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  4. Streaming music is a brutal business. Just ask Spotify.

Streaming music is a brutal business. Just ask Spotify.

Peter Kafka   

Streaming music is a brutal business. Just ask Spotify.
  • Spotify is the most dominant force in streaming music.
  • But streaming music is a really, really hard business to make money in.

Podcasts. Concert tickets. Super-high-end audio.

These are some of the ventures Spotify has bet on to expand beyond its core business — selling streaming-music subscriptions. And, as a new Wall Street Journal report explains, they have all failed to deliver for the company.

The Journal piece does a nice job of explaining the ins and outs of many of Spotify's attempts to do something other than music streaming, including its newest bet: becoming a hub for audiobooks. (Not listed: an earlier, now abandoned attempt to become a video company by pushing clips from the likes of Comedy Central and ESPN into the Spotify app.)

But the main takeaway you ought to get from reading about Spotify's attempts to do something beyond selling music subscriptions is this: Spotify really, really wants to do stuff beyond selling music subscriptions.

Because just selling music subscriptions is a really hard business.

And that's worth spelling out here, very briefly: The music-subscription service is really hard because your costs scale along with your success. As Spotify sells more subscriptions, and generates more streams, the amount of money it has to pay music labels and other rights owners increases in turn. The company says it shells out $0.70 to music owners for every dollar it generates, primarily from the 226 million subscribers it has acquired worldwide.

That's radically different from other digital subscription businesses, such as those for video or software. A company such as Netflix or Microsoft can pay once to license a movie or create a new version of Excel and sell it an unlimited number of times.

It also explains why Spotify is by far the biggest independent music-streaming service. Its real rivals are the services run by the likes of Apple and Google, who view music as a sidelight at best and don't need to worry about generating real profit from it, or any profit at all.

And while music-industry insiders like to bat around the idea of Spotify as an acquisition target, this explains why it's hard to imagine that actually happening: Who wants a business that's so hard to make money in? And if they did, why not build their own version, as both Google and Apple have done?

There's good news for Spotify, though. For starters, investors do like the story the company has been telling. After plummeting from a pandemic and tech-frenzy high, Spotify shares have been steadily increasing for some time and have more than doubled in the past year.

And even if fickle investors decide that they're once again skeptical about Spotify's chances, there's one group that's always going to root for them — or at least root for them not to fail.

That's the big music labels, which don't always love Spotify but are most definitely locked in a codependent relationship with it: Spotify needs the big three music labels (Sony, Warner, and Universal) along with Merlin, which represents a lot of indie labels, to supply the vast majority of the music it streams. And the labels need Spotify to keep finding more people to pay for music. They can't afford to let it fail.


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