Entertainment

Blame cheap music for Joe Rogan being on Spotify

But what else can it do?

Spotify product line on mobile phones

By shifting listening to podcasts, Spotify aims to reduce the revenue share it has to fork over to music rights holders.

Image: Spotify

A growing number of artists are pulling their music from Spotify to protest its business relationship with Joe Rogan. Some subscribers have started to jump ship. And among Spotify staff, there’s growing discontent, as The Verge reported Thursday.

Despite all of this, there’s no indication of Spotify changing its tune, with The Verge reporting that Daniel Ek defended the Rogan deal in a company town hall, calling it critical to Spotify’s success. Ek’s argument, in a nutshell: Every streaming service carries the same music, making it easy for competitors like Amazon and Google to give their own services preferential treatment on their hardware products.

“There was really no reason for them to integrate our service,” Ek said in a transcript published by The Verge. “Their users weren’t necessarily demanding access to Spotify, either. They were demanding access to content.”

That’s not entirely wrong. Amazon Music, Apple Music and YouTube Music all carry more or less the same music catalog as Spotify's, and the music industry has largely given up on exclusive album releases. In that context, exclusive podcasts can be a key differentiator.

  • “Spotify has to pander to podcasters more than it does to artists,” said MIDiA Research analyst Mark Mulligan. To maintain an exclusive distribution deal with one of the most popular podcasters in the world apparently requires a lot of pandering.

Left unsaid during the leaked town hall was another aspect of this relationship: Spotify is in bed with Joe Rogan because streaming music is too damn cheap.

Music services have long struggled to pay those huge royalty checks their contracts with the music rights holders are calling for. Some have even argued that the deck is fundamentally stacked against the streaming media industry, and that music subscription services can never be profitable.

  • Spotify has indeed lost billions of dollars over the years, a streak that continued in 2021: For the full year, the company booked net losses of $38.8 million on $11 billion in revenue, according to its latest earnings report released yesterday.

And there’s a big reason why Spotify isn’t generating profits: The price of music subscriptions hasn’t changed in 20 years.

  • You read that right: When streaming music pioneer Rhapsody (now known as Napster) first began offering unlimited streaming access to the major labels' catalogs in 2002, it priced its subscription bundle at $10 a month. Fast-forward to 2022, and Spotify still charges $10 per month.
  • The price of Netflix’s mid-tier subscription plan went from $8 to $15.50 during the same time, and everything else has become more expensive too: Adjusted for inflation, $10 in 2002 is equivalent to about $15.50 today.

So why can’t Spotify just raise prices like Netflix? Turns out comparing those two companies isn’t even in the apples vs. oranges territory, but more like adding meat to your fruit salad.

  • Netflix produces shows and movies you won’t find anywhere else. As mentioned before, Spotify streams the same music as Apple Music, Amazon Music and YouTube Music.
  • “There is a prisoner’s dilemma dynamic at play because of the lack of differentiation between the streaming services,” Mulligan said. “If one increases its pricing, then it is simply a more expensive version of its competitors.”
  • In other words, if Spotify were going to charge $15 a month, people would just switch to Apple’s $10 plan.
  • And unlike Spotify, those other guys can afford to lose money on music. They’ll just make up for it by charging you more for other things (iPhones, Prime subscriptions, etc.).

This has forced Spotify to get creative. The company has tried many things over the years to make more money.

  • This included a short-lived foray into video, and attempts to strike direct distribution deals with artists to cut labels out of the equation.
  • After major labels and distributors pushed back against those efforts, Spotify settled on its current strategy: to become the biggest player in podcasting.
  • By shifting listening to podcasts, Spotify aims to reduce the revenue share it has to fork over to music rights holders.
  • Exclusive deals like the one with Joe Rogan also come with the promise of a more Netflix-like business model. Instead of paying for every stream, the company simply writes a big check once and then watches those subscriber dollars come in.

But what else can Spotify do? It’s unlikely that Spotify would abandon that $10 price tag without industry-wide support. However, Mulligan thinks it can still tweak some nobs to make music streaming more profitable for everyone involved, labels and artists included.

  • That includes cracking down on all those discounts. “The majority of consumers are not paying $9.99,” Mulligan told me.
  • Instead, they may be paying $5 a month for Spotify’s student plan, which also includes access to Hulu and Showtime. Or maybe they’re getting the bill footed by their parents as part of a family plan. (Hi there, fam!)
  • The result: Spotify’s average revenue per premium subscriber is just $4.97. In 2018, it was still at $5.34. “Subscriber ARPU has been declining every year for five, six, seven years,” Mulligan said.
  • Spotify began to raise some of those bundled and discounted prices recently, leading to a small ARPU uptick. Mulligan thinks the company could do more. “The most important task is not increasing $9.99, it’s making sure that more people are paying $9.99,” he said.

Even so, it’s unlikely that raising the price of bundles would solve all of Spotify’s financial issues, which is why we will likely see more Joe Rogan-sized bets in the company’s future — even if that occasionally pisses off people like Neil Young.

“This is probably just an opening skirmish in what might be a much longer series of conflicts,” Miulligan said.

A version of this story also appeared in today's Entertainment newsletter; subscribe here.

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