Spotify (SPOT) Chief Executive Daniel Ek recently affirmed that the streaming-music and podcast service would back Joe Rogan, in the face of calls to cut ties with the controversial podcast host.
Rogan has taken flak for spreading misinformation about the Covid vaccines and giving air time to conspiracy theorists. More recently a video showing him repeatedly using anti-black racial slurs circulated after being posted by Grammy-award-winning singer-songwriter India.Arie.
Music artists led by Neil Young, as well as his former bandmates David Crosby, Stephen Stills, and Graham Nash, as well as Joni Mitchell have asked Spotify to remove their work from the service because of Rogan.
Spotify's backing of Rogan isn't necessarily a corporate decision favoring free speech. It's possible the company has backed its highly paid host because streaming music isn't terribly profitable and streaming talk is. Podcasts are hugely popular and many companies -- including Spotify itself as TechCrunch lays out here -- have put big dollars into the medium.
At the same time, Rogan has an exclusive deal that reportedly pays him $100 million. Spotify's got to pay that salary and all its other bills.
Streaming Music Margins Are Thin
Spotify started in 2006 and launched in the U.S. in 2011. It built its business on the promise of making streaming music easily accessible to everyone.
As of 2020, Spotify had paid more than $23 billion in royalties to rights holders — including more than $5 billion in 2020 alone, up from $3.3 billion in 2017, according to its Loud and Clear explainer site.
The site hasn't disclosed how much in royalties it paid in 2021. But since it claims to give "roughly" two-thirds of-proceeds from its revenue to music rights holders (meaning both publishers and mechanical royalties) and it has since it generated 2.69 billion euros (or $3.04 billion) in revenue last year, that means it paid out $2.02 billion in royalties.
Because of the negative attention currently coming Spotify’s way, a number of musicians are bringing attention to Spotify’s royalty rates, saying they find them inadequate.
But from the company's perspective, the problem is that music just doesn't make enough money. In music, Spotify goes up against sharp competition, in particular from the technology behemoths Apple (AAPL) and Amazon (AMZN), and because of its tight margins and operating costs, Spotify overall has never actually turned a profit, according to The Wall Street Journal.
That's a difficult competitive position because, as Statista points out, Apple and Amazon don't need to make money from streaming.
"As user numbers rise and revenue subsequently increases, so do licensing fees and other costs," noted Statista in its analysis of the streaming industry. The firm concluded that the streaming business in its current state was "inherently unprofitable" and that "no current music subscription service … can ever be profitable, even if they execute perfectly.”
For all of 2021, Spotify narrowed its net loss to 34 million euros (US$38.8 million), or 1.03 euros (US$1.18) a share, from 581 million euros, or 3.1 euros a share, in 2020. Revenue for the year rose 23% to 9.67 billion euros (US$11.05 billion) from 7.88 billion euros.
Spotify Makes a Pivot to Podcasts
Spotify's business model is still based largely on music (at least one track is uploaded every second). But with those thin profit margins, it's been investing heavily in podcasts.
Spotify has been on a buying spree lately, purchasing outlets like the sports and entertainment website The Ringer, home to more than 30 popular podcasts; the podcasting networks Gimlet Media, Anchor FM and Parcast and the live audio developer Betty Labs, which it used to create a live interactive audio experience, the Spotify Greenroom.
So far, the plan shows promise.
In a fourth-quarter 2021 shareholder letter from earlier this month, Spotify indicated that in the quarter its monthly active users grew 18% to 406 million and premium subscribers grew 16% to 180 million.
“We had [3.6 million] podcasts ... and were pleased to see a double-digit increase in the number of [monthly average users] that engaged with podcast content relative to Q3," the letter stated.
And "[among] MAUs that engaged with podcasts in Q4, consumption trends remained strong (up 20% year over year on a per-user basis) and podcast share of overall consumption hours on our platform reached another all-time high.”
The letter also noted that “podcast share of overall consumption hours on our platform reached another all-time high. We also expanded our paid podcast subscriptions to creators and listeners in 33 additional markets and enabled podcasts for users in Russia, Egypt, and Saudi Arabia."
Spotify has bet that podcasts are its future, so holding on to the biggest name in the game might well be worth the controversy that accompanies Joe Rogan's program.
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