Spotify, SoundCloud, and the Race Up the Value Chain

Too Long; Didn't Read

It’s no secret that the music industry is a tough nut to crack. <a href="https://hackernoon.com/tagged/spotify" target="_blank">Spotify</a>, <a href="https://hackernoon.com/tagged/soundcloud" target="_blank">Soundcloud</a>, and a host of other music industry startups all struggle to reach profitability despite their vast consumer networks. Spotify has a staggering <a href="https://www.statista.com/statistics/244995/number-of-paying-spotify-subscribers/" target="_blank">70 million subscribers</a> to its service, and yet it still has a <a href="https://www.bloomberg.com/gadfly/articles/2018-02-28/spotify-found-its-footing-with-a-hand-from-record-labels" target="_blank">cost of revenue of 79%</a>. For every dollar of revenue it makes on its subscription fees, it has to pay 79% of that to record labels (and other assorted costs). This is in large part due to the price setting power of music suppliers. Compared to other aggregators Spotify has to pay far more for its content and has much less negotiating power. Netflix is at a cost of revenue of only ~66% and Zillow has been able to strong-arm its suppliers (Multiple Listing Services) into submission because of their fragmented nature. Spotify, on the other hand, takes virtually all of its supply from only 3 firms; Warner, Sony, and Universal. These firms have huge negotiating power and only recently have generously re-signed their contracts with Spotify to reduce its costs. This type of generosity cannot be relied on forever, however, and <strong>eventually Spotify will have to revolt if it wants to see profitability.</strong>