Universal Music Group – Streaming Revenue Growth Outlook & Marketing Spend Trends – 17 September 2021

  • Public Equity
  • TMT
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Former Commercial Director at Universal Music Group Sweden AB (Universal Music Group Inc)


  • Streaming revenue growth outlook for Universal Music, including record label monetisation on non-streaming platforms such as Facebook (NASDAQ: FB), TikTok and Snapchat (NYSE: SNAP)
  • Artist-label relationship, deal structures and split between catalogue and frontline music – evolution and economics
  • Spotify (NYSE: SPOT) – Discovery tool adoption drivers plus streaming platforms-record label relationship evolution and marketing budget share
  • Catalogue purchasing, focusing on rights and royalty streams



Where will growth for record labels come from? Is there a distinction for these businesses between publishing and recording music?

SP (Specialist): I think everyone who is on the call, or some of you at least, have seen the trajectory that Goldman Sachs handed out a few years ago which says that for the next 10 years revenues will double. I think that is the prevailing situation, but what’s also interesting is where growth will come from. You will have the streaming revenue, which is a significant portion of where the growth is going to come from, but then you also have sync income, which is something like you put the music against a film or commercials or a game in sorts, so you will see growth in other areas than just streaming. I think in particular, the sync and the public performance income and how that trajectory will develop over time is particularly interesting but I think the consensus in the industry is that they will double over the next 10 years. My personal view, which I don’t have any numbers to back up, but my feeling is that that’s probably an understatement. I think we’re going to see more growth than we previously saw, mainly because we will have more areas in the future, which we can come to later, where revenues from music will be coming from. That’s my guess anyway. I think it’s also worth coming back to both [sic] for the publishing, because publishing is roughly, if someone pays you USD 100, about 50-60% of that is going to be to the label and then you have 10-15% that’s going to be in the publishing area, I think that’s if you want a general rule of that. As the entire ecosystem around music grows and is better monetised, everything is going to rise in terms of revenues, profits and so forth.

I think there are a couple of things that are going to be the drivers behind those. First of all, we have the music services, the Spotifys of the world, the Apples of the world, the TikToks of the world, and they are going to cater to different use cases for the users. When I’m in the car, I might listen to Spotify. When I want to watch the music video, I might go to YouTube. If I just want to entertain myself sitting at the train station, I can watch TikTok and whenever I want to connect with friends, I probably go to Instagram, but something like that. If I’m oversimplifying, that’s how it looks like. I think what the industry is very conscious of is that they want to have, I would say, 4-6 global players who are good partners in contributing to this growth, because, ultimately, I think you need scale and you need reach in order to be successful. You have Amazon, you have Spotify, Apple, YouTube. TikTok is there, and they have a particular music service which I really encourage everyone who is sitting in, I would guess, Indonesia and Brazil, maybe India as well, can look at. It’s called Resso. It’s probably the most modern music service in the world. They will see there are going to be different use cases and drivers of this growth, purely from a music service perspective. Along with that, is going to be obviously more technology, consumer’s willingness to pay. I think if you go back 10 years, paying for a premium content subscription was awkward. Now, everyone is doing it and I think this trend will transition into developing markets and more markets. Then you can always question what kind of ARPU will come to that, but I think that’s an undeniable trend.

The last bit, which is more of a macro perspective, it’s governments’ willingness to protect IPs in general because of a bigger portion of their growth in their economy is going to come from that. In order to protect that, they want to make sure that creative work and products are being monetised properly. I think China is probably the most well-known example, whereas if you went back 15 years or 10 years, everything was privacy and now they have TME, which owns Spotify and a lot of other stuff. They want to be a global force in music and the only way to do it is to ensure that the companies and the artists that are contributing to those platforms can make a living. I think those four or five major catalysts are the key drivers for the industry as a whole, both for publishing and also for the recorded music side.

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How do record labels such as UMG [Universal Music Group] monetise on non-streaming applications you mentioned such as Facebook, TikTok and Snapchat?

