Power and Exchange: Spotify as the New Netflix
By 2014, with the exponential growth of the industry over the past decade, subscription-based streaming services had become a primary medium for listening to music. Streaming services were seen as a legal alternative to piracy and now offer an expansive catalog of music available to a large market segment of nonpaying listeners or monthly subscribers. Spotify had emerged as the leading company within the streaming industry with nearly 30 million songs available and by 2014, hosted 50 million active users, which was 34 million more users than the second most popular service Deezer. The main stream of revenue Spotify earns is through subscriptions and advertisements.
Although Spotify seems to be a rapidly growing company and player in the streaming industry, the company actually only receives a small cut of these revenues due as they have little power in relationships with record labels. Record labels have largely hindered the success of Spotify and their ability to optimize profits. Around 75% of the actual revenue Spotify receives is funneled into royalty payments to labels. Being primarily a technology company, Spotify is mainly focused on the consumer rather than supplier side of the business as they face so many monetary and contractual barriers with record labels. Given the label holds so much leverage in the relationship, Spotify would face significant impacts to profit if such labels do not agree to terms of revenue conversion and decide to block content from the service’s platform. At the end of the day, Spotify is selling access to music by serving as the middleman between record labels and consumers, but as a result reducing their own personal power in the stakeholder relationship.
Similarly, artists are barely receiving the any payout. Record labels are the middlemen between them and the actual streaming services such as Spotify. On average, Spotify pays about $0.006 to $0.0084 per stream to the holders of music. This holder title however is split among record labels, producers, and finally artists who are often negotiated down to low conversion rates. There are only two ways artists would be able to increase their payout, which include Spotify raising rates considerably or more effectively negotiating with record labels.
These relationships that record labels seem to possess so much power begs the question of whether power is a property of the record label themselves or the structure of the network in the underlying social structure between streaming services, labels, and artists. Record labels do not present an intimidation factor necessarily because of the individuals who run the labels, but due to their pivotal position in connecting streaming services to consumers and connecting artists to streaming services. In this case, value is divided unequally across record label, streaming service, and artist relationships. The powerful party of the record label gets a majority of the value in both relationships, thus maximizing its power across the network.
In this case, record labels maintain their power through both exclusion and satiation. Record labels have the ability to exclude Spotify or the artists as the two parties have no direct established relationship with each other given the record labels determine the royalty rates for artists and can selectively choose streaming platforms they enter into contract with. Additionally, in terms of satiation, we can see that of the actual revenue produced, 70-75% is given to the party consisting of both record labels and artists. However, since the artists have entered into existing contractual agreements with Spotify, it is often times difficult to negotiate higher payout rates from these record labels so the labels tend to receive the highest share of revenue in the end comparative to the other two parties. Thus, record labels may experience satiation and be only interested in maintaining these relationships between artists and Spotify if they can receive an unequal share of the value and maximize their own benefits. Just as many experiments have placed a resource pool of money to value each social relation, the revenue serves as the valuation on each relation held by record labels. However, record labels perform two negotiations with the artists and Spotify. Artists and Spotify are only able to negotiate directly with record labels, and without a successful negotiation are unable to reach a deal and receive any of the monetary benefits.
A few days ago, Spotify announced they had acquired podcasting companies Gimlet and Anchor. While podcasts do make up a significantly smaller portion of their revenue, it is the first step in the streaming service producing their own content and eventually moving towards vertical integration. This integration will essentially entail Spotify gradually taking over multiple stages of the product supply chain, and in this case of music, essentially becoming a record label itself that directly manages contracts with artists rather than going through a middleman. For Spotify, this will mean creation and distribution of their own content that also create a sense of exclusive access of certain music for its listeners and increase its competitive appeal. In a network, this essentially is forming a direct relationship with the artist and optimally managing better payouts for both parties. If Spotify makes strides towards becoming a permanent record label, it may incentivize artists bound by existing contracts or even attract artists who have not yet attached themselves to record labels.This trend similarly mimics the behavior of Netflix, who in recent years has accelerated its production of original content and seen profit benefits as a result. Becoming increasingly involved in the podcast content creation industry will hopefully be in the first step in propelling the company out of its struggle to maintain profitability as well as serve as a precursor to its eventual integration as a music label.
Sources:
https://qz.com/1543627/why-spotify-wants-to-be-like-netflix-now/
https://www.inquisitr.com/5284469/spotify-seeks-to-become-the-netflix-of-podcasts/
https://in.mashable.com/tech/2081/spotify-is-going-the-netflix-route-with-focus-on-original-co
