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Dear Friends,

Spotify is one of the most popular streaming services. In fact, Spotify, has been championed as the savior of the recording industry. However, there are hundreds of artist that do not feel this way. “I don’t know any artists who feel their career has been made better by Spotify” – said artist Dupuis.

Before Spotify, the music industry was in a crisis mode due to the illegal downloads of music. (Shoutout Napster and Limewire)

I would like to add a full disclaimer: This newsletter might seem like a negative about Spotify, but I am a big fan of CEO/Founder of Daniel Ek of Spotify. I do not own Spotify stock because I believe it has been overpriced until just recently. With that being said, I would 110% own the stock at the right price. However, this doesn’t mean that Spotify is perfect by any means. Spotify does not treat the music industry fairly.

When you invest in companies, it is very important that you have a full understanding of every aspect of a company. The good, the bad, and everything in between.

Spotify has been in the news recently due to the controversy behind podcast host Joe Rogan. Due to the controversy, the platform has come under intense scrutiny for their payments of artist.

In this newsletter, we are going to discuss how Spotify operates as a business, and the reasons why artists are so badly compensated.

I think it is very important that we double down on my prior point: the music industry was in complete crisis mode before the rise of Spotify because of illegal music downloads.

When Daniel Ek founded Spotify in 2006, there were 3 ways to listen to music:

1. You would pay .99 cents for a song on iTunes to download to your iPod.

2. You would pay $15 to purchase a CD or a digital album

3. You would illegaly download songs on LimeWire for free

I don’t think it takes a genius to realize that option number 3 was becoming incredibly more popular. In fact, if you take a look at this chart below, you will see how big of an impact LimeWire had on the music industry.

In 1999, the Music Industry brought in $22.7 billion. At the peak of LimeWire in 2014, the music industry was only making $7.3 Billion.

Daniel Ek realized that there was room for innovation in the music industry. Spotify offered an in-between option: all the music you could illegally download on an app but available to legally stream at a monthly cost or on a free ad-supported tier. 

Since 2006, Spotify has became an absolute monster in the streaming space.

Spotify users:

• 406 Million Total Users

• 180 Million Paid Users

• Spotify accounts for 20% of all recorded music revenue

The music industry has a history of suing companies that tried to disrupt them. Daniel Ek knew that he could not beat the music industry, so he decided to basically join them.

Spotify negotiated a massive deal with the biggest record labels. Warner Music Group, Sony, and Universal Music Group, received a combined 18% ownership stake in Spotify, netting them hundreds of millions of dollars. 

On top of the ownership stake, the record labels were getting a massive kickback in the form of Royalty deals. 67% of revenues from music go right back to music rights holders. In 2020, this share of revenues was ~$5.7B which is up from $3.3 billion. 

You might be thinking, 67% of revenues?! Wow! In fact, the music industry revenue has increased from the 2014 low of $7.3 Billion to $12.2 billion in 2020. Fortune even proclaimed that Spotify saved the music industry.

Not so fast! These royalties are divided up between the artist, record labels, music publishers, and song writers. In total, the labels get 50% while everyone else gets 17% of that 67% revenue share.

This is GREAT for the record labels, but it is actually horrible for the artist/songwriters.

JD Groover is creative director of Sea Gayle Music and tour manager for Jon Langston. He is a good friend of mine, give him a follow! 

Spotify launched a campaign that is called Loud and Clear which puts an emphasis on Spotify paying creators by sharing the data of how much artist make.

Unfortunately, the numbers are rather alarming.

In 2020, Spotify had 8 million artist on their platform.

Out of 8 million artist, there were only 13,000 artist that made over $50,000 in revenue in 2020.

In fact, only 2.3% of artist made more than $1,000 in revenue in 2020.

You might be wondering how the payout system works.

The math ends up being where artist make around .003 cents per one single stream or $3.48 per 1,000 streams. However, if a big artist makes a deal with their music label then they would be entitled to much more of the payout.

Keep in mind, the music labels are keeping a significant amount of the revenue share.

It’s also important to remember that the music industry moved from an upfront payment solution to a micropayment solution.

In 1999, someone would pay $15 for a cd and then have access to that music for a lifetime.

With the micropayment solution that same cost is now being split up over months, years, and decades, each time somebody streams a song.  

However, this does not help a struggling artist who is trying to make a living with their music.

Conclusion

Spotify has yet to make a profit, so it is highly unlikely that they will increase their payouts. They are paying out right around 65% of their revenue to the record labels.

If they paid out anymore revenue, they would not be able to keep growing/sustain their growth.

You have to remember that if Spotify didn’t make that deal with the record labels, they would not be around today.

However, we should not punish artists for the deal that Spotify made with record labels.

In my opinion, Spotify should start putting pressure on music labels to give more of money to artists. If music labels only took 25% of the revenue, it would be HUGE for artist and songwriters alike.

I hope you have a great rest of the week! Talk soon!

Stay Hungry, Stay Long,

Matt Allen