SP: I can’t go into the exact deal points because I don’t think they’re public but there are different ways that the labels are viewing this, if I speak non-specifically because I think it applies to the majors in general. The majors’ view of their contribution to these FANG companies, Facebook, Google, YouTube, is that they contribute about 25% of the value of those businesses, and they are very eager to make sure that they tell the platforms that. On the other hand, the platform doesn’t necessarily agree because they say they have an audience. Essentially, what the labels are saying and Universal is saying is that, “When you are using our newsfeeds in order to drive ad sales or product develop or ensure people are around for longer, we want to get paid.” I think Facebook is a very good example where they, in the beginning, said, “Why should we pay? If you ask us to take down stuff that we’re not allowed to have, we will, of course, take it down,” but the way that YouTube grew in the beginning is to say, “We can’t control everything so you just have to tell us what we can’t have.” I think Universal, and maybe the other labels, very successfully made the user experience on Facebook very hard and very difficult for the users because they went down and struck down a lot of the uploads. Eventually, Facebook came around and said, “Obviously, our users want this content, and hence we need to pay for it,” and then they struck a deal which made both parties satisfied with the solution.

I think that platforms are increasingly understanding that the content that is glueing and creating stickiness to their platforms is coming from, in the main, Sony, Warner and Universal. The reason is that they all have the artists that create stickiness and create an interest and make these platforms sexy, for lack of a better word. They’re more and more forced to pay for the consumption on the site and the value that the music brings, and there are two ways of doing this. One is to say, “We want you to pay for every stream. If someone is streaming music, we want X,” but the way the publishers and labels are increasingly saying it, that, “Actually, we don’t necessarily just want you to pay for the actual usage. We’re saying that we’re creating a destination as a whole in the whole ecosystem that you provide to the users where we have a very important part, and we want a share of everything of that.” You can always argue if that is a successful way of negotiating and creating deals but I think, in general, that content providers at that level with that exclusive content, because there is only one Ariana Grande and there is only one Eminem and there is just one Doja Cat, you can’t multiply them, they have a very strong negotiation point at that because they can offer those kinds of artists.

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Do you expect record labels’ monetisation on non-streaming platforms to play out as a royalty rate agreed between Facebook and UMG or any of the major players? You mentioned per-stream and per-performance approaches.

SP: I think they want to move to the value they bring to the platform. I’m sitting in one negotiation now with Universal and Sony and all the publishers and the view is that, “Regardless of what income that is being generated in this space, we are the one enabling people, even if it’s a non-music product, so we should take part of that revenue, regardless of where in this entire universe that something is being monetised.” That is the approach that they want to take and I think they will increasingly take that position but, since a lot of the deals have a legacy to them, it’s easily stuck in a licence power play view. For everyone to recap, if you look at Spotify, for every USD 100, USD 25 is VAT, or whatever it is, and then Spotify takes one third and then the two-thirds are being divvied up between rights-holders. Then your share, so if Ed Sheeran had 1% of all the streams on Spotify, then he would earn 1% of that two-thirds. I’m oversimplifying but if he wrote the song and he was just the sole writer and he was the only one performing the song, he would earn 1% of that two-thirds in the entire world’s pool of revenue. If Spotify generates, I don’t know, USD 100m a month and Ed Sheeran accounts for 1%, he would earn I would say USD 6.7m. Something like that, so it’s 1% of the 67%. That’s how much he would make every month. That is the general calculation, so it’s essentially your share of the entire pool of revenue that all the labels are making money on. I hope that answered your question.

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How would major record labels demonstrate value creation for Facebook? You mentioned music companies are talking about driving 25% of non-streaming platforms’ value.

SP: The way that you do that is to say, “How many percentage of the interaction and time spent on the platform is being caused by something that we create?” Let’s say that if you go into an artist’s page on Facebook, let’s use Facebook as an example and let’s say that 25% of all traffic that’s being driven on Facebook is, in some shape or form, driven out of artists, then you can say, “They actually generate 25% of the value,” but that’s not what you’re getting paid on. You’re just getting paid on their actual consumption of music. That is music rights-holder’s way of saying that Facebook wouldn’t be able to create Ed Sheeran, it’s Warner who have done that successfully. If you aggregate that over the entire platform, music companies are saying that, “We are generating 25% of your business because of our IPs, so our IPs are driving 25% of your monetisation.”

