{audio:0:00:00} Roger, great to have you with us today. I think a good place to start would be if you could provide some context as to when you first joined EMI and how you’ve seen the major changes in the music industry?

{audio:0:00:18} I was fortunate and unfortunate in joining the music industry. I was fortunate that I got in in 1994, where the music business was soaring. I remember the CEO who hired me said, the one thing you need to know is, you have to be stupid not to make money in the music business. But fearfully, we have a lot of stupid people in the music industry. People did lose money but, largely, the market was driven in a way that people probably don’t understand. At that time, there were four major music businesses and they’d grown up by buying independent labels but, mostly, by consolidating distribution. In that period, the CD was driving meaningful growth, in sales. Music retail, music stores, were expanding at a rapid rate.

{audio:0:01:52} What you had was, four businesses, whose business model was, basically, shipping as much music into stores and leaving it there, as long as possible, until it sold. So the inventories started to go way up. But the businesses looked as if they were doing fantastically, because they’d get 8% to 10% growth a year, which is astounding. By 1996, 1997, you started to see the world be very different. It didn’t show at the top line, but it showed in the bottom line, within the P&L, where you saw huge amounts of inventory that was stuffed out into stores. Over time, that started to become more and more evident.

{audio:0:03:19} Guess what was happening at the same time? First of all, I was hired, effectively, to drive a digital change, for EMI, amongst other things. We did all sorts of things; we were very aggressive in partnering with new digital groups. Digital then is nothing like it is today. It’s like the Dark Ages and we were learning how to build fires, as opposed to other things. There were a lot of ways of thinking about how you would use the digital world, to distribute music. That was true of all major players, to one extent or another. EMI was at the forefront of it, because it was part of a conglomerate that had very large interests in digital kinds of technologies. As I say, in those two years, the underlying economics of it was starting to dissipate. Then you get to 1998 and something happens, and that’s Napster.

{audio:0:05:12} Napster was the first time that digital really became understood as a mortal attack on the music industry. It made absolutely clear that music could be transferred indiscriminately. That the availability of one CD, in a marketplace, could mean that the entire world could have access to the music. That’s a pretty awesome and disturbing thought. Some people, like Bertelsmann, what they thought is, what we’ll do is, we’ll grab hold of Napster and we’ll tame it; we’ll make it work for us. That was probably the most idiotic view that I could ever imagine because its whole model was free. When they tried to get them to create a business model that was related to revenue, all that happened was that they just lost their place in the market, because the market had so many others that were pirating music.

{audio:0:07:11} The music industry had no experience with technology. It had no experience with digital activity. They just went to the law and started to try to solve this issue by attacking every digital use that was being pirated – that was impossible – as opposed to trying to build an alternative world, an alternative that was more conducive to consumer wants and was much more as what we’re seeing today.

{audio:0:08:13} Music businesses, at that time and, to some extent, even today, are run by A&R people; people who choose music, in effect and help develop it. They’re not strategists, in the broader business sense. The management of the music business was aging. These were guys that made their mark in the sixties and the seventies and here we were, in the late nineties and into the 2000s. They were frozen; they didn’t know what to do, other than to just try and fight the hurricane that was coming at them, with the law. What it took for us to come out of that, which was a very long time, by the way, was for others to find a different model, to try and create a different model. It wasn’t the record companies that did that. The record companies resisted. So you first had Steve Jobs, who said, I’m going to solve your problem. Apple is going to be your digital music. The old guard didn’t understand what they were about to do with him, was to give him the keys to the business, which probably wasn’t a bad thing. I’m speaking as though I wasn’t in favor of it. But what happened was, the old guard were at a level where if Steve Jobs wanted to do something, they would just agree to what it was that he wanted to do and not create a different kind of alternative.

{audio:0:10:50} Essentially, the music business, which continued to sell physical goods and it even does today, gave over the digital answer to Apple. What was happening with the physical goods? The physical goods were declining at an astronomical rate, of between 7% and 12% a year, which is devastating for a business. The CD and all of the infrastructure to service physical goods had huge margins. But once the volume drops down, you can’t make it work. Every year, you try and close down pieces; you try and lose pieces of what you’re doing, so that you’re shrinking the business as fast as you can. Every music business had that same issue. There was no one who was immune. Size made the issue even more difficult. But music continued to be sold and the pirates, in many ways, created a greater level for music. The volume of participation in listening to music expanded at as much of a rate as the decline in the physical goods.

