Cornerstone Bets on Spotify
When new business models appear there is often speculation, especially by those who would like nothing to change.
When it comes to music industry, I have strong views on the speed of change and the realities of what that change looks like. You can read these points by choosing ‘The Manifesto’ from the top menu.
Today, the talk of the town is Spotify.
I have commented on the service several times but here, I wanted to outline a few things that don’t seem to be reported much – yet are the cornerstone’s of the service’s success chances, in my opinion.
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Cornerstone #1:
Currently, Spotify is aided by some advertisers thinking that advertising on the service is a worthy part of their media mix.
A mix that surely sets out to drive awareness, drive interaction and above all, drive sales.
For the few advertisers on the service, Spotify apparently is a good bet.
Luckily, for Spotify, we live in an age where assumed accountability is still just about good enough for some advertisers.
Fast forward to a world where every £/€/$ spent needs to prove a return and the above may not hold for long.
Cornerstone #2:
Currently, Spotify’s advertisers are OK with the fact that Spotify is intentionally interfering with user experience to drive people to subscribe.
This is the same as saying to an advertiser – we need your ads peppered through the service so we can make a tenner from subscription when people get really pissed off with you.
Oh – and by the way, here is our invoice.
In Spain, the ad breaks are even longer and more intrusive which is reported gleefully as ‘great news for Spotify’ as this gives people even more reason to go premium.
Cornerstone #3:
The 4 big UK record labels are willing the service to succeed – especially as they took a collective 16% stake in the company in lieu of licence fee income – despite this being diluted when Wellington Partners and Li Ka-shing threw in $50m.
However, the labels will not relent on their remarkable licence demands and ironically, it is these fees that throttle the ability for services like Spotify and We7, to flourish. That, in addition to diminishing advertising revenues and peoples innate desire to avoid intrusive ads.
Cornerstone #4:
Much hope is placed on the iPhone app which requires a premium subscription but few commentators are recognising the incredibly small device penetration of iPhones. Added to which – forcing people into any situation is a dangerous game and the average app store feedback score of 2 out of 5 from punters shows there is a low appetite to pay anything for content that is often seen as free.
Cornerstone #5:
When people don’t pay a subscription, its mainly because they can ignore the adverts or they don’t want to pay for the service – not because they like the adverts.
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In summary, the below 5 cornerstones are the key variables I see:
#1. Advertiser spend on service versus focus on strict return on investment. What is the length of time to mature from fluffy to strict?
#2. Advertiser attitude to being used as the fall guy. How long with advertisers mind being used as a negative sell?
#3. Greed of record labels. Will the model ever loosen? Is the model still valid, actually?
#4. Volume of application enabled handsets and willingness of people to subscribe to a premium app. How long until enough phones are enabled and enough people want to pay?
#5. People’s willingness to ignore adverts. Will people always tolerate or will people find alternatives?
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It is a waiting game to see which of the above variables grow or shrink, quicker or slower. My thoughts are as follows:
Bet #1. People will only pay for what they value – not through blackmail. The price may be zero, or more – but ultimately people will set the price.
Bet #2. Artists will increasingly go direct and bypass traditional record labels. They will find ways of being directly in contact with people who value them.
Bet #3. Application enabled handsets will eclipse standard handsets as we know them today. Applications that are most useful will become most successful.
Bet #4. Brands will favor provable returns, directly linked to purchase. The links in the chain that delay this will eventually diminish through lack of demand.
You can decide whether this paints a rosy picture for Spotify or not. Either way, it will be interesting to watch the way the cards fall. Personally, I would only buy shares in a company that was moving in the combined direction of the four bets. Is yours?