TB (Third Bridge): Do you think record labels will be successful in that argument? I think it could be received dimly by social media companies.

SP: Yes, and let’s be honest, I don’t think it’s an easy discussion, but let’s not kid ourselves, the social media companies know this. They know this 110% but of course they’re not going to pretend that’s the case because then it would be game over. At some point, I think 44% of the consumption on YouTube was related to music.

That’s just a number I heard. Let’s say it’s 50%, that means that 50% of all revenue that has been generated on YouTube should come to rights-holders or to artists. I don’t know how much YouTube are actually generating in revenue. Let’s say it’s USD 100bn a year. I don’t know if that’s the case. Might be USD 50bn. I don’t think that the payout for YouTube should then be USD 25bn. That is the entire industry right now just from one tech company. Let’s say, for argument’s sake, that you did the same exercise for Facebook, then 25% of all income on Facebook, or 44% of all income on Facebook, all platforms, in ad revenue should be coming towards new (audio distorts 19.53) and artists. That’s not the case. That is why the writers are talking about the value gap, which some of you have might heard, is that they don’t think they’re accurately paid vis-à-vis the value that they bring to the platforms. They want to try to close that gap by putting new perspectives on how the deals are made, and I think rightly so. I think it’s a big imbalance between the value that those IPs that are developed by artists themselves, or with the help of a major, are actually delivering in terms of payout from the platforms.

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Is monetisation on non-streaming platforms still based around a royalty rate?

SP: Yes. Okay, so how it works right now is if an ad is sold for USD 1 against Ariana Grande’s music video, then the label would receive a share of that revenue that is then paid to the artist. It’s just revenue directly associated with the music that is being generated. That’s how it works right now on, for example, a Facebook or a YouTube.

TB: How big is that revenue pool for major record labels?

SP: I think the right way to look at it is, I assume that’s not public information but if you assume that two- thirds will go to rights-holders and 15% goes to publishers, then you can assume that you have around 52-55% left to distribute to labels. If YouTube have currently 46 or 50 million subscribers, they pay USD 10 a month, that’s USD 500m a month. Am I calculating this right? About half of that will go to the pool of revenue that is being split by labels. If there are, let’s say it’s 10 billion streams a month on YouTube that are music-related, it might be more, let’s say 20 billion, then you take USD 250m and divide it by 20 billion. That’s how much a stream is worth for an artist.

TB: Are those rates determined through direct negotiations between social media companies such as Facebook, Instagram, TikTok and Snapchat?

SP: Yes, so the labels will go and say, “We believe you’re using our music,” or the platform comes and says, “We want your music, we want to license your music,” and then you come into negotiations and you discuss the terms of that negotiation.

TB: Do music companies report the monthly engagements or the monthly platform?

SP: It’s either being reported live as it actually happens, 24/7, every second, so, for example, if I release a song on Spotify, I can see on a live basis how many people are streaming the music, it’s accessible to every artist, but you can assume that every night there’s a data dump being delivered to all the labels for processing. Every night we, I don’t work there any more but labels are getting an update on consumption of their music.

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There’s a lot of news around artists falling out with their record labels. Do you think this is a negative trend for record labels and could impact their margin expansion, given they may have to pay more revenue out to artists?

SP: Yes. The margins at labels are very healthy. I’m not saying they’re super-wealthy companies but it’s a healthy business, so an artist should earn a higher margin or a higher royalty rate. If you look over the past 10- 15 years, the royalty rates have essentially soared, on average, I think between 25% and 35%, so the royalty costs have increased. On the other hand, it also comes with a shift in investment for labels, so it’s justified, so to speak, and I think that margin will continue to be under pressure, mainly because different solutions and different agreements with labels, but you can assume that the royalty rates are on the rise and that’s going to benefit artists and be negative to publishers and labels. In general, you can assume that it’s been an increase in royalty rates of 25-35% over the last 10 years, and that’s probably going to increase going forward.

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What’s the typical artist royalty rate with a record label?

