In fact, 2014 was the low point for music sales—and the start of a resurgence for the business, led by Spotify.

Since the year of Swift’s Spotify defection, the global recorded music industry has seen overall sales grow every year—from $14.3 billion in 2014 to $18.1 billion in 2018. That’s predominantly thanks to paid streaming, according to the International Federation of the Phonographic Industry, or IFPI. Today, paid and ad-supported streaming together represent almost half of all global recorded music revenue. (Physical sales of CDs and records still account for 25%; the rest comes from other avenues, like performance rights.) And Spotify—with 232 million monthly users and 108 million paying subscribers globally—leads the pack with more than a third of the streaming market, estimates U.K. market researcher Midia. 

Even Swift has gained an appreciation for the benefits of Spotify. Today, the entirety of the “Shake It Off” singer’s catalog is available to stream on the app, including 1989 and her latest album, Lover

Spotify and Ek have reaped the benefits of his platform’s rise. Ek took the company—which he cofounded with Martin Lorentzon in 2006 in Stockholm—public via a direct listing (rather than a traditional IPO) in April 2018. Today, Spotify has a market value of about $21 billion, and Ek himself has an estimated net worth of nearly $2 billion. Analysts estimate that the company will reach $7 billion in sales for 2019. Spotify’s overall prospects are so robust, according to BCG, that it ranks No. 5 on this year’s Fortune Future 50 list of the companies best positioned to generate long-term growth.

But there’s no guarantee that Spotify will hold its position at the top of the charts. Encouraged by streaming audio’s growth, tech giants Apple and Amazon have entered the fray. Each has extraordinarily deep pockets—not to mention a home court advantage as the makers of the iPhones and Echo devices on which so many listeners access their music. Meanwhile, the maturation of major streaming music markets such as the U.S. and the U.K. has Spotify and its rivals chasing emerging opportunities in Brazil, Mexico, India, and “late adopter” nations like Germany and Japan. 

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Already, Spotify has found profits hard to come by. After reporting its first-ever quarterly profits in the third and fourth quarters of 2018, the company returned to losses in the first half of this year, leading some investors to sour on the stock. Since Spotify’s listing, its shares are down 30% versus a 15% gain for the Nasdaq. And the painstakingly negotiated agreements that Spotify has with the major labels—the majority of the music streamed on the service is licensed from Universal, Sony, and Warner plus indie agency Merlin—don’t leave the company much room to boost its profit margins.

Spotify has been a savior for the music business. Now it needs to prove that it’s not a one-hit wonder.

Just how hard has Spotify rocked the record industry? Consider where the business was at the turn of the millennium. In 1999, still riding a multi-decade wave of growth, the global recorded music industry logged a record $25.2 billion in revenues, all of it via sales of physical media like vinyl records, cassette tapes, and above all, compact discs. (For perspective, Starbucks had just under $25 billion in sales last year.)

Then Napster came along. The launch of the notorious file-sharing platform that very same year took the homegrown piracy that has always been part of the music industry and put it on steroids. Cue the slide: By the time Apple launched its iTunes Music Store in 2003, annual music industry revenues had dropped by some $4 billion, according to the IFPI.

By the time Spotify launched in 2006, music sales had fallen another $1 billion. But the record companies were still wary of the streaming service, which Ek was pitching as a solution to piracy. The industry cut a deal with Spotify for music rights outside the U.S. in 2008, but it took until 2011 for Spotify to negotiate its way into the U.S. market. Alarmed by the sudden erosion of their business, all of the major record labels finally signed licensing deals with Spotify and quietly took an estimated 14% combined stake in the company. (Universal, Warner, and Sony declined to comment for this story.) 

With more than 48 million monthly listeners, pop singer Ariana Grande was Spotify’s most-streamed female artist last year.

“The major labels kind of sat on their hands at the advent of streaming,” says Errol Kolosine, former head of the record label Astralwerks and a professor at New York University’s Clive Davis Institute of Recorded Music. “The music industry went through a period of relative uncertainty, driven by not understanding the permanence of streaming. That reality has set in now.”

Part of the industry’s reality check was to realize that Spotify, especially in the era of smartphones and speedy Wi-Fi, offered a superior experience—one that customers would now demand. “What it provides for the listener is amazing,” says Jeff Peretz, a studio musician, producer, and music teacher in New York who has worked with acts such as Mark Ronson and Lana Del Rey. “They have access to everything.” 