{audio:0:13:06} The existential question was, how do you move to a different basis on which you are going to connect with your consumers?

{audio:0:13:20} What was the strategy of EMI then, when you’re seeing this physical distribution decline, the market expand, because more people have access to the music, but now the profit pool is, in effect, unknown or questionable?

{audio:0:13:36} At EMI, it goes in layers here. As I was saying earlier, in the latter half of the nineties, EMI was very aggressive, in terms of the way in which it looked at the digital opportunities. But by the time it was 2002, the lawsuits associated with the business were so great that investing in those things was impossible. I’m not overstating how distressing the entirety of the industry felt about where things were and how to fix them. My role changed across the industry too. Consolidate, so let’s get bigger so we’ll be less small, going forward. EMI tried to do that with Warner Music. It was turned down by the European Union. But others did happen. There was consolidation. Bertelsmann and Sony got together and there were smaller consolidations that went on, as well. That gave you more scope, as long as you could continue to reduce your costs.

{audio:0:16:16} What does that all mean for the people who make music? The artists and the songwriters and the producers? What happens is, they have, historically, been completely dependent on major record companies and publishers for their income. Now, the opportunity for income is declining and declining and so how do you fix that? The record companies took the lion’s share of any of the revenue and that’s largely because their business model wasn’t about optimizing the value of each song or each recording, but was, let’s find the ones that are going to break out and those are the ones we are going to pay attention to. A lot of music got created, but a lot also got dumped into a junk pile. That cost meant that, in order for the economics of the music business to work, you had to make a lot of money on the things that worked. The more failure you have, the more your successes have to be greater.

{audio:0:18:11} That model had been the way in which the business had worked for decades. The deals for music creators, even in successes, the majority of their revenue related to their works, go to the record companies. Otherwise, the business model doesn’t work. You had distress among the artists and you had distress among the record companies themselves. You had distress among the retailers, who are getting hammered, closing their stores as fast as they possibly can. In the United States, the malls had a lot of small, odd shops, for records and people weren’t buying, so in every mall in America, you had a shop that went out of business. In the United Kingdom, in this period, you had the same kind of phenomenon. It was a little less dire there, because the US tends to be more adoptive of new technologies. But nonetheless, pretty dire.

{audio:0:20:03} Getting back to the middle of the decade, 2005, 2006. That’s the point at which new models start to come forward and have something. They come from places that you don’t really expect them to. The one that is most prominent here, is Spotify. Spotify would not have happened in the same way if it had been started in the UK or the US or even in France as they’re basically conservative, in terms of their way of thinking. But Scandinavia, they thought, okay. It’s Sweden; it’s meaningless, in terms of the amount of records we sell. Let’s give it a try.

{audio:0:21:25} Sweden also subsidized bandwidth and had the infrastructure required.

{audio:0:21:29} Precisely. They had the structural elements that allowed Spotify to exist and they had managed the piracy to a greater extent than most territories. The heads of each of the major labels, in those territories, led by EMI, decided that they wanted to do it. They wanted to give them the ability to do it. The key way that was accepted, was that there was control over the actual distribution. It wasn’t simply an open book and that there was an economic model which was, we’ll give it to you free, with advertising and limited options, but we’ll have a subscription model that gives consumers the music in ways that are more satisfying and that is the basic model, at the end of the day. It’s a funnel. We have a funnel and we’re going to get a lot of people to listen and come in and then we’re going to get them to come through the funnel and start to pay.

{audio:0:23:18} What was driving the music business was the presumption that this would reduce piracy. You would see changes in piracy. That was what the proposition was. It was not seen as the future, so much as it was a way to fight piracy.

{audio:0:23:52} So the labels were just thinking of ways of capturing some margin from this piracy and the explosion in people listening to music online?

{audio:0:24:01} Right; get it out of the way. Even in that time, CDs were what we did. If we can get the piracy to go down, maybe the markets will start to stabilize and we can make money again.

{audio:0:24:29} You thought the CDs and the physical distribution may stop declining or even come back?

