Playing music is part
of civilized humanity. Music is so important to us
humans and has been for thousands of years, the last 20
of which have seen an incredible shift; online
streaming music. What started out as music
piracy became an 11 billion dollar industry, making up 56
percent of global music industry revenues in 2019. And one company has become
the clear winner globally in terms of paid subscribers. Spotify is where
everyone is at. Taking on bohemoths like Apple,
Amazon and Google, Spotify has dominated the streaming music
industry with about 130 million premium subscribers worldwide,
despite being number two behind Apple in the U.S.,
according to data from 2019. Spotify has been on a
winning streak recently with the acquisition of Joe Rogan's
incredibly popular podcast, along with exclusive deals with
Kim Kardashian and DC Comics, all in an attempt to
broaden its scope from music streaming to audio giant. The companies that we bought and
the talent that we have brought onto the platform will
help us become the number one audio platform
in the world. And the devastating global pandemic
has also contributed to Spotify's recent
financial gains. Boom. Look at this stock verse
three two hundred for first time and it
just keeps surging. Linear radio is moving
to on demand. We're talking about something
that has billions of consumers around the world that
are now moving their behaviors online. Something like the Covid will
likely accelerate that trend. But Spotify had an uphill
battle from music rights to artists demanding fair pay. This is the story of how
a small Swedish startup came to define the way we listen to
music in the digital age and what we can expect
in the future. The podcast is
moving to Spotify. The Internet has changed so
many aspects of media consumption, but few have
had a more tumultuous relationship with these changes
than the music industry. I don't believe we're talking
about streaming music if it's not for Napster and Sean
and everything they did. CDs became the standard
medium in the 1990s. At the same time, home
computers were becoming more commonplace. Many with disk drives
built in, allowing users to take their favorite CDs and
rip them on to their devices as MP3 files. This made way for peer to
peer music sharing or music piracy through platforms like
Napster and LimeWire. If you look at Napster and
of course other competitors that followed, it really
disenfranchised the industry. Apple, having had great success
with iTunes and the iPod, decided to start selling music
digitally on iTunes in 2003 as a way to charge into
the music industry and combat music piracy. It's not
stealing anymore. It's good karma. iTunes was
the first legal attempt of saying, OK, what Napster is doing
is piracy and it is the wild, wild west. How can we
start to look at digital downloads? Would people pay 99 cents
for a song to be able to have access to it? And it succeeded. It was all about downloads. It's all about iTunes. iTunes was the driving force. It in turn, destroyed
other music selling businesses, knocking out Tower Records and
almost every other music store. This was a tough pill
to swallow for the music industry as a whole. During the 90s, the
money was still flowing. The advances I would get,
they would spend a million dollars on the promotion
of my singles. Me. Like, someone who doesn't
even write mainstream stuff. Then the Internet put
a stop to that. The industry was so
used to big margins. To sell a CD for 20 bucks
and it only cost one dollars to manufacture. So the
margins were huge. And then go from that to OK,
now albums are 9.99 at iTunes, those margins started
to depleat. And for music lovers who wanted
their music for free, radio was still a
resource they cherished. Online radio company Pandora claimed
some of that market when it launched in 2000 and
10 years later, it had 48 million subscribers. I remember when everyone I know
was trying to tweet their Pandora stations. I had it on my phone all
the time, was like, oh, like this station becomes this, and
it was cool. But pirating was
still an issue. A 2007 study concluded that
twelve point five billion dollars in total output was
lost in the U.S. annually because of
music piracy. And radio was great, but
users wanted to choose their music. That left the market
open for a small Swedish company to make its way in. We want music to
be like water, everywhere. Spotify was founded in 2006 and
made its way to the U.S. in 2011. It started with an invite only
beta program for the free tier and quickly
garnered favorable reviews. But it faced an uphill
battle to the top. It was getting the rights. It was convincing subscribers to
get onto the platform. These were extremely difficult times
for Spotify to make sure that they were able to
nab the content, especially at that time. One reason for
the company's delayed entry into the U.S. market was
because of music rights. It's a complicated business that
costs Spotify nine point eight billion dollars between
its launch in 2018. They made that risky
bet at the time. They're like, look. We know we're
going to lose money, but that's what we're going to need
to do, if our investors support it, for music rights,
given the price, given content. Once we acquire that
content, it's the carrot and stick approach in terms
of subscribers would come. Clearly, the company was onto
something and that piqued the curiosity of some
major brands. Now it seems every major tech