But giving listeners so much control meant that the way artists and labels made money had to be completely rethought. Adds Peretz: “The average listener doesn’t care about how money moves through the industry and where it winds up.”

Spotify makes its money in just two ways. It generates less than a tenth of its revenue, or $291 million in the first half of this year, by selling advertising against its free listening service, which offers limited, on-demand access to its audio catalog. It generates the vast remainder—91% in the first half of the year, or $2.89 billion—from fees for its paid subscription service, which offers unlimited access to the catalog, online and off. The company has long held that its free service serves as a funnel to its paid counterpart, and it has the data to back up the claim: More than 60% of new paid subscribers to Spotify upgraded from its free tier. Most of the company’s growth has been the result of working within these two categories: more effectively monetizing its free customers, and attracting more paid subscribers. Annual growth in both categories tops 30%, and the company keeps a tight enough lid on fixed costs so as not to outpace revenue growth.

But, as industry observer Ben Thompson pointed out last year in his Stratechery newsletter, Spotify’s upside is limited by its marginal costs—that is, the royalties it pays the record labels from which it licenses the vast majority of its music catalog. Despite its impressive continued growth in terms of users and revenue, Spotify’s margins are “at the mercy of the record labels,” Thompson wrote, and its losses are growing in absolute terms.

Wall Street has grown concerned as well, with more than one analyst arguing that the company needs to lower royalty rates to justify its market value. “We can all contemplate ways that Spotify could one day add in higher margin products to their business,” says Deutsche Bank analyst Lloyd Walmsley. “We just haven’t seen any real signs of that coming to fruition.” Spotify and the labels are in the middle of negotiating their next two-year deal, and the talks promise to be intense. While Spotify is bigger than ever, the increasingly fierce competition it faces from Amazon, Apple, and others gives the labels new leverage

As one music industry executive with continued ties to the company puts it: “Spotify is one fail away from becoming less relevant.”

It seems appropriate that Cecilia Qvist is calling from the future. Qvist, who serves as Spotify’s global head of markets, is speaking to me via videochat from Japan, the world’s second-largest music market but a late bloomer when it comes to streaming adoption. It’s 6:30 a.m. in Tokyo; fledgling rays of sunlight peek over her pixelated shoulders. Qvist explains why Japan represents such a big opportunity for Spotify.

“Japan has been a very physical market,” she says. “We have the ability and opportunity to show them things they haven’t seen before.”

The land of the rising sun isn’t the only place where Spotify believes it can dazzle new users. The music industry considers at least a third of the top 10 global music markets to be immature when it comes to streaming adoption, either because of a lingering love of CDs (Japan) or lagging technical infrastructure (Brazil). 

That’s good news for Spotify, which is under great pressure to show that, category dominance now achieved, it can reliably turn listeners into profits. Qvist, whose mandate includes international expansion and product localization, believes the path to growth lies in balancing a trio of strategies.

“There are a few ways for us to grow,” she says. “Growth within existing markets. Expanding into new territories. Enhancing our product offering. It’s not just one thing. You have to have enough bets in enough buckets.”

To date, Spotify has bets in 79 buckets—far more than Amazon Music, which is available in about three dozen countries, but well behind Apple Music, which operates in more than 110. To broaden its reach, Spotify announced in July what it dubs Spotify Lite, “a small, fast, and simplified version” of its signature streaming service that’s optimized for older computer hardware and slower cellular networks. It launched Lite in three dozen emerging markets, including Argentina, Brazil, Canada, India, and Mexico.

“There are almost 5 billion smartphones around the globe,” Qvist says. “Just look at the potential that exists.”

One notable omission? China. Spotify doesn’t officially operate in the most populous country in the world, though in late 2017 it swapped minority stakes with Tencent Music, giving it an indirect foothold. Midia, the market research firm, estimates that Tencent Music—which went public on the New York Stock Exchange in December and carries a market capitalization of $22 billion—claims about 8% of the global streaming music market, behind Spotify, Apple, and Amazon. Together, Spotify and Tencent control a near-majority of the world’s music streaming business, providing a bulwark against competition from its Big Tech rivals. (Neither Apple nor Amazon responded to Fortune’s inquiries for this story.)

Not that Qvist is terribly concerned about it. “You would be surprised how little time we spend looking at competition versus what we can do on our own,” the Spotify executive says with an air of defiance. “We are a global service, by far the biggest. We are solely focused on audio, and that’s a big difference.” (Story continues after sidebar.)