{audio:0:24:34} Yes. What was interesting, at the same time, was that Apple was in their world, which was digital downloads, selling digital downloads, as opposed to a subscription model, they fought absolutely tooth and nail on this model. They were clearly the leader, by far, in the digital download world. They became much more conservative about technology and where to go, because they had a really good thing going. They had a very good deal and Steve wanted to have it where you pay $1 a song, effectively; that was the proposition and Steve keeps $0.50. Actually, more than $0.50, by the way.

{audio:0:25:50} How did you feel about that?

{audio:0:25:52} If you think about what the economics of a record company is, that doesn’t really work very well. But it works better than not selling anything. The Spotify model started to get a hold and it expanded to other territories. That’s the way the world went. That didn’t really get into the place where we see it today, with a variety of alternative subscription models, subscription services, but I would remind everybody that, today, you still have 40% of the worldwide revenue of the record industry, in hard goods.

{audio:0:27:03} How do you think about that? Do you think there is a floor to the physical distribution?

{audio:0:27:08} If you look at the world, you’re talking about volume here, not value. It’s about where are each of the territories out there, in this environment? If you’re in India, think about the infrastructure you have to have, to drive a digital answer. That’s what keeping them, but the value in contribution is lower than the actual unit numbers.

{audio:0:28:01} My point is, we are still in transition.

{audio:0:28:07} How have record labels changed, in organizational structure, culture, mindset? You mentioned how it was run by A&R people before, who pick music; how have you seen that evolve?

{audio:0:28:22} I don’t think it’s changed very much at all. The underlying economics of the record company is not sustainable, in my view. It has been sustainable, for a long time, but long term, it’s not. I’ll give you the classic story. When I first went to EMI, I had been in the movie business and so I didn’t really understand the music business. I said to my boss, the CEO, give me a sense of how the business works. He told me, if you have albums that you’re doing, or artists, you’re going to see about five of them lose money; they will lose a lot of money. Then you will have about three of them that break even and, if you are lucky, you have two that make money. You’re investing in 10 and two are actually going to make a profit.

{audio:0:30:23} It’s like a VC company.

{audio:0:30:25} Yes. My question always was, why can’t we do a better job of determining of what’s going to sell, what’s going to touch the consumer, in a way that makes them feel as if that is the song for them, or the album for them; how do you do that? The A&R thing is really all about, I’ve got the ear, I know what people want; I know that’s the thing. That whole sense of the world, it’s certainly not as virulent as it was when I was running these businesses, but it still is the concept. The underlying business model hasn’t really changed, except that now, their revenues are limited by having subscription models and they get their margin out of that.

{audio:0:31:52} It hasn’t changed very much and, in the latter period of EMI’s existence, we challenged that view and we used a lot of data, which is an anathema to A&R, and we understood how you have to move artists into cohorts of consumers. You then start to build more demand. We were able to move from two successes, to four. That’s why EMI, in those last years before it was sold, was the most profitable music business in the world.

{audio:0:33:02} How exactly did you look at doing that?

{audio:0:33:06} This is a while ago, so the technology and the understanding was pretty rudimentary. But we did huge amounts of consumer research, online. We looked at how we were touching the consumers. How does a consumer know that that music is there? How do we do that? We do that statistically.

{audio:0:33:44} That’s interesting because Spotify, obviously, own the customers now. They own the users. If you’re saying that the essence of the record labels was the A&R people thinking that they could choose music or understand the taste of the consumer, now the discover funnel actually lies with Spotify. How do you look at that shift in discovery and consumer data?

{audio:0:34:16} Spotify doesn’t make the music. They take the music that is made and make it available to a large number of consumers. There’s all sorts of statistical work that has been done on what does it look like, in terms of listens or sales? They do cluster at the top. What tends to happen and is happening, even today, is that music, basically, becomes stagnant. Everybody produces the music that was successful yesterday. It takes something to break away, to change the nature of what’s out there in the marketplace. I’m a true believer that you can keep doing that. You can keep moving with your consumer. Not that the consumer knows what they want, in a particular way, but there are ways of testing them and understanding whether you’ve got the right mix. That means you need to know who you’re trying to go after. Who controls that? Who knows that? Spotify knows that. Apple knows that.

{audio:0:36:26} Now, you’re captured again. I think that’s where the industry is. I think they are changing a bit; that doesn’t mean that they are not paying attention. A lot of A&R is now about looking at the charts of Apple and Spotify and looking at what’s moving and we’ll go get those people. We’ll convert them from indies to majors.

