U.S. Markets closed
  • S&P Futures

    -8.50 (-0.21%)
  • Dow Futures

    -52.00 (-0.15%)
  • Nasdaq Futures

    -24.50 (-0.20%)
  • Russell 2000 Futures

    -3.40 (-0.18%)
  • Crude Oil

    +0.33 (+0.41%)
  • Gold

    -0.20 (-0.01%)
  • Silver

    +0.06 (+0.24%)

    +0.0011 (+0.1054%)
  • 10-Yr Bond

    -0.0230 (-0.65%)
  • Vix

    -0.78 (-3.93%)

    +0.0027 (+0.2174%)

    -0.8100 (-0.5986%)

    +216.75 (+1.28%)
  • CMC Crypto 200

    +2.91 (+0.72%)
  • FTSE 100

    -2.26 (-0.03%)
  • Nikkei 225

    -448.20 (-1.59%)

Spotify Signs Joe Rogan, Becomes More Like Netflix

(Bloomberg Opinion) -- Spotify Technology SA has long purported to be the next Netflix Inc. Signing Joe Rogan in a deal that could earn the podcaster more than $100 million helps the music streamer start to deliver on that promise.

The Stockholm-based tech firm has a stubborn problem: For every dollar in revenue the music streaming giant earns, it sends 65 cents straight to the record industry.

The royalties that Spotify pays the labels, publishers and artists cap its earnings potential. That’s only fair: Without the musicians, the company wouldn’t exist. But it also means that, for all the superficial similarities between Spotify and Netflix as subscription services offering an endless supply of content, Spotify’s business model is less robust.

If Netflix pays, say, $30 million to make a new season of a drama like Ozark, that cost doesn’t increase if it attracts more eyeballs. Media Rights Capital, which produces the show, makes the same money from Netflix irrespective of whether the audience is 5,000 or 50 million.

That is not the same for Spotify. Costs rise with subscribers. Every stream of, for instance, Billy Eilish’s Grammy Award-winning hit Bad Guy will see another slice of the listener’s monthly subscription fee directed towards Universal Music Group, the Vivendi SA unit that owns her recording and publishing rights. Spotify’s gross margin will likely hit just 25% of revenue this year – a low figure for what is supposed to be a software and services business. Netflix, for all of the billions it spends on content, is expected to enjoy gross profit representing 39% of sales.

With just three major record labels controlling most of the music industry, Spotify’s relatively high costbase is unlikely to change any time soon. And it’s hard for Spotify to cultivate its own artists. That would rile the labels, and musicians usually want to be on the greatest number of possible platforms as that helps sell concert tickets.

Podcasts provide Spotify with a revenue stream over which it has more control. The firm has recently spent more than $600 million acquiring four podcasting firms – the Ringer, Gimlet Media, Anchor and Parcast. Tuesday’s signing of Rogan brings one of the world’s most popular podcasts.

For a fixed — or capped — cost, Spotify attracts new listeners and potentially subscribers — especially if it’s making the podcasts itself. The more time listeners spend on podcasts, the less money Spotify gives to the record labels.

Then there’s the advertising opportunity. Spotify made just 4.42 euros ($4.84) per user from its subscription business in the first quarter, and an additional 91 cents per user in advertising revenue. Facebook Inc.’s thriving ads business helped it make $34.18 for each of its North American users in the same period. Advertising could account for 12% of Spotify revenue by 2022, up from the current 8%, according to Bloomberg Intelligence.

True, Spotify still has to grow into its $33 billion market capitalization, a multiple of 3.7 times expected revenue (it’s not expected to be profitable this year). But Chief Executive Officer Daniel Ek is starting to play the tunes that investors need to hear.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

For more articles like this, please visit us at bloomberg.com/opinion

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.