A Brief History of Music Streaming

Eight years after launching in the U.S., Spotify dominates the global streaming market. But it wasn’t the first mover in digital music. Here, some major milestones. —Aric Jenkins


The Internet Underground Music Archive launches as a platform for unsigned artists to share MP3-formatted tracks to the public, free of charge.


Sean Parker and Shawn Fanning found Napster, a peer-to-peer file-sharing service that allows people to access MP3 files for free. The site is shut down in 2001 after being sued by rock band Metallica.


The iTunes Music Store launches to sell digital music for Apple’s iPod, legitimizing the practice of accessing music from an online platform.


Internet radio service Pandora debuts. It features algorithm-based playlists as well as a “freemium” model allowing consumers to listen to music either for free, with ads, or uninterrupted with a monthly subscription.


Swedish entrepreneur Daniel Ek launches Spotify in Europe. Rather than pay artists a fixed price per song or album, his business model pays out royalties based on the number of streams.


Spotify debuts in the U.S.


Spotify reaches 40 million listeners and 10 million subscribers, but suffers a blow when Taylor Swift pulls her music from the platform.


Rival streaming services Apple Music and Tidal (the latter backed by Jay-Z and Beyoncé ) hit the market.


Spotify goes public via a direct listing. Meanwhile, Drake becomes the first artist in history to reach 50 billion streams across all platforms.


Amazon launches Amazon Music HD with lossless audio, joining Tidal in the high-quality streaming market.

Which brings us to podcasts. It was perhaps unsurprising that Spotify might look to other kinds of audio as a way to expand; it was another matter entirely that it was willing to pay a premium for a pair of podcast producers. 

In February, Spotify announced that it had acquired New York–based Gimlet Media, known for its podcast series Reply All and Crimetown, for $230 million; the following month the company shelled out $56 million for Parcast, known for true-crime shows like Unsolved Murders. The moves capitalized on the fact that Spotify has become the second-largest player in podcasting (behind a certain competitor in Cupertino, Calif.). They also underscored Spotify’s need to break free from the constraints of its music contracts to see improved growth.

“The shift to podcasting—we understand what’s going on there,” says a second music industry executive, who requested anonymity, citing his employer’s business relationship with Spotify.

Despite its booming popularity, however, podcasting is still a much smaller business than music. In addition, the music executive adds, podcast economics aren’t the same as those for music. The royalty pool is different, and the audience itself is different. “Being really great at podcasting does not solve all the issues with respect to [Spotify’s] position in the music business,” the executive says. “It’s an interesting opportunity; I understand why they’re going after it. But it’s not a game-changer. The jury’s out.”

Dawn Ostroff, Spotify’s chief content officer, begs to differ. The longtime television industry executive (she was for years president of the CW and UPN networks) calls me from Spotify’s new U.S. headquarters at 4 World Trade Center to explain why podcasts hold promise for the company. At 564,000 square feet across more than a dozen floors, Spotify’s playful NYC digs are more of a vertical campus than an office, and the perks within—including free meals and an ocean of standing desks—signal the company’s rapid ascent.

Ostroff says the landscape for podcasts mirrors the one that Spotify encountered in music in the 2000s. They’re also an attractive opportunity for Spotify to gain additional leverage over the next generation of consumers: Generation Z, which is listening with increasing enthusiasm. In 2017, 27% of the cohort listened to a podcast at least once per month, Ostroff says; this year, 40% tuned in.

“Podcasts have been around for years, but they’re still nascent in other ways—the business has been incredibly fragmented,” she says. “It’s an opportunity for Spotify to build and unify the industry at a time when we’re seeing listenership explode.”

It’s also a chance for Spotify to own the content in its catalog, rather than license it. Podcasts haven’t been the company’s only attempt at this. Last year, Spotify experimented with a service that would allow independent artists to upload their work directly to its platform, à la streaming peer SoundCloud, and cut out the middlemen—that is, record labels. Predictably, the initiative was met with some complaints from the music industry. In July, Spotify shuttered the program, saying it wanted to focus on serving artists and labels. “I still think [direct uploads] might be part of their long-term perspective,” says the second industry executive. “But it wasn’t moving the needle.”

All of this is important because Spotify lacks a key tool to fend off Apple and Amazon: hardware. According to its own count, Apple has more than 1.4 billion active iPhones, iPads, TVs, and Macs around the globe to leverage for Apple Music; Amazon has sold more than 100 million devices with its Alexa personal assistant and counts more than 100 million members of Prime, both of which allow for access to its music catalog. Whereas Spotify must fight for every eyeball on someone else’s device, its well-heeled rivals can activate a customer base overnight. That Spotify continues to grow is a testament to its strong engagement figures, but the threat to its future prospects remains. (Story continues after sidebar.)