{audio:0:37:09} How do you look at the position of the labels, in the value chain, given that we’ve seen such a huge shift in usage and, arguably, the digital players owning the consumer?

{audio:0:37:24} I don’t think it’s necessarily true that it is inevitable that the digital players, the subscription players and others, have a unique way of understanding. You can deal with these things, even though they do. But they have a strength. One of the things that Spotify is talking about, as part of their economics, going forward, is using that knowledge and charging the record companies.

{audio:0:38:14} How attractive do you see that, for the labels?

{audio:0:38:18} I think it’s just one more step to saying that the major record companies are going to lose market share. If Spotify can help somebody understand how to position and where to position their music, and be able to look at that in real time, that’s really what the role of a major record company is. Their economic advantage is that they have huge catalogues. Those catalogues, based upon the economics that they represent, have very, very high margins. They’re able to buy successful artists. Therefore, their market share can be retained, but their economics is dependent upon history, not the future.

{audio:0:39:58} What I think will happen and is happening, is that so-called independents will continue to grow. In this world, it’s interesting how we describe independents. Independents are ones who do their own A&R and they have their own economics. But most of them are captives of the major record companies, because they provide the capital to do what I’ve just said. I’m talking about non-captives. Just like what’s happening in the music publishing business, given how robust the music business is, at the moment, the investments will start to calm and there will be alternatives, with sufficient enough capital, to drive companies into being competitive.

{audio:0:41:18} Let’s walk through that. Let’s say that I’m a major artist, I don’t want to go with a large record label, or I’m even with a large record label. If I was to approach a smaller independent, that’s not a captive of a large record company, what would the relationship be like and how would Spotify be involved, for example?

{audio:0:41:43} Spotify is, in effect, selling a deep dive understanding of current consumption and trending consumption. Think about the independent as being an investor, they want to have a greater amount of success, per dollar, per pound, than the major record companies. That’s how they can succeed and be able to match the economics, the advances, that go to major artists. I don’t want to get too granular here. The big advantage that the record companies have at the moment, is that when an artist looks as though they’re going to forward and they are a true independent artist, they go and they sit down with artist and their manager, and it’s all about the advance. It’s all about, how much money, up front, do I get? The money they get is structured. For example, I’m going to give you $1 million, a lot of money, and for that, you’re going to deliver me a record. Then I’m going to sell that record, get that record into the marketplace and make money and I’m going to take X amount, as a record company, and you’re going to get Y amount, out of which I’m going to recoup the $1 million I gave you. That’s the way it works.

{audio:0:44:23} But the independents don’t have that large capital base to give the advance?

{audio:0:44:29} That’s correct. They try and get in much earlier and, by the way, the reverse way of this is that the indies go out and they find the people and then they will sell their position with that artist, to the major record companies. That’s how they make their money. That’s historically true, because they don’t have any capital; they have very little capital. What should happen, if you can efficiently understand what music is going to be more accepted in the marketplace, it’s a play that absolutely is primed for an investor. That is happening and it’s going to happen more because, where most of those investors have been, in music publishing, those numbers are eye-watering, and if you can lay this out in the proper way, you can probably get to a pretty good answer.

{audio:0:46:05} It’s not as complicated as it sounds but it’s the moment at which it’s starting to happen, I think. The record companies have lots to do, to be able to change that. But if I were an artist, and there are artists that are doing really well, but are not at major record labels, the individual artist needs to believe in themselves. I always used to say in making deals, to the artist representatives and the artists was, look, we’re betting for you, that you’re going to do really well and you’re betting against yourself. You’re saying, I want the money now, because I don’t believe I’m going to succeed and we say, we’re investing now, because we think you will. When you have people you believe in and the artist believes it, because it’s a more coherent way forward, that changes the entire way in which the market will work.

{audio:0:47:44} Let’s say that we do see a larger shift of artists to independent labels, how do you look at the game theory, between Spotify and the major labels?

{audio:0:48:03} Spotify reached agreements with the major record companies, because it was their cost of entry; it was what they needed, in order to have a legitimate organ. The record companies and publishers, represent a very substantial portion of the revenue that goes to the artist and them. The margin that Spotify has is pretty thin, especially given the nature of their model. Unlike Netflix, Netflix spends X amount of money on content and then it gets more and the more subscribers they have, the cost of content doesn’t go up, per se. They choose to make it go up, but it doesn’t necessarily. In Spotify, if they gain one more subscriber, their margin doesn’t shift.

