Founded in Sweden in 2006, Spotify has risen to become one of the world’s largest music streaming service providers. The platform can now boast 356 million active users, with approximately 44% of those being paid subscribers. The company has a mission to unlock the potential of human creativity and allow billions of listeners to enjoy and be inspired by music. Spotify plans to fulfill this mission by paying 1 million artists enough money to live off their creative work through royalties based on stream shares.
Royalties
Musicians and related professionals on the Spotifyplatform earn two different types of royalties:
Recording royalties – this is money owed to rights holders for tracks streamed on Spotify that is paid through the licensor delivering the music. In most cases, the licensor is a record label or distributor.
Publishing royalties – these royalties describe money paid to a songwriter or owner of a composition. Publishing royalties are issued to publishers, collecting societies, and mechanical agencies based on usage territory.
It’s important to note that rightsholders receive royalties whenever a qualifying song is played on Spotify.
The song does not need to be played as part of a premium user subscription.
Brands paying to advertise to users on the free version.
The company says that approximately 66% of the revenue from these two sources is paid to music rights holders.
In 2020, this equated to over $5 billion.
Taking 2020 as an example, the $5 billion royalty pool is then divided amongst rights holders based on their respective streamshare.
Streamshare is calculated by:
Determining the total number of streams each rights holder receives, and then:
Dividing that number by the total number of streams in the applicable market. Spotify markets are typically represented by countries or geographic regions.
In terms of the royalty pool itself, the share each market receives depends on the total revenue it earns from advertising and premium user subscriptions.
It should also be pointed that royalty pool fund distribution is not based on each musician’s streamshare alone.
In other words, musicians do not earn a fixed dollar amount per stream because Spotify Premium subscribers do not pay to listen to music on a per-stream basis.
Funds are usually distributed to eligible artists once per month. In some cases, they may be distributed to record labels and distributors first and then shared with musicians as per contractual agreements.
Key takeaways:
Spotify pays artists through a combination of premium subscription and advertising revenue.
Musicians and related professionals earn two different types of royalties on the platform. Recording royalties are paid to record labels and distributors while publishing royalties are paid directly to the songwriter or owner of a composition.
Spotify claims to pass on two-thirds of all its revenue to musicians. In 2020, this amounted to over $5 billion. Musicians are not paid on a per-stream basis because premium users pay a flat subscription fee for access to ad-free content.
Spotify is a two-sided marketplace, running a free ad-supported service and a paid membership. Founded in 2008 with the belief that music should be universally accessible, it generated €11.7 billion in 2022. Of these revenues, 87.4% or €10.25 billion came from premium memberships, while over 12.6% or €1.47 billion came from ad-supported members. By 2022, Spotify had 489 million users, of which 205 million premium members and 295 million ad-supported users.
Spotify Audience Network is the underlying advertising infrastructure that supports its ad-supported user base. The Spotify Audience Network was born as the result of the acquisitions of Anchor and Megaphone. By 2022, Spotify had 273 million ad-supported users.
Spotify licensing deals affect its businessmodel. The company runs on both a free service, which is ad-supported and a subscription premium service. They have different economics.
The ad-supported business had a 10% gross margin in 2021, compared to 29% of the subscription-based business. That’s because the more the content gets streamed on the platform, the more that increases royalty costs for Spotify. That is also why the company invested in developing its content. Thus, in part transitioning from platform to brand.The Spotify Model is an autonomous approach to scalingagile, focusing on culture communication, accountability, and quality. The Spotifymodel was first recognized in 2012 after Henrik Kniberg, and Anders Ivarsson released a white paper detailing how streaming company Spotify approached agility. Therefore, the Spotifymodel represents an evolution of agile.
The multi-billion music streaming company Spotify is primarily owned by its founders, Daniel Ek and Martin Lorentzon.
As of 2022, Daniel Ek has 16.5% ownership of ordinary shares and 31.7% of the voting power.
Martin Lorentzon has 10.9% of ordinary shares and 42.6% of the voting power.
Another key shareholder is Baillie Gifford & Co, a Scottish-based money management firm, followed by Morgan Stanley, T. Rowe Price, and Tencent.
Spotify is not profitable. The company’s net loss in 2022 was €430 million, compared to €34 million in losses in 2021, and €581 million net losses in 2020.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
