Spotify looks beyond music in search of a profit - Financial Times

Spotify is in talks to renegotiate onerous music royalty deals that limit the profit potential of its half-billion-dollar push into podcasts.

The music streaming group, which pays the majority of its revenues back to the owners of its song catalogue, has been buying up podcast start-ups in the hope that producing and owning more of its content can lift its meagre margins in the long term.

But under the terms of its existing contracts, Spotify must pay music rights holders a minimum proportion of its revenues from subscriptions, regardless of how much music users consume versus podcasts or other content, according to three people familiar with the matter.

This means that even as non-music listening grows — chief executive Daniel Ek expects it to reach 20 per cent of the total eventually — Spotify’s ability to increase its profits will be held back by the need to funnel funds to the music companies.

The podcast issue is among matters Spotify and the music labels are tackling in high-stakes talks that have been under way for almost a year.

$700m

Amount of annual advertising revenue generated by podcasting

The music companies fear Spotify will seek to squeeze their share of its revenues if music consumption on the platform declines relative to other content such as podcasts. They want to defend their minimum claim on Spotify’s revenues, regardless of how much listening on the app drifts away from their music.

“They are constantly trying to chip away at that share of music on the platform,” said one music executive familiar with the negotiations. “Of course there is friction there. We are playing a defensive play right now and they are playing offensive.”

Spotify declined to comment but a person close to the company said that in terms of how subscription money was allocated to music rights holders, “the relationship may evolve over time”. In the near term, the company was focused on increasing advertising sales through podcasts, which could contribute to its profitability, the person added.

Spotify and others believe podcasts could become a big business, supplanting radio. However, podcasting remains a small industry, generating about $700m a year in advertising revenues.

Bernstein has forecast that Spotify’s revenues from podcasts could grow to $174m in 2025 from $11m this year.

Spotify is expected to give more details about podcasts when it presents its latest results on Wednesday, when analysts polled by Factset estimate it will report an operating loss of €32m for the fourth quarter on €1.9bn in revenues.

Analysts say that for the Swedish group to replicate the success of other media industry disrupters, such as the video streaming platform Netflix, it needs to own original content rather than merely distribute it.

Spotify has promised investors a long-term improvement in profits and is targeting margins of 30 per cent to 35 per cent by an undefined date.

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