Music is important to the overall economy. It was one of the first industries to be disrupted by the Internet, and the first to repackage itself as all-you-can-eat rather than all-you-can-steal. The status quo has been the norm for a while: Napster shut down two decades ago, its nemesis Metallica made streaming platforms its own more than a decade ago, and Spotify Technology SA’s subscription prices have hovered around $9.99 for years (about 800 rupees).
It’s time to think about the potential for radical change. For one, if this is the endgame for the music, it would be a sad state of affairs. The streaming economy is crushingly unequal. It’s great for consumers and for labels and rights holders who have found ways to make a living off royalties, as well as the most listened to artists like Taylor Swift and Ed Sheeran. It wasn’t so good for musicians further down the ladder.
It wasn’t good for shareholders either Spotify or similar standalone music-streaming platforms like Deezer SA, with stiff competition in a saturated market threatening their place as high-growth tech games. Platforms also have limited bargaining power with record labels and rights holders looking to maximize the value of their hits and star artists. Spotify has never had an annual profit; it appears to be in “permanent start-up mode,” as music licensing expert Phil Bird recently put it.
With inflation and the economic slowdown hampering growth — MIDiA Research analyst Mark Mulligan estimates global streaming revenue may have grown just 7 percent in 2022 — and Spotify’s earnings likely for a few more years are elusive as more money pours into podcasts and podcasts audiobooks, what are the ways to get out of launch mode?
One is to raise prices, like Apple recently did. Music is very good value for money – paying $10 (about 800 rupees) a month gets you pennies an hour. Former Spotify economist Will Page noted in 2021 that the price of a glass of Malbec wine has doubled since 2009, despite not bringing any significant improvements for consumers, while songs despite an explosion in depth of music libraries, personalization and algorithmic Curation cost the same.
Higher prices would certainly increase the overall economic pie. It might even provide some incentive to change the unequal way subscription fees flow into an overall pot that favors the biggest artists regardless of what individual subscribers are playing.
But Spotify’s halving in share price over the past year shows that the move comes with risks. No one can predict how price increases will affect demand in a fragile economy. We’re close to saturation as platforms are only able to add subscribers by stealing from others. Spotify faces big tech companies that view music as a loss-maker bundled with other services.
Spotify appears to be taking an alternative course and disrupting its own core product by cramming into a new breed of technology offering that’s been touted to investors as a “Spotify machine.” Co-founder Daniel Ek’s vision is to create a platform for everything audio-related, from music to podcasts to audiobooks. More products would lock in more users at a higher subscription price, along with higher ad revenue and more sophisticated algorithms and payment mechanisms to tie it all together. The plan has some amazing goals, including annual sales of US$100 billion (about Rs.8,13,780 crore) in the coming decade that would put it in the same league as Citigroup or WalMart.
But even here the risks are high. The story of the convergence of different audio streams and increasing profit margins is taking a long time to bear fruit; Jefferies analysts expect Spotify’s gross margin to be below 2021 levels by 2024. The podcast bubble is also deflated, with no guarantees that Spotify’s entry into spoken word will be profitable this year. Audiobooks look like another long-term journey. The notion that these investments won’t hurt appetites for music is also debatable: the potential for surprises when a platform hosts both Neil Young and Joe Rogan has become apparent.
Something even bigger is on the way: artificial intelligence. ChatGPT and tools like this are already being treated the way Metallica treated Napster, with lawsuits and boycotts. It’s only a matter of time before AI-generated music starts taking over music platforms — you can already listen to AI-powered music on Spotify — and the rise of auto-tuned vocals and drum loops in popular music has the humans for machines made easier to imitate.
Of all the changes on the horizon, AI could ruin all sorts of long-term plans. Record labels are already accusing Spotify and others of beachcombing their platforms and diluting star artists’ market share (and thus their bargaining power) by accepting all kinds of independently distributed music. AI-generated music, especially if it didn’t require payouts to artists or labels, would turn the industry on its head.
I guess that wasn’t what the architects of the post-Napster revolution had in mind. That means governments and regulators need to keep a close eye on what’s happening in the music industry; With one in three music jobs lost during the pandemic in the UK, another wave of disruption would hurt. When Spotify revs its machine and techies turn to literal metal machine music, things get loud.
© 2023 Bloomberg LP
