Spotify, Universal, & Major Label Bargaining Power | In Practise

Spotify, Universal, & Major Label Bargaining Power

Former CEO at EMI Group & Board Member at Pandora Media

Learning outcomes

  • How Spotify can improve the underlying economics
  • What would happen if a major pulled their catalog from Spotify
  • Major labels and Spotify management quality
  • UMG valuation and margin pressures
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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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Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

I've been interested in Spotify for a long time. Pershing Square is bringing UMG public; they're splitting out of Vivendi and they'll be a standalone. I'm interested in UMG, so I'm trying to get smarter in the music space.

You’ve chosen two businesses that are in the same universe but not in the same place in any other sense. Universal is the largest music business in the world. It's been around in various iterations for decades and decades. Spotify is the new boy in town and was seen for a long time, by the music businesses, as something that will rip off artists and companies. So you have two very different players. Tell me where you'd like to start. There are so many different entry points here; I want to be sure I come at it in a way that will help you.

You were on the board of Pandora, right? So you’ve been on both sides to the equation.

Yes; and I'm on the board of a small business at the moment called Xite, which is a Dutch business, focused in America, on music videos.

You’ve been on both sides. When labels and a Spotify or a streamer are negotiating a contract, I’m sure payout comes up, but there must be other things negotiated as well? Could you walk me through what matters and what the sticking points are on each side?

The nature of how this happens changes marginally between who the players are. In the beginning, Spotify was embraced by EMI, which I ran, and the other European labels. They looked at it as a way of trying to stop piracy or at least tame piracy. It was seen as being a test because it was just limited to the Nordics. So we gave them a lot of room to prove that there was an alternative to piracy. They did pretty well, but Daniel wasn't a warm and fuzzy compatriot of the music business. He saw it as being an antiquated and destructive force that got in the way of progress. He was able to drive his business based upon the acceptance of the record companies to license them, but he then started to go way off. That moment created a very distinct relationship between Spotify and the music industry. Ultimately, he could move fast enough to be a meaningful revenue source and be seen as a bulwark against piracy, but the music industry has never really liked him, never found him that good.

He had a two-pronged approach. One was free, ad-supported, leading the masses into subscription, and that message was well received because everybody was getting free music. If you could create value even when it was free, then you could move it to a pay system, which was an ideal way of thinking about the world. Problem one, he didn't care about the free and monetizing it, so he wanted to allow it to move naturally. So the first burden was to get enough revenue for the record businesses out of the free.

And he wanted to have all the money coming out of the pay. The devil’s in the detail, and in the end, what happened was he won on paying more into the subscription world and somewhat less into the other. He's living with that. He made an error. He was willing to pay way up as a percentage of their overall revenue. Therefore his margins were pressed very tightly, and they remain that way, as you know. So in the free service, they allowed a certain amount of creep in the revenue as time went on. Even the free service was not well, and he did not care so much about building an advertising base for his business. That takes you up to about five years ago, in a very swift way. So record businesses have no choice. If they're not on these big platforms in the modern age, they don't have a business. At the same time, unless the platforms have the major content, they don't have a business.

I agree with you, and at this moment in time, they're married. If UMG pulled from Spotify, the business collapses, the artists are suing them; it's a disaster. Tell me if I'm wrong on that. And if UMG pulls from Spotify, it's a disaster for Spotify because millions of people are going to say, where's my Taylor Swift music. But my worry, and what I'm trying to think through, is that Spotify will be more of all these labels' revenue in eight years. Spotify will be pushing people into podcasts and all this stuff, and I don't think Spotify ever wants to pull the trigger and have a big record label. I just worry that all the leverage continues to go over to the Spotify side. I'm a subscriber, and I've got 15 years’ worth of Spotify. Spotify is pushing me more into podcasts; all the leverage in Spotify can start taking that cut to labels over time. Can you talk about how you see it playing out as we go forward?

I think that what’s happening with Spotify and others, but Spotify in particular, is they’re expanding their approach because the economics just don’t work with the music business. Unless they can absorb more of the central costs and the operating costs, he has to do two things, and he has always been wary of doing them until the last three years. He has to bring in other content with better economics, and he has to drive much more forcefully on the advertising side. He can do those two things. How can he change his economics, but what makes them happen in the numbers that they are in the music. It drives everything.

Everything else is just a carry-on. I think podcasts will have a place but think about podcasts. Podcasts tend to take a lot of time – half an hour, 20 minutes – that's a long time to dedicate to something. So there will be winners in the podcast world who have big audiences, and the costs, as you can see from what Spotify paid for them, are huge numbers. And they don't own them; they license them for a period.

When they buy The Ringer or something, they don’t own the podcast?

They can create content, but content at the level of what's necessary here is very much individual. Some individuals drive the outcomes. If I do my sports podcast with this one, my deal is five years, and in year six, I can go somewhere else if I want. That's what talent does. It's not like the old sports stuff; it doesn't create much value; it's all the new stuff. If you look at podcasts, which used to be sort of PBS sort of things, those have longevity, but that's a really small market. What makes these things is either TikTok kinds of elements or individual personality-driven types of events. That’s where you get the most activity.

For the podcast it’s, hey, the Superbowl happened Sunday night. Right after that or Monday morning, Bill Simmons and a former NFL quarterback break down the tape.

So if you look at these things, what they try and do is they try to have must-have content to drive the whole play, and you have all the other content that is less so. Or the big music business, both the record industry and Spotify, are stuck basically with the same deal, and they'll be there forever. There's no incentive for either of them to give in. There's nothing new that's going to get them there. So now you have the big piece of the business, which is driving the subscription number, and then you have these add-ons that will marginally increase the margin. Frankly, it doesn't take a lot to get Spotify into a true position of actually having a reasonable amount of net? They should be able to get more from the ad side, they should be able to get more from the podcast, but it's a big bite to assume that the podcast world will drive the outcome for Spotify in a very large sense.

The problem for them is that they compete with other platforms for this podcast content. Apple is now not just creating a platform, but they have two problems. One is Spotify and others are paying big numbers for these things and taking their audience, so that's one side. The other is that they make quite a lot of money off of their podcast business, and if they start to lose that massive position, it's a big part of Eddie's world. It's a much bigger part of Eddie's world than you would think.

You think Apple makes a lot of money off their podcasting business?

Yes.

How is Apple making a lot of money off their podcasting business right now?

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