player has its own music streaming platform. Apple dropped
iTunes and created Apple Music. Amazon created
Amazon Music. Google created Google Play Music
and then YouTube Music. Jay-Z even formed his own
service called Tidal, which focused on professional
sound quality. But Spotify kept its spot at
the top thanks to its freemium model, where users can listen for
free with ads or pay for a subscription without ads. We believe in a
true free service. We believe in something where the
user knows that they can go back month and month and
month, month again and have access to your music. By the end of 2019, Apple
Music had 60 million paid subscribers worldwide. Amazon Music had 55
million subscribers worldwide, nearly all of which
were paying subscribers. Chinese company Tencent had thirty
nine point nine million paying subscribers, while Spotify
had one hundred and twenty four million
paying subscribers. It was about
free going premium. Conversion was key, and I think
Spotify was really the one that started that. Platforms like Apple Music
are more exclusionary, forcing customers to pay after their
free trial is up. Apple even tried to kill
Spotify's free version back when Apple Music launched. Free just makes sense for
customers, which is a major reason why Spotify is
so popular today. But free isn't so
great for musicians. The ad dollars are actually
less than the premium subscriptions. But Apple Music,
Tidal, those platforms, you get your free trial, but
you have to pay. So it's a hard pill to
swallow when you're looking at your statement saying, dang,
Apple Music. Should I focus my energy on
Apple Music because this is where the money is? Or do
I still go with Spotify because that's where the users are? Spotify gained popularity, artists
started to wonder why they weren't seeing the financial
gains they were used to with CD sales and downloads. Taylor Swift boycotted Spotify in
2014, pulling all of her music off the service and
saying she and other artists weren't being paid enough
for each stream. Adele followed suit in 2015,
announcing her album 25 would not be released on
Spotify or Apple Music. The term windowing became popular,
where artists would only release an album on a certain
platform or would not stream an album at all for
a certain amount of time. So a lot of artists window
the records where it wasn't on Spotify, say, for a certain period
of time but on Apple Music. Kanye West was known
for this with Tidal. Taylor Swift and Adele both
released their albums on Spotify eventually, but it opened
streaming services up to questions about how much they
were paying their artists per stream. Spotify and Apple both
don't release exactly how much they pay distributors per
stream, but it has been reported that Spotify pays around
70 percent of the revenue made on a stream. I mean, people listen to
my music on Spotify. That makes me happy. Now, I know there people aren't
getting paid for that, and that makes me sad. But I think that
that's a systemic, technological, capitalistic, human issue. And you have to go back 300
years and look at how a musician was making their
living for their intellectual property in 1901. In 2019, Spotify announced it was
moving its music focus to a more general audio focus
to broaden its offerings and widen its global
lead on competitors. It acquired the Joe Rogan
Experience early in 2020 and penned exclusive podcast deals with
Kim Kardashian and DC Comics. The company's stock jumped
eight percent at the announcement of the Joe
Rogan acquisition alone. A year ago, when I was on
the show last time, I introduced the shifts in our strategy
from music to audio. At that time, we were a
very small player in audio, but growing fast. Now, where the number one player
in more than 20 markets around the world and quickly
catching up in the markets where we're not number one. That's where Spotify is taking
the future right now, and analysts believe it can ride
that wave for a bit. Ninety percent of our monetization
is on the subscription side. But 10 percent is on the
ad side, and we do think that there is real growth opportunity
for us in the ad space, particularly
with podcasts. Just after these podcast deals
were penned, the global pandemic started taking its
toll on the economy. But Spotify was one of the
few companies that weathered the storm. In fact, Spotify stock
increased 70 percent from the beginning of January 2020 to
the end of June 2020. They benefited from Covid
because the lockdown's forced people to stop listening to
radio and they discovered Spotify while stuck at home. Of course, yes. If your
Spotify, you'd much rather make money from the podcast acquisitions
and that then having to pay 60 to 70 cents for
every dollar to Universal or Sony. But in order to stay at the
top, Spotify is going to have to stay nimble and quick. Competitors like Tencent are
already adding features like karaoke to their
streaming music platforms. Tencent, at least, is on
that path from a gamification perspective. So I do think that
that is an opportunity for Spotify to keep in mind, like,
yes, it's great that you got Joe Rogan. It's great that
you've got Bill Simmons. But look at those
opportunities as well. Even though it's a different market,
I think there's a big opportunity there. Nevertheless, Spotify
is still very much a success story. Today, they're sitting there
thinking their cappuccino laughing as they
see this success.