SP: In some ways, it differs on the artist but, in general, there are different ways of doing deals. I can just tell you a general one. If you do a master deal or an artist deal, that means that the labels are bankrolling every part of that music and launch and marketing and everything. If you want a general number, I would say that the royalty rate from the first dollar earned, so to speak, if you take out advances and stuff and let’s assume that we’re talking about an artist that doesn’t get an advance, then they would earn between, I would say, 15% and 25% on every dollar made. If it’s a licence deal, which means that the artist owns the master but the company are licensing it over time, then I would say the royalty rate is between 20% and 40% perhaps. If it’s a (? 27.52), then it’s 50% after costs, and the last one is a distribution deal, which is essentially the artist collects between 75% and 90% of the revenue, but then the label doesn’t do anything, you’re just using their pipes. The first three are essentially, I would say, connected to actual personnel and resources and money being used in order to achieve a success. In the cases where the artist is making 75-90%, you yourself, as the artist, you’re responsible for your own success, so to speak. In general, there are four deal types that are depending on what service the artist would like from the label, they choose what they want to have. It really depends on what kind of deals are being made.

I should also say that a lot of these fights in the media are created based upon old deals that are not being, I would say, modernised or upgraded, and I think artists have a point there. First of all, I think a deal is a deal, but, with that said, does it make sense that the royalty rate on a 20-year-old track which has been recouped 50 times over should stay at that level or should a higher percentage come to the artist? I think that you can argue both ways but I think it’s fair to say that once the label is recouped and has a healthy profit on the track or the music, you should be generous and give more to the artist, and that’s usually what the fights are about.

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How do you expect deal structures to evolve between artists and labels? What types of deals are artists increasingly opting for given the range of options available? I assume the majority of the catalogue is master or artist deal-based.

SP: I think it’s somewhat of a mirage because if you go to the big artists or someone, they’re essentially saying, “I want to own the masters,” because why shouldn’t they? Masters represent real value. I’m not going to venture in and talk about how many percentage of Warner or Universal or Sony’s catalogue that is licences or distributions or areas which they don’t really control in perpetuity. Honestly, I don’t know. I don’t really think it’s relevant but if you’re a nerd and want to dive into it, I’m sure it’s super interesting. Essentially, what artists are doing is they’re doing, “I own the master but you are licensing my catalogue for 100 years.” Both parties can save the face because the artists don’t want to be seen as they give away something valuable and the labels can just say, “For 100 or in perpetuity,” or whatever, “This catalogue is going to be with us and we’re going to monetise it together with the artist.” I think there are different ways in how these deals have evolved but, when you look at it in actuality, it hasn’t made a big difference, but I think that it has intensified the number of deals and number of renegotiations that need to be done.

As you grow older, you get closer to estate planning rather than as an active artist, so I saw that David Bowie had made a deal with Warner the other day. Without knowing the details, my guess is that that is that way where Warner just says, “Here’s a bunch of money,” to the estate because they don’t want to deal with managing the catalogue, because that’s a lot of managing. David Bowie’s IP and catalogue and how to use and develop his music for future generations, you don’t want 15 siblings to do that. You need a steady hand to do that and a way of doing that is to essentially take over the catalogue management of that artist. Pay a good amount of money, you get a few headlines, you can go to people like analysts and say, “Look what we did.” Ultimately, it’s about giving the chance to do these deals but that’s the last bit of where you essentially say, “Here’s USD 300m,” or whatever, “And we have taken over the entire catalogue of David Bowie.” Whether or not you’re actually going to make a profit out of it, I’m sure they are, but it’s also a way of creating a buzz and also to have an IP that you can develop over time. David Bowie’s legacy is going to be relevant for a long time in the future, and if you can create a moment or a cultural relevance that’s going to last with someone like David Bowie, you obviously can create a big uplift in streams and in consumption, and you, as an owner of that IP, can generate an increase in cash and revenue over time.

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Why do you think deal structure and the mix of deal structures is irrelevant? It seems it would be significant in determining royalty cost and thus labels’ profitability.