{audio:0:49:46} They’ve got far less operating leverage than Netflix.

{audio:0:49:49} Exactly. So it does move because, obviously, you’re getting more, but if you’re trying to extend your business, you’re using a lot of capital to try and keep expanding. Their margins are low and that’s not going to change. It’s not going to change because they’ve set, for themselves and everybody else, the basic underlying economics, between the record industry and them. Now, how do they do that? There are two things they can do. One is to use that data that we’ve been talking about. Use their knowledge to help market and exploit – in a good sense – the music, to create greater value and use that as a way of improving their margin.

{audio:0:51:05} The second is to diversify their content. That’s what they’re doing with podcasts. The third one is that we should also remember that the freemium piece, as we used to call it, the economics there are not good and it is an advertising medium. There is still a great deal of room for them to increase their position in advertising. Again, for every dollar that they create, they give a big chunk of it away to the record industry. As we were saying before, there will be margin improvement and that’s just simply because you’ve got more revenue to play with and your fixed costs aren’t going up as much. For them to really come out, they have to have another source of revenue. That’s podcasts. That’s what I believe they think.

{audio:0:52:32} Before we go onto podcasts, just tying up the section on the record labels, it’s possible that the unit economics of the record labels, going forward, could be under serious pressure? Potentially, independents taking market share, artists moving away from the larger record labels or, if they’re staying, record labels putting up more capital for advances, to keep the artists. Do you see artists demanding more capital from the revenue they are receiving from Spotify and the streaming revenues?

{audio:0:53:08} When most artists come to a record company, they are at the beginning of their careers. The deals that they make are to the advantage of the record company, if they are successful. If the artist is not successful, then the artist has probably done a good job, because they wouldn’t have had the resources. The record companies control the records that are produced, effectively, for the first term of copyright. If you’re an artist, it feels really bad to move to somebody else and not have any control. We’ve seen this time and time again; it’s a problem. The record companies have real strengths in these discussions.

{audio:0:54:35} Because of the original IP that they hold from the artist?

{audio:0:54:38} Yes. Largely, what happens is, they write another big cheque, it feels fantastic and they will, again, have to get that recouped against the sales going forward and they move on. That’s what happens. The real critical thing, to see a full change in the structure is that the first or second deal that an artist does, that’s where the shift to another model is possible. It’s a little hard after that, until you get all the way to the top and, in effect, what happens is that if you are a Drake, he has a very complicated relationship, back at Universal. He’s getting a big tranche of the flow, because what he can do is, he can just stop recording. He’s too big a player. That’s the 1%.

{audio:0:56:09} For this change to happen, what could Spotify do? If you’re Daniel Ek and you know that you have increasing power, in the sense of data and understanding and also more revenue and users, how would you be looking at playing this change, in the structure of the industry?

{audio:0:56:33} I’d be very careful, if I were Daniel, about being perceived as trying to disintermediate the majors. But I would be very aggressive if I were he, and I think he intends to be, on building that data stream and monetizing it and making it available to not just majors. Trying to create a greater diversity of sources of content. I think that is an important thing. It is absolutely true that Spotify needs 100% of the content, to be competitive. It is true that the record companies can’t afford not to be on Spotify. For all their arguing against each other and all the difficulties and other stuff that goes on, the deals are not going to move very much, if at all. Something in the marketplace is going to have to shift for that to happen.

{audio:0:58:36} What could that huge shift be? It seems as if there is another huge revenue line or potential for Spotify, with this data, with independents, with artists directly. But you also have the big elephant in the room, which is the large record labels, which drive 85% of your streams, pretty much.

{audio:0:59:00} There are ways to do that which is, we have all this data and we’ll make that available to you and for that, we’ll take 1% of your profits. Therefore, we will benefit more than just on a, pay me $10,000 and I’ll give you the information.

{audio:0:59:35} In effect, they become a publisher.

{audio:0:59:37} Yes, exactly. For the last five years, it has been within Spotify’s ability to do things like that. Every time they’ve sparred around this, they’ve not done it. But I think they are now serious about using their marketing knowledge and making that a part of the economics of their business. Whether they go so far as to take the approach of, I’ll give you all this stuff, but the value I’m going to get is, I’m going to participate in your success, I’ll be interested to see. I’m unsure as to whether they would do that.

