Two ways to view this:
- Spotify's business model isn't working and they need the breaks to survive, or
- They're comfortable paying these penalties while building scale until the labels became dependent on Spotify revenues, at which point they'll negotiate more favorable rates.
As a premium Spotify subscriber I love the service and I want them to succeed. But from a business model perspective I think it's going to be tough.
I tried to build an online property back in 2007 and learned then that online ad models only work at massive scale, which Spotify doesn't yet have. Their premium subscriber base remains small. Customer acquisition has to be a priority for the business. As a SaaS business charging $10/month, customer LTV is likely to be quite high, perhaps greater than $300.
But that's not why I think they're future is troubled. Spotify is exclusively a music service, yet the ideal subscription model enables users to access any content they want, any time, anywhere.
So Spotify needs film, books, TV, podcasts and so on. While not zero sum, I don't want a different subscription for all of my content. The idea that I should need multiple subscriptions per content type is a last century model not suited to digital economics. So the content solution has to be one-stop, which means more licensing negotiations.
Also, if Spotify is to incorporate other content and given the precedent of issuing equity to rights partners (see 2009 cap table below as reported in Techcruch) presumably they'll need to offer a similar carrot.
Major label positions will become so diluted to potentially be worth pennies (ironic given that's what Spotify pays artists). With the IPO upside removed labels will play hardball on licensing.
Spotify is great. A "billion dollar exit" looks challenged, today. Their team is incredibly talented, and it will be interesting to see how future licensing talks play out.
Spotify's 2009 cap table as reported in Techcruch:
- Bolag Andel
- Rosello (Lorentzon) 28.6%
- Instructus (Ek) 23.3%
- Northzone Ventures 11.9%
- Enzymix Systems (F. Hagnö) 5.8%
- Sony BMG 5.8%
- Universal Music 4.8%
- Warner Music 3.8%
- Wellington IV Tech 3.8%
- Creandum II LP 3.5%
- Swiftic (Strigéus) 2.6%
- Creandum II KB 2.4%
- EMI 1.9%
- Merlin 1.0%
- SBH Capital (B. Hagnö) 0.8%