SP: This is my personal view, is that if someone came around and said, “Do you want to own Universal?” if someone said to me, “You need to own the Universal stock or the Warner stock or Sony stock for 50 years and you can’t sell it,” would you be comfortable in doing that, and do you think you’re going to make money on that? 100%. These companies are going to last for the next 200-500 years. Why? Because they sit on IP that, transactionally, lasts 75% after the composer’s death. They have been around for 100 years. They’re going to be around for 100 more. They are, in my world very, in a layman’s terms, safe companies. It’s not like Intel, who can essentially vanish after five years if they don’t create good enough chips. I think that’s one thing.

The second thing is that if you think that the music labels and the record labels are a rational business where you can predict what’s going to happen, you are all wrong. The only thing you know, that if you have enough artists and you have enough scale, you will have, somewhere, some place in the business that will succeed. That’s what I mean, that it doesn’t really matter what deals are being made, because you’re never going to be able to know what deals are being made and how they look. You’re never going to be able to understand that, and the label is sure not going to tell you, and I don’t think it matters. It matters to someone like maybe me. I would be interested in that. If I were the MD of Universal in Sweden or the region, I would want to know what kind of deal my MDs strike, of course I want to know that, but it doesn’t matter on that level where you look at the company from a global perspective, because ultimately these companies are going to be healthy for a very, very long time and the money is going to flow through their pipes for a very, very long time. That’s why I don’t think that it matters, because you can assume that margins will be pressured from artists and royalties. You can just assume that’s going to happen. You can assume that labels will diversify their income stream. That’s definitely going to happen, and you can assume that after seven good years or 10 good years with a label, that’s going to be (? 38.23). Right now, there might be a label that’s on a spree and, chart-wise, is doing very well. Give it five years and it’s going to be someone else because it always goes in cycles. That’s why I think that labels, in general, are very good long-term investments, because if a label, let’s say Warner or Sony or Universal, doesn’t do well for three years, they’re going to come back because it’s been like that forever.

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How do you expect the split to evolve between catalogue and frontline music? UMG reported in its prospectus that 54% of consumption was catalogue and 46% was frontline in 2020. Do you think consumption could shift more towards frontline?

SP: I think when someone would throw that number at me, I would probably say, “What do you mean?” Let’s talk about defining catalogue. I think in some cases, when these numbers are thrown, they assume that everything that’s older than one year is catalogue, and in some cases, 18 months. I think the industry standard right now is 18 months, so when I speak to someone in the business and say catalogue, they assume it’s 18 months, but I think that Spotify sometimes refer to it as 12 months. In general, I think between 55% and 65% of all streams are catalogue and the rest is frontline. I think that’s a good assumption. When it comes to profitability-wise, the frontline is not very profitable at all, if you look at it on a scale, because it costs so much to launch new songs. Maybe 80-90% of the profit is the catalogue, but in order to have a profitable catalogue, you need to invest in the frontline. Revenue-wise, it might be closer to 50/50, whatever number you’re familiar saying what it is, but profit-wise, the catalogues are the one generating, essentially, a significant portion of the revenues when you look at the company as a whole, not when you look at individual labels or artists. Then, it might be completely different.

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How could profitability be impacted as frontline content moves into catalogue at a higher royalty cost or with artists having a higher negotiated royalty rate?

SP: Of course, it’s going to put pressure on the margins. On the other hand, the artists that are enjoying these much higher royalty rates are usually artists that stream a lot, and since consumption as a whole is going up, the profits will still be healthy, so you might see a decrease in margins but the actual revenue or profit in actual numbers will continue to go up. If you went into an operating company at any of the big labels, they are probably mandated at this point to look at where is profit going to come from for the next five years. Then everyone knows that profitability in the pure record music industry core product, new streaming music, that’s going to decrease, so what they are doing is that they’re investing in new IPs. Warner did an investment in Roblox. Sony owns a part of, I think, Fortnite. Universal is 20% owned by Tencent, and if you look on the individual market basis, they are investing in merchandise. If you look, for example, at Universal, they own a company called Bravado, which is, I think, the biggest merch company in the world. I wouldn’t be surprised if Bravado increased their revenues five- to tenfold over the next 10 years. It’s such an untapped part of the business.

TB: That was Bravado, the merchandise business?