{audio:1:01:05} If I were in his position, I would think very seriously about using those things, as part of an overall helping of the independent record companies compete in the same way as the majors. But I think there are near-term issues that may make that a very difficult thing to do. But I do think that they will definitely be able to use their knowledge to build information that will be of value to any record company and that they will settle, in effect. The record companies have, in the past, and will again, they will demand that that data is their data and that you can’t use it for anybody else and all of that sort of stuff. There’s going to be difficulty across the expanse. As I said, at the end of the day, the record companies can’t not be on Spotify and Spotify can’t not have them.

{audio:1:02:40} Do you think there is some kind of prisoner’s dilemma evolving here, with the labels, where if one label leaves Spotify, the others reap the rewards?

{audio:1:02:50} The answer is, there isn’t a record company that could leave. You have to get it through your mind and it’s hard. Warner says that they’re not going to sign; that’s been said so many years at signings. At the end of the day, a deal is made, because neither party can afford to do so. That’s the position. It’s why the existing economics aren’t going to change. For the last X years, the deals have been all but the same, with just tweaks here and there. Not unimportant tweaks, but tweaks nonetheless. I fully expect that to be the case.

{audio:1:04:01} Wouldn’t the new strategy move, into audio and podcast, suggest that Daniel Ek has given up that fight, in trying to claw back margin from the labels?

{audio:1:04:19} Knowing what Daniel thinks is something that I try not to opine on. I think it is completely logical that you have an audio platform, that’s reaching millions and millions and millions of people and there is a format that has appealed to many of those people, that you wouldn’t also provide it. That’s what we did at Pandora. It was clear that the demand for podcasting was increasing. It had, largely, been something driven by Apple. There’s an immense number of podcasts. It’s astounding. For a Spotify, it’s clear that they want to have something that is unique to them, that gives them a bit more stickiness so that it’s not just, I’m the same thing as Apple or Amazon.

{audio:1:06:36} Which is why they went exclusive with Joe Rogan, I imagine?

{audio:1:06:39} There was an attempt, with music, to do that. But music is a different play. People expect to see everything and podcasts, not so much. Certainly, it’s still not a very mature marketplace and medium. But it makes sense. SiriusXM, back in the day, went and bought Howard Stern.

{audio:1:07:23} How do you compare those two deals? The Howard Stern Sirius deal, versus Spotify and Joe Rogan?

{audio:1:07:32} I think Howard’s deal was much more lucrative. I think they’re very similar, in the sense of what the objective is. The objective is to pull fans into your broader environment and for Sirius, Howard’s talk, it was radio talk and radio talk that, largely, was in the morning which was, mainly, for people driving to work but also for commercial drivers and, therefore, if you have Howard Stern, they’re going to have to subscribe, because that’s what they want to listen to. It made a huge difference to their ability to traction at that time. It’s still a hugely important thing for Sirius. Is Joe Rogan of that level of strength; very popular, but relatively new. Unlike Howard, who had spent two decades building an audience that was in the millions, Rogan has not demonstrated that yet.

{audio:1:09:37} But he has huge appeal and if you are trying to build a go-to place for podcasts, having a series of those key drivers, is really important. It doesn’t all have to be – in fact, it shouldn’t all be, in my view – unique and exclusive. But you need some clear pillars there that are doing something.

{audio:1:10:20} Intellectual property, you mean?

{audio:1:10:22} Yes. Joe’s show, next year, I guess, will be exclusive on Spotify.

{audio:1:10:38} But what is interesting is the fact that it’s almost as if Spotify started with distribution and is now moving into owning intellectual property. This question between content is king, versus distribution, is interesting. Obviously, Netflix has been similar, where Netflix started off licensing content and now, they’re producing originals. How do you look at the move, from Spotify, into actually owning intellectual property?

{audio:1:11:12} I don’t think they properly own it. They control it; they have an exclusive license to distribute it, for a period of time. It’s very much like anything else. The difference is that, with Bill Simmons, they have him on, but he has his own, unique distribution. I think they’re feeling their way. They’ve spent a lot of money on getting there, there’s no question about it. Building their infrastructure, to be able to service them, which isn’t trivial. So three businesses, cost them hundreds of millions of dollars, so they’re serious. Anybody who looks at it and says, I don’t know what they’re doing, should think, there is only one thing that they can be doing and that is to try and build a platform for podcasting, which has enough exclusive content that it will draw incremental listeners. Therefore, they will be able, over time, to create a business that has higher potential margin than the music side.

