Petty Betty Part Four
Petty Betty Part Four
Hey everyone,
I haven’t done a Petty Betty newsletter since I’ve been on Substack so I figured it was time to bring this out of retirement. I’ve been thinking a lot about the next controversial topic I could write about. My first one was about Coca-Cola going out of business in my lifetime, the second about condiments being overrated, and lastly about Penn State University being banned from all athletics in the future. But this newsletter topic is one that I’ve been dwelling on for a while and I think now is the time to flesh out my thoughts finally. Without further ado, today’s Petty Betty topic is:
By January 1, 2026, Spotify will be out of business.
I first signed up for Spotify around 2012, and I remember sounding ridiculous trying to explain it to people. I would describe Spotify as an application that you can download to your desktop or laptop that lets you play anything you can find in the iTunes Store. Remember the iTunes store? The big differentiator was that you could play exactly what you wanted to hear, as opposed to creating a radio station like Pandora. This was a radically new feature before YouTube became the music destination that it is today. I could see the infinite potential in the platform, and being an early adopter, Spotify generously let me try out products as they first came to market, like the Gramofon. But a few years ago I started to look more into Spotify’s business model.
Despite owning twice as much market share as its closest competitor Apple Music, Spotify has struggled to become profitable. Spotify’s only source of revenue is from monthly subscriptions, and though they’ve taken steps to create Premium plans and raise subscription costs, they suffer from not owning any of the content they broadcast on their platform. There are a handful of Spotify Original podcasts, but those will undoubtedly be declining after Spotify laid off virtually its entire podcast department in June last year. In total, Spotify laid off 17% of its employees last month to become more lean.
All content is licensed to Spotify by music labels, publishing houses, or other third-party owners. The royalties and revenue must be split 70/30, with Spotify only keeping 30% of the revenue they generate. After facing backlash about low payouts to artists, Spotify decided to be transparent and disclose how much money they were paying out to these labels and publishing houses. In that report, Spotify claimed it had paid out over $7B in royalties in 2021 alone. A lot of money is being made, but the majority is not going to Spotify or the artists.
Spotify is not the only giant technology company to be a bit cash-poor. Much has been made about Netflix and Uber’s struggles for profitability, with Uber famously having its first-ever profitable quarter in August last year after 14 years of losses. Uber and Netflix have both branched out into other areas that allow them to own their product as opposed to being a middleman service provider. Uber now offers freight, business cars, and rental cars and is exploring self-driving cars. Netflix has fully committed to funding and creating Netflix original content that you can’t find on any other platform. Spotify is far behind compared to their peers when it comes to creating their own content, and I feel for them as I imagine the situation is very complicated.
We hear a lot about the decline of music sales, and while that’s accurate it doesn’t tell the full story. Music sales and digital downloads were down 10-15% across the board in 2023, but as I stated previously music labels have been paid billions of dollars each year as part of their revenue cut with streaming services. Music that the labels own and Spotify doesn’t. If Spotify were to begin to create its own content, it would be in direct competition with music from music labels and publishing houses for listeners, fans, and engagement. So it would be in the best interests of music labels to put language into their licensing agreements with Spotify that Spotify can only be a third-party provider and can’t create its own competing content. If this stipulation is indeed the case, it puts very real limitations on Spotify’s sustainability.
Spotify has four main options if it wants to become profitable and sustainable. The first option, and one they’ve already started to implement, is laying off its workforce and reducing costs. The second option is to branch out into mediums other than music, like podcasts and audiobooks. The Spotify podcast division is in dire straits, much like the entire podcast industry, and users are pushing back on the idea of paying for audiobooks or listening hours on top of their existing subscription plans. This leads to the third option, which is to raise the price of membership, which is a slippery slope and can very easily anger customers and push them to competitors such as Apple Music or Tidal. The content found on Spotify can be found on all of its other competitors as they don’t have exclusive licensing agreements for any songs. So if you push too far past a certain price point, users will simply switch platforms.
The fourth option is to begin to create Spotify-original content, similar to the Netflix model, but this might risk angering the music labels that allow them to license their content. Imagine if Spotify started creating its own music but you were unable to listen to the latest Taylor Swift album because of a dispute between Spotify and the label that owns and licenses Taylor’s content to the platform. Would you keep Spotify for certain Spotify originals if it meant that you wouldn’t be able to listen to some of your favorite music? Would users entertain owning multiple music streaming platforms? Technically, there’s also a fifth option, but why would anyone want Spotify hardware?
Spotify is in a precarious situation. They don’t own any of their content and are at the whims of the licensing agreements that they have in place. They have genuine market competition that limits how much they can raise the price of their monthly subscription. They have had mixed results from trying to branch out into audiobooks and podcasts. There’s also a very fine balance between a lean organization and one that pushes too far into cost reductions and begins to suffer impacts to quality and performance. And finally, I think it’s long overdue for an upstart company to disrupt the streaming industry that Spotify and Beats Music created.
The disrupting organization would need to have a ton of audience engagement, primarily with children. They would need to have a way to market music directly to its user base, primarily via a skilled algorithm. It would need to have access to influencers and content creators that could promote it entering the music streaming business, and it would need to have a working relationship with music labels to negotiate a licensing agreement. Finally, it would need to enter negotiations from a place of financial strength so that it could undercut the 70/30 agreements that Spotify has in place and essentially become the Walmart to Spotify’s convenience stores.
I think that company is TikTok. And for these reasons, I think that Spotify will be out of business within the next two years.