SP: Yes. Universal owns that. That’s the gem within Universal, if you ask me. Not a lot of people are talking about it but they have huge potential upside. What I mean is that when you look at Universal as a company as a whole, or Warner as a whole or Sony as a whole, they are going to be healthy companies for a very, very long time. However, where the money actually will come from is another thing. It might come from music record sales or music sales or streaming, but it can also be divestments in IP, so companies that they have invested in along the lines. If you look at the acquisitions that Sony or Warner or Universal have made over the last year or two or three years, they’re more like VC companies and investment firms than anything else. At some point, they want to make sure that some of these bets are becoming healthy profit. Universal owns, I don’t know how many percentage of Spotify. Let’s say, for this conversation’s sake, that they own 4% of Spotify and they eventually sell that, then that’s essentially going to come into somewhere in the bottom line of Universal for that year, and that’s just profit, essentially. If Warner was to sell Roblox now, how much profit would they make? That’s what I mean. I think you should see labels as music companies, and really good investors in artist development, creating IPs, but also investment firms in this part of a creative industry. I think they’re going to continue to be deal-savvy and I think the mix where revenues and profits will come from will be much more diverse in the future than it is now, but I’m very confident that they will continue to thrive.

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What are record labels such as UMG specifically buying in catalogue purchases? What rights and royalty streams are they acquiring?

SP: You can assume it’s the right to make money on the music sold, and maybe there are different rights. Maybe they have movie rights in it as well, like, “We also are 100% owning the next film with this. All the proceeds that should go to the artist on this new movie about,” I don’t know, “Ray Charles or Stevie Wonder, they’re going to come to us because we paid for it.” I think labels are becoming more deal-savvy in taking revenue participation in a bigger share of the overall IP, but, in general, we’re talking about music sales, and maybe also live rights. That is essentially what they’re bidding on. If you look at valuations, because there are a lot of companies that are currently bidding on these kinds of companies, you have the Hipgnosis of the world, you have KKR or whatever private equity firms that are out there, you will have pure investment funds in entertainment that are coming into play. Major labels are, in general, paying a valuation which is significantly lower than these other companies. From what I’ve heard anecdotally, major labels are paying between 6 and 15 in P/E, earnings, yearly earnings in price. Whereas some of the non-music companies are paying between 20 and 30, so they’re paying, essentially, double the value or even more. I think the whole discussion around valuation around catalogue and the current rates of what they’re paid at is, from what I heard, still in the favour of labels because they pay less.

TB: Are major labels acquiring different rights? Why are they paying less? Is it a different royalty stream that they’re acquiring vs the likes of Hipgnosis?

SP: I think Hipgnosis is a great company but if you talk about general investment funds in entertainment, if a banker came to me and said, “We’re KKR. We want to acquire your catalogue,” my view would just be, “What the hell are you going to do with that? Yes, you can buy that and this is the price.” I’m oversimplifying. I’m sure KKR is a great company but I’m just exemplifying it. If Universal came around, I probably would say, “That’s great. Tell me what you’re going to do,” because I also know they have the resources to do it. If they say, “We’re going to hook up with Universal Pictures, and then we’re going to put screenwriters to this, and then we’re going to do this with your catalogue,” I know they can actually do that, or at least you know they have a big shot of doing that. A label is, in general, a better custodian of a music catalogue and music rights than a banker is, and I think that is partly why you see this different valuation. I also think that if a label doesn’t acquire a certain catalogue, they have others to rely upon. If you’re an investment firm who went to your investors and backers and said, “We’re going to buy a lot of catalogues,” then you sure have to buy them. There’s no way I’m not doing that. I think that also drives up the valuation. I think as we go around and as time passes, I think you will see some of the catalogues that have been acquired from [sic] mainly non-music companies that are going to be on the block and for sale because they don’t know what to do with it.

TB: Does the label also retain the artist royalty in these deals? Is the composer still paid separately?

SP: If it involves, let’s say David Bowie, my guess in that deal, without knowing, is that they would say, “We’re going to collect all David Bowie’s income as writer, as a composer, and then as an artist,” so essentially three streams of income. “We have already paid you an advance on that, and once we’re recouped, we’re going to start paying you at a certain rate.” Let’s say that I wrote Let’s Dance with David Bowie. That is not included, so my share, that’s a separate thing. They probably just have captured everything that’s all of David Bowie’s (talking over each other 52.02).

