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Spotify: Strategic Options

Roger Faxon
Former CEO at EMI Group & Board Member at Pandora Media

Learning outcomes

  • Three core strategic options for Spotify to increase gross margins

Executive Bio

Roger Faxon

Former CEO at EMI Group & Board Member at Pandora Media

Roger has over 30 years experience in the music and publishing industry. In 1994, he joined EMI, one of the four largest record labels globally, and spent 5 years as CEO of EMI from 2007-12 just as the industry was rapidly shifting digitally. Roger has led A&R investments, negotiated deals with the largest streaming platforms, and is on the board of Pandora Media and ITV. Previously to working in the music industry, he was CEO of Sotheby’s Europe and EVP at Lucasfilm.Read more

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Interview Transcript

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?

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.

They’ve got far less operating leverage than Netflix.

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.

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.

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