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Spotify Positioning

Nick Gatfield
Former Chairman and CEO, Sony Music, UK

Learning outcomes

  • A framing of Spotify as an advertising company versus a music subscription business

Executive Bio

Nick Gatfield

Former Chairman and CEO, Sony Music, UK

Nick is a British music industry executive with over 34 years of experience scouting, signing, and working with global artists such as Amy Winehouse. Nick started his career as a musician in the band ‘Dexys Midnight Runners’ before moving into recorded music. At the age of 26, he was made Director at EMI Records, the youngest in the company’s history. Over the next 20 years, he went on to lead global labels such as PolyGram and Island Records and has worked at three of the four major record labels. More recently, as the Former Chairman of Sony Music, he was leading negotiations with Spotify and both new and old artists in the repertoire. Nick currently runs Twin Music, an incubator for new talent, which funds and services new artists coming to market.Read more

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Interview Transcript

One view that I find pretty interesting is the framing of Spotify as an advertising company, rather than a subscription company, because that’s where most of the margin and sustainability of the business is probably going to come from.

I think you’re right. If you look at their revenue, the level of advertising revenue is fractional; it’s 10%ish of their overall business. There is a reasonable argument that when you hit scale and you really have the reach that Spotify have, across global consumers, and you really understand those consumers, then their CPM should be massively increased.

The other interesting point is the view around the fact that content is king. You mentioned earlier how the power has shifted to the distributors, yet content is, arguably, still king and that’s where the rights are, the margin is. How do you look at that paradox where there are more powers to the distributors like Spotify, yet content is still king?

I look at it purely on the basis that 50% of most major’s revenue stream is derived from Spotify. I’ve been asked, but what if they pulled the repertoire? That would be an act of huge self-harm. Spotify were pilloried by the artist community, because the level of pay away. But actually, now, I think that has turned around and I think most artists understand that this is a lifeline and the low payments from Spotify are partly driven by the royalty rates they have from their contractual relationships with record companies. You would have a huge outcry if Universal suddenly decide to pull all their records away from Spotify and it could hurt them more than it will hurt Spotify.

Do you think that, eventually, Spotify will move into owning music repertoire, as they do in podcasting?

No; I think that is an anathema from their point of view. For instance, as we said earlier, there is nothing to stop Drake going direct to Spotify. It doesn’t mean they have to own his records; I don’t think they will do. They may have a conversation around artists saying, look, we’ve got all these tools for you to come in direct. We can help you access your music fans, globally. We provide this suite of marketing tools that enable you to, not only stream your music, but to also sell concert tickets and merchandise, and build that really strong connection with an audience. That’s quite a compelling argument to any artist, I think, without having to own anything.

The other thing that I think is really fundamental, as well, and where the business has changed is that the economics of major music companies is shit or bust. That means that you either hit it out of the park or you fail; there is no middle ground there. Where there is a huge part of the market now is what I’d call middle-tier artists. This is largely where Twin was fishing where you may have an artist – such as one we currently have on our books – where, arguably, there is a million dollar a year business there. It comes across from streaming, publishing, merchandise, touring etc. but it may not be financially viable for a major music company to invest in that artist because the recorded music side is just not that lucrative. For those type of artists, this type of third-party aggregator is a win/win for them. They may have a small amount of money to be able to help create the records but by and large, they retain the rights, they retain that flexibility and they can build a sustainable business, without having to knock it out of the park.

It’s that old internet adage, 1,000 true fans. But the reality is, with 5,000 global fanatics – which sounds like nothing and no major would be interested if you said we can show you 5,000 people who would get incredibly excited about this – if you are smart enough about how you monetize those 5,000, those 5,000 should be able to generate you half a million a year, in revenue. They will buy the ticket and they will buy the merchandise. That is very much the way that we look at that and that’s a very viable business.

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