{audio:1:13:27} The argument that podcasts also appeal to people that also love music, isn’t a hard thing to say, because almost everybody loves some music and it is likely that a lot of those people will like podcasts. But I think that the challenge that we had, at Pandora, was to understand what your proposition is, to your subscriber, when you’re pulling them on. How do you talk about yourself? I thought you were about music and now you’re about something else; how does that work?

{audio:1:14:23} The only thing I’d say about it that would be concerning to me is, Apple controls this market at this moment. It controls it because it is purely distribution. If they choose to move into this play, it will be tough for Spotify to compete, because they’re already by far the lead. 80%, I think; maybe I’m wrong on that number, but it’s in that stratosphere. For Spotify, as I thought for Pandora, I think it’s a very good addition to a body of music but, at the end of the day, you’re going to have to go to video.

{audio:1:15:35} In terms of Spotify, they are just licensing Rogan’s stuff. They don’t own it, as such. They have exclusive access, but Apple can easily go and get other podcasts. Clearly, Joe Rogan is the most popular but it doesn’t stop anything from Apple going to get great podcasts and outbid Spotify?

{audio:1:15:59} I think the issue for Spotify is, what’s your creative strategy, in building a podcast business?

{audio:1:16:23} You mean, what fans are you attracting, to then upsell them?

{audio:1:16:27} How do you build enough that is unique, into that, that draws people who wouldn’t otherwise be in your universe? In the end, there are only two places where you are going to make money, at Spotify – advertising and subscription. If you move to subscription, so get rid of the ads, that creates one economic line. The other one is, it’s all ads or it’s bifurcated. I have to watch ads anyway, which is one of the things we were doing at Pandora. Whichever subscription you have, either you’re an ad-supported subscription or a cost subscription, you get the podcasts. Maybe you’ll get a couple of specials, if you’re on the pure subscription model. Those are the sorts of things that I’m sure they are doing.

{audio:1:18:19} So for the Joe Rogan deal, he would receive part of the revenue from plays on the ad tier and, obviously, the premium tier, plus an advance. He would get a similar deal to a record label, in effect, do you think?

{audio:1:18:34} I haven’t done one of those, so I’m more speculative than I usually am. I’m a little nervous about giving a view on that. If you look at the way that it was announced, they didn’t say anything about how it was organized. They did make clear that it was going to be exclusive, but it was pretty mushy. I don’t know quite what the deal is. But it had to be very rich, because he is a phenomenon at the moment. That was, obviously, important to them. He wasn’t doing badly where he was.

{audio:1:19:40} But the point on the business model is, they don’t own the IP.

{audio:1:19:50} Think about how valuable a podcast is, that’s all about current activity. How much future value does it have? Howard Stern created huge amounts of IP and he brings it out occasionally and they use it as filler and all of that sort of stuff.

{audio:1:20:30} It’s got no lifetime value?

{audio:1:20:32} It has some lifetime value. I look at Howard because he is the quintessential star of podcasting, because he created it, in effect. It’s not structured as a podcast, but it is the same kind of thing. His value is in being there and securing the subscribers so they don’t go away and appealing to the new subscribers, so they want to come on. The churn is a really big part of why they pay him so much. If you took him off – and you have to imagine that they will have thought about that, given how much he costs, and also he keeps saying he is going to stop – it would be a big number. They know that Howard generates the sort of loyalty that’s really important to their overall economics. I think that’s what they think they are going to get with Joe.

{audio:1:22:17} How much would you pay for Joe? Just looking at the downloads, 2.2 billion downloads, at $30 average CPM for podcasts, for one ad and I think he reads a couple of ads, at least, an episode, you can easily get into the hundreds of millions.

{audio:1:22:42} If you think about this, I was doing a little bit of work before this, to see whether I could get some data, the overall revenue that exists, across all platforms, for podcasts – and Howard wouldn’t be in that; that’s a different thing – is a billion dollars. That’s the entire marketplace, which is highly fragmented. If you think about US radio, which is the other place that you hear these things, that’s an $18 billion business. Where you are here, is in a world where this is a play for a longer term. It may be the start for Spotify, which is we want to play against terrestrial radio. We want to draw the value out of terrestrial radio. This is certainly what we were doing, at Pandora. That was the plan. That was what we were doing on the audio side and it was one of the reasons that we were building a podcast business.

