The Hypocrisy of the Digital Age…

One will never forget the invention of the compact disc, which was a digital solution to an analog world.   Music went from being stamped or etched into a record, to being magnetically recorded on cassette tapes and then digitally encoded to a compact disc. Tapes led to the introduction of the first “Walkman”.   The portable player that ran on batteries and could play all of your tapes.

Fast-forward to today and we have come very far. Not only have we removed the need for you to carry around cumbersome equipment with tapes or records, but also we have seen the whole music industry revolutionized. We have seen storage in the music industry go from the iPod to your iPhone. Now several services have taken the digital experience to a whole new level with streaming music via the internet.   Whether it is using data on your phone plan or utilizing WIFI, you can now ‘stream’ music at the same time as everyone else does.

Streaming services differ slightly, but most have the same idea behind the business plan. One in particular that is going public now, is Spotify.

Spotify is the premier music streaming service that charges more than fifty million (50,000,000) people $5.00 a month for the ability to listen to over 30,000,000 songs.   The company that is currently filed to become a publicly traded entity in early April has been valued at north of $18 billion by investors.

The company has helped to transform the music industry, as we know it.   The old world record production houses and studios who only green-lighted the acts they wanted to record and promote for financial reasons have had to retool or close.  Today with the use of Spotify artists have the ability to reach an audience on their own and can write, sing, play and produce their own work.   Cutting out the middlemen of the record companies was what Spotify was invented to do. Spotify’s original concept was to connect artists directly with fans and make the record labels and publishers a thing of the past.

Fast-forward to today and that plan is being executed with precision with one inherent flaw. Spotify itself does not make any money. Somewhat like the IPO of Snapchat, Spotify will be another company going public without earnings to speak of.   While business has increased significantly over the past several years so have costs.

One of the major issues with the Spotify business model is that the artists who have their music on the service get approximately $.75 for every dollar spent.   As the company tries to attract investors to believe in the next level of its growth as a public company, Spotify has some large hurdles to get over.   First, Spotify needs to negotiate better with the record companies it is trying to replace.   Why you ask? Well because most of those labels own the publishing rights to more than fifty percent (50%) of artists’ music on the service.   Second, there are other competitors out there who have had issues making money themselves such as Pandora.   Since Pandora has been a public company it has filed to make any money.   (Spotify needs to decide that it doesn’t want to be come that)

Spotify will have to use the public markets not only to attract capital but to possibly attract a maker of technology that fills a void. A good combination with a company in the tech world that has some distribution of a product in the music industry would help the company be able to lose money on the listening of music. Take the example of Apple Music.   Obviously Apple does not have a valuation issue, as its cash horde is larger than the GDP of some small countries.   That is why Apple can afford to make next to nothing off of their streaming service, as the music streaming is only designed to sell more hardware.

Spotify not unlike Netflix is cost heavy but must continue to expand in order to remain dominant in a very competitive market.   The same way Netflix is changing the way we watch movies and TV, the music streaming service run by Spotify is user friendly and allows you to have instant gratification.   You can listen to music anytime, anywhere night or day.

Netflix, who has its own original programming, competes with the major studios. Spotify has claimed to date it will not be looking to compete.   It has stated that it wants to be the premier platform for content not unlike other social media platforms.   The company has already been dabbling in videos and podcasts among other directly related offerings.   It is also utilizing the data it collects on the tastes of listeners and it can help artists target audiences more directly for an album launch or a tour.

All in all what will Wall Street’s feeling be when Spotify the public company hits the market? The jury is still out. One thing is for certain and that is the company cannot continually depend on just offering up the same services. In order to continue to be the dominant player in the space, Spotify has to allow artists to bridge the gap that will allow them to market directly to fans.   The other thing is a company cannot lose money for forever.   It doesn’t matter how good the technology momentum is.   At some point and time earnings need to be seen…..or are we headed to a new market paradigm where companies have tens of billions of dollars in valuation but will never make any money……

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