Spotify and the discrete charm of inevitability

Music streaming company Spotify is going public on the New York Stock Exchange on April 3rd 2018. It’s all about fresh money from a broader set of investors for a company in need. Technology analyst Ben Thompson looks critically at the business model:

Spotify is in one sense an aggregator, in that it increasingly controls access to music listeners, and to the company’s credit, it has demonstrated the ability to exercise power via its control of music discovery and popular playlists.

Being a true aggregator, though, means gaining power over supply; Spotify doesn’t have that — the company doesn’t even have control over its marginal costs — and it’s hard to see where the profits come from.

There is one more possibility: Spotify could one day cut out the labels altogether — the idea certainly makes sense on a conceptual level.

The marginal costs Thompson is referring to are the royalties it pays the music industry (not just record labels but also songwriters and publishers).

For Thompson, the promising inevitability to make “Everything as a service” is based on the idea of a new service-based economy that deprioritizes ownership in favor of renting what you need when you need it. He cites sharing services in industries like software, cars, homes and music as examples. As long as consumers frictionless discover these services, access them in a low-threshold way and start using them as ubiquitous commodities it should all be fine and dandy. Spotify as a music streaming service does meet all these consumer friendly criteria on the surface. Below that it is a bloody mess of fake charts, major labels as stakeholders infight, black market for playlists and lawsuits for not paying fair royalties.

Let’s recap: Lower marginal costs can only be achieved by cutting out the labels. Cultural decontextualisation of music is not a problem but a requirement for Spotify to overcome the missing profit potential. Cutting out labels means getting rid of a huge part of marginal costs but also of the cultural bottle neck so everybody can upload music. This inevitably creates a bubble where music and music making gets devaluated even more.

By the way, have you heard of YouTube?