TB: Would a label, if it owned everything, take 75% of the revenue? Would 25% stay with a DSP [demand-side platform] such as Spotify?

SP: Yes. That’s exactly right.

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How could the relationship evolve between big streaming companies such as Spotify and record labels?

SP: I don’t think it’s going to be a lot of a fight. They might shout in the media but ultimately they’re owned by the same companies. Tencent and Spotify own each other, and Tencent owns 20% of Universal, and I think Sony is partly owning Tencent and they own a part of Spotify, and Warner, I don’t know, is it owned by Tencent a bit? I think they are. Everyone owns each other, so yes, they might fight in the media, and yes, they should fight in the media, but ultimately it’s left pocket, right pocket. I think the big fight with the Spotifys of the world, I think that time is over. I also think, if I’m not mistaken, Daniel Ek has said that, “The margin fight with labels, I think that’s pretty much over.” I’m not saying Spotify won’t put up a fight and argue that they should earn a higher percentage, but, ultimately, everyone knows that the deal is going to be made, no one is going to back off, and they’re owned by the same people, so why should they have a fight?

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Do you think that Spotify will be able to leverage its non-music share of consumption – if and as it scales it – in negotiations to walk the rate down, even if it’s only 100bps every renewal cycle?

SP: My guess is that the rates of music consumption, of the subscription revenue, I think that’s going to stay the same. What I do think is going to happen is that they’re going to add additional tiers and ways of monetising in which labels aren’t participating. There are two scenarios here. One is to say, “The total amount of consumption of music is now down to X. Why should we pay you Y?” to your point, which I think is one approach, which could definitely happen. I think a more likely approach, because they don’t really want to
hurt each other because they’re owned, essentially, by the same people, is to say, “We’re going to make sure that you have a healthy growth and margin, you as a label, but you’re probably not going to be part of the upside. We’re going to make sure that people stream more podcasts, and we’re going to make sure that we monetise that in a successful way, but you’re not going to be part of that.” I think that’s probably going to be the case. They’re not going to be part of all the upside that Spotify is currently thinking of or planning or doing.

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What are your thoughts on Spotify’s Discovery tool? Could it be used to lower the royalty or headline rate that record labels receive?

SP: I think it’s very interesting. I think currently, labels are looking at it quite favourably and I think the decreased margin and what level that should be, it comes down to return on investment, like, “Is this more efficient than if we would do it ourselves outside of the platform?” If you leave that aside, I think it’s dangerous for labels to start putting a discount on their price because, ultimately, what Spotify is doing is they’re taking quality music and serving it to more people. Essentially, people are staying longer so why should that be met with a discount? On the other hand, I can definitely see why labels would agree to it. I don’t think that it’s a necessary significant margin increase for Spotify and the opposite for the label, but I think it’s an interesting experiment and I think it’s going to be around if it continues to provide value. I think ultimately what Spotify is saying is, because they have also experimented on trying to capture a significant portion or a portion of the ad spend that labels spend outside of the platform, and I think this is probably the most efficient method they have come up with in order to capture part of that revenue. The previous one, where they said, “Why don’t you advertise on the platform? All your customers and users are here,” hadn’t really succeeded. I think this, actually, it might succeed.

TB: Is that Marquee specifically?

SP: No, it’s Marquee, it’s banner advertising, it’s audio advertising, and, depending on the market, there are different, I would say, numbers of people you can actually reach. If you go to Norway and Sweden, a lot of people that are streaming a lot are not even accessible through advertising, so I think it depends on the maturity of the market. The problem is that the prices and the follow-up and essentially Spotify’s willingness to develop transparency and a modern advertising tool haven’t been great. I think that is one of the reasons why they haven’t been successful in getting a high share of the label’s marketing budget.

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What budget share do you think Spotify captures of labels’ marketing spending?

SP: I would say on the frontline release, I don’t know, maybe a handful of percentage of total marketing budget, 5%.

TB: Do you think Spotify could start to meaningfully grow this budget share?