{audio:1:24:39} It could well be that that is where Spotify wants to go, to build out a more rounded way of interrelating with their listeners.

{audio:1:25:02} They’ve got the new ad-insertion technology for dynamic ads, as well?

{audio:1:25:10} Right. Let’s just go back to that. It’s always been surprising to me that they haven’t been as aggressive in their freemium world, in developing tech and they are clearly doing that now. Anecdotally, it was because they believed that the whole business was about subscription and that that’s where they should put all of their efforts. I think what they’re doing now, and have been for the last year or so, which is building out a proper ad platform, is exactly what makes sense.

{audio:1:26:26} That’s the other thing that I find pretty interesting, and I think Daniel Ek mentions this a few times, where the ear is under monetized, relative to the eyes and the size of the music industry, versus the box office, etc. Nobody pays for podcasts and so it’s interesting to see how Spotify is moving more into content and exclusives and also has this option where you can see how much premium subscriptions Joe can drive, but also more likely, it’s going to drive more ad revenue, with this new technology.

{audio:1:27:09} Yes. If you’re thinking about what the economics are, for Joe, and I know Joe, he’s probably looking at numbers of listeners and having value attached to that, because if you go on the subscription models, those are without ads, there’s no incremental revenue, but there has to be incremental revenue to him. My suspicion is that the ad revenue will do what we were doing at Pandora which is, it essentially sits and is adjacent to the subscription. You have it if you have the subscription and you’re going to have to listen to ads. That’s why it’s impossible to understand what the structure of the arrangement is. It will become clear, over time. At the moment, there are real questions, in my mind, as to how they are structuring it. They were pretty cagey about, it’s $100 million, yes, but when, how, how do you get it back, how do you make money on it? None of those things are answered.

{audio:1:29:13} I fully expect that there are clear answers to all those questions and that there is a broader strategy than just, let’s get a big name and put it on our podcasts. I think there’s a much bigger strategy around what they’re doing and how they’re going to do it. We can talk, at some point in the future, when that becomes clearer.

{audio:1:29:47} Yes, for sure. What do you think is the big risk for Spotify, here?

{audio:1:29:54} I think the big risk that their incremental subscriptions are in low margin territories. That’s the biggest risk that they have, in the sense that the whole proposition is that they have to keep investing, to drive increased usage. If they finally grab hold of the freemium users and do a good job with advertising, that will be very, very helpful. But they need to do those two things and, in freemium, selling ads is a data-driven business. What they need to do for both, creating value for the business, it is equally true for their strategy, to create value on the record side, if you will, providing data and structure, so that people increase their take. Similarly, on the ad payment side, to have the data that really delivers the outcomes. Of the things that they’re doing, those two things will make, in the near term, the biggest impact. Podcasts will, I believe, take longer. They’ve invested a surprising amount of money in where they are with it. I think that’s going to be a longer effort.

{audio:1:32:47} But the other two things are things that they’re perfectly capable of moving on now. If I were an investor, and I am, I would wish that they do so.

Spotify & The Economics of the Music Industry

Fundamentals of a music artist deal with a record label

Potential pressure on the economics of the record label business

Spotify's strategic options to increase gross margin

How Spotify can replace services that A&R houses traditionally offered artists

Strategic rationale of the Spotify Joe Rogan deal versus Pandora's Howard Stern deal

Spotify & The Economics of the Music Industry

Former CEO at EMI Group & Board Member at Pandora Media

inpractise.com/articles/economics-music-industry-emi-spotify

Why is this interview interesting?

Executive Bio

Roger Faxon

Former CEO at EMI Group & Board Member at Pandora Media

Interview Transcript

Related Content

Spotify / Label Dynamics: Prisoners Dilemma

Former CEO at EMI Group & Board Member at Pandora Media

Music Artist Deals

Former CEO at EMI Group & Board Member at Pandora Media

Joe Rogan Spotify Deal Economics

Former CEO at EMI Group & Board Member at Pandora Media

Spotify’s Exclusive Podcast Strategy

Former CEO at EMI Group & Board Member at Pandora Media

Audio

Spotify & The Economics of the Music Industry(June 5, 2020)

PARTNER

Speak to Executive