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Don’t like Joe Rogan on Spotify? Then pay more for music.

Protocol Entertainment

Hello, and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. Today, we’re exploring why the price of music subscriptions has led Spotify to write big checks for people like Joe Rogan, and how much Meta is spending on AR and VR. Also: VR ouchies.

Why you can blame the price of music for Joe Rogan

There’s been a lot of finger-pointing ever since Neil Young removed his music from Spotify last week to protest the company’s exclusive podcast distribution deal with Joe Rogan. Depending on who you ask, the whole controversy is about a company putting profits over public health, the difficulty of doing content moderation at scale or the demise of RSS.

Here’s another explanation: 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. 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,” MIDiA Research analyst Mark Mulligan told me this week. “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.

— Janko Roettgers (twitter)

One big number: $10 billion

That’s how much the company formerly known as Facebook lost on AR and VR last year, according to its Q4 earnings report. It’s not necessarily a huge surprise: Zuckerberg had first warned investors in October that the company’s 2021 metaverse spending would top $10 billion.

Still, seeing that number in the earnings release did underscore how massive of a bet AR and VR is for Meta, and the company’s executives made it clear during yesterday’s earnings call that the company is prepared to spend a lot more money.

Zuckerberg teased a version of its Horizon VR world that will run on mobile devices, and said the company still has plans to launch a high-end VR headset later this year — all things that won’t be cheap, which is why CFO David Wehner warned about the potential for additional sticker-shock moments in the coming quarters.

“We do expect Reality Labs operating losses to increase meaningfully in 2022," Wehner said.

— Janko Roettgers (twitter)


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In other news

Comcast will stream 2,800 hours of Winter Olympic coverage on Peacock. The company will also launch a dedicated Olympics hub on its set-top boxes and smart TVs.

Sony is still struggling to make enough PS5s. Sony CFO Hiroki Totoki warned that the ongoing chip shortage will affect sales of the sought-after game console through 2022.

Smart TV sales are starting to affect dongle usage, and Korean TV manufacturers are seeing demand surge due to supply chain constraints in China, according to the latest data on streaming devices.

Sonos has bought a Bluetooth audio startup, and appears to be getting ready to launch its own headphones soon.

Hollywood preps more video game adaptations. A new report this week said Dwayne Johnson’s unannounced video game film, which the actor teased last month, would be based on Call of Duty. Indie game It Takes Two is also getting the Hollywood treatment, while Sony’s Uncharted releases Feb. 18.

Electronic Arts CEO Andrew Wilson reversed course on NFTs, which he called an important part of “the future of our industry” three months ago. In an earnings call on Tuesday, Wilson said the company isn’t focusing on them right now.

Epic invests in more filmmaking talent. The Fortnite maker led a $20 million investment round in Spire Animation Studios. As part of the deal, Spire will integrate the Unreal Engine into its animation pipeline.

An indie studio that supports unionization. The founders of new developer Gardens, formed by former members of thatgamecompany, said they want to foster a positive, healthy work environment, telling Inverse, “If the day ever comes when our employees want to unionize, we would support them.”

Microsoft’s AR hardware plans are in disarray, Business Insider is reporting, with word that plans for a HoloLens 3 device may have gotten canceled.

VR to ER

The Wall Street Journal published a story about people hurting themselves while wearing VR headsets this week, and I can empathize: I’ve never had to go to the doctor as the result of a VR mishap, but I’ve definitely had my fair share of close encounters with dressers, ceiling fans and TV screens. Double-check your guardians!

However, one of the anecdotes cited in the story left me with a lot of questions. A British VR fan is said to have knocked his girlfriend to the ground while playing Beat Saber. Supposedly, the incident didn’t result in any major injuries, and the accidental perpetrator assured the Journal that it had “nothing to do with their subsequent breakup.”

This feels like one of those cases where it would have been worthwhile to talk to all sides involved. Maybe there’s even room for a follow-up for metaverse-related breakups. VR to Tinder, anyone?

Thoughts, questions, tips? Send them to Enjoy your day, see you tomorrow.

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