SP: No, I don’t think so, because Spotify, I think if they really put their mind to it, they probably would, but they need to be competitive in a lot of spaces. Labels media buying, the savviness of them from a media buying perspective is just exploding. They’re becoming so much better for every day that passes. I think in the beginning, it was like, “Yes, why don’t we try this?” Now, the labels, I think they’re really professional in terms of buying and using and allocating their budget. Of course, they sometimes do, “Why don’t we just do this because it looks cool, or why don’t we do it because it might be an argument in the conversation with Spotify or a radio station?” or whoever, “Or we just want to boost this segment of the audio because we believe we can make a difference,” but I think on scale, a lot of the revenues, Spotify doesn’t provide a competitive offering. That’s why, until they do, I don’t think it’s going to change.

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Would you say Spotify provides an uncompetitive ROI on ad spend?

SP: Yes, competitive in terms of the product, in terms of transparency, in terms of follow-up, in terms of connecting to databases. If you buy on Facebook or Google ad networks, in real time you can follow on a dashboard what’s happening. On Spotify, getting a follow-up and attribution on ads and stuff like that, it’s just enormously difficult. It takes time. For a label that releases a lot of music and who is looking at real-time data, wants real-time information on their ads and Spotify can’t provide that. However, if that would change and the prices were to come down and Spotify could provide reach, because that’s another thing, you want reach, especially when you release a lot of music. Spotify, in my opinion, can’t really provide that now.

TB: Do you think Spotify can’t provide reach because it’s limited to the core subscriber base?

SP: It’s limited to the core subscriber base, and you can only reach a number of people. I think the maximum amount of people that you can reach with either Discovery or Marquee, it’s 10% of the fanbase. The 90% won’t get it. 90% of the high-propensity users of an artist, for example, you can’t even reach them because, obviously, Spotify don’t want to spam people. I understand Spotify’s view but that is why there are different ways that are efficient if you want to mass-market a release.

TB: Presumably, that’s an artificial cap at 10%, that’s something it could walk up to add more value to that product?.

SP: Both yes and no. The problem is that you’re probably not just a heavy user of Ariana Grande. You probably are a heavy user of Drake, Ed Sheeran, Dua Lipa, Doja Cat, and you will just get spammed if they would do that. It’s probably a wise decision but it also caps their ability to make money. It might sound like a weird thing to do but in actual user experience, I think it’s probably well-balanced.

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How much could Spotify Discovery’s prevailing rate be discounted if the product gains buy-in and support from record labels? There’s an experiment in what the appropriate rate would be.

SP: It currently has buy-in so it’s already there. I don’t want to speculate on that because I don’t know if I should. I think the interesting thing is if this beta testing and experiment is going to continue, I don’t expect a big shift in terms of levels in terms of margins. That would be my guess. I think it’s going to stay pretty much where it is.

TB: Do you think there would be a small discount in the rate for priority placing within a playlist or autoplay feature?

SP: Yes. I think the definition of what is small, I don’t think labels see that as a small deduction. I think it’s a deduction that they can swallow. I think the problem is that if you start by discounting your premium products or IPs, if that’s the route you want to go, should you be doing that? I don’t know.

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Could the Discovery tool play into the record labels’ desire to grow their market share relative to each other? Spotify is suggesting that Discovery mode could apply to a significant share of the platform’s total music consumption, given the proportion of passive consumption within this. Could that be a way to grow market share?

SP: Yes, but it’s not going to really move the needle. It will probably help an individual artist but it wouldn’t matter on scale. I don’t imagine it’s being used in that sense. If I were the head of a company, I would probably look at that and say, “Don’t do it too much because it’s depriving us from revenue.” At some point, you might just do it because you cannibalise yourself. There’s no guarantee that that stream that you are generating actually is coming from a competitor. It could just as well come from yourself, so let’s say you discount a Doja track, Doja Cat, and you stream 10 more Doja Cat streams, there’s nothing to say those 10 Doja Cat streams would have come from Kid Laroi, and then it decreased your margins. Let’s say you discount 100 streams that are being generated. Statistically, X% of that was just cannibalising your own. I’m, for this conversation, saying that Sony has 30% market share. Then 30% of that discount just went out the window because of cannibalisation on your own repertoire, and so the win was down to 70%, and does it really matter? Probably not.

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