Swimming Upstream

Spotify dominates the global music-streaming market with 108 million premium users—nearly 50 million more paying customers than its closest competitor, Apple. But the Swedish company has a host of fierce rivals. —Aric Jenkins

Apple Music

An Apple exec confirmed in June that the service, which launched in 2015, had 60 million paying subscribers. And Apple’s marketing heft plus the enduring popularity of the iPhone is a good formula for winning new customers. At $9.99 per month, it costs the same as Spotify premium.

Amazon Music Unlimited

Amazon got a late start in music streaming, debuting in 2016, but is now growing faster than the market leader. Subscribers increased 70%, to 32 million, over the past year compared with 25% for Spotify. Amazon’s big advantage: its popular Echo line of smart speakers, which use Amazon Music as the default. Its premium service is $7.99 a month for Prime members.


The radio-like service that changed the way we listened to music more than a decade ago was acquired for $3.5 billion by SiriusXM Satellite Radio in February. Advertising and subscription revenues are up. But overall monthly active users fell from 71 million to 64.5 million over the past 12 months.

Tencent Music Entertainment

With a staggering 652 million monthly active users in China—31 million paid—Tencent has massive scale in a market where Spotify doesn’t compete. (But Spotify owns a 9% stake in its Chinese rival.) Tencent, which went public last year, generates revenue not just from music but additional services like online karaoke and live-streaming. 

YouTube Music

Google has struggled to build its subscription media businesses, but the company gave it another go last year with the launch of YouTube Music. Priced at $9.99 a month, the service not only offers access to artists’ catalogs, but also remixes, covers, live performances, and music videos. Together with the older Google Play Music being folded into YouTube Music, Google reportedly now has more than 15 million subscribers.


Despite high-wattage backers like Jay-Z and Beyoncé, Tidal has yet to really catch on. Estimates have pegged the pricey ($19.99 a month) service with about 3 million subscribers. Still, the service has been praised for its high-fidelity, lossless audio quality. In September, Tidal struck a deal to bring its platform to Roku, making it an entertainment option for the smart home.

Daniel Ek glances around nervously. Gayle King, the <em>CBS</em> This Morning anchor, has just asked him live on the air how, after three icy years, he managed to mend Spotify’s broken relationship with Taylor Swift. “She’s got a song, ‘Love Story,’ that says, ‘Baby, just say yes,’ ” King offers with a smile. “Is that what you did?”

“It was slightly more complicated than that,” the CEO says with a chuckle, adding that it took several trips to Nashville to convince the pop star that streaming had come around enough for her to reconsider.

In truth, Ek always had the upper hand. It’s in the interest of artists signed to major labels—including Swift, who has a worldwide deal with Universal Music Group—to be on every platform where they have listeners. Spotify has done nothing but build that base since its spat with Swift; in the interim, physical album sales have fallen off a cliff. It was only a matter of time before economic pressures would push Swift into Spotify’s open arms.

That’s not to say that Spotify has solved the one bugaboo that continues to dog it: artist payouts. By the company’s own calculations, more than two-thirds of its total revenues are funneled back to artists, record labels, publishers, and distributors. And yet, the itemized numbers for streaming revenue feel distressingly low.

Spotify is cagey about revealing specific figures and payout rates, which depend on label agreements. But reports have pegged rates between three-tenths and eight-tenths of a cent per stream—or up to $8,000 for a million streams. Most of that goes to the master holder of the song rights. The songwriters themselves get less. (A ruling last year by the U.S. Copyright Royalty Board aimed to hike songwriters’ share by almost half; it’s stuck in appeals.)

Those figures aren’t unique to Spotify. Apple and Amazon pay similar rates, industry sources say. Tidal, the troubled streaming service co-owned by a roster of famous artists and Sprint, pays a little more; Pandora, the pioneering radio service owned by SiriusXM, pays a lot less.

Taken as a group, though, the streaming services have proved to be a powerful engine for listeners to discover artists and a growing revenue generator for labels. As one music executive puts it: “We’re frenemies. We need each other. It’s in our interest for them to be as dependent on us as possible. And our artists need to reach as many customers as possible.”

To stay on top, Spotify must keep that balance between partner and adversary with the record industry. And just to be safe, it should probably avoid starting any new fights with Taylor Swift.

This article appears in the November 2019 issue of Fortune.

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