Spotify's Stock Market Success Says Nothing About the Future of Music

Had you invested $1,000 in Spotify on January 1st this year, you could pull out $1,800 right now. Had you invested $1,000 in Spotify in the midst of market-zapping pandemic uncertainty in March, you’d have more than doubled your money.

Last Thursday, Spotify’s market cap soared to an all-time high of $49.7 billion — well above what shares traded at when it went public two years ago.

At first glance, Spotify’s rapid share boom appears excellent news for the commercial status of music, and especially for music’s biggest company, Universal Music Group (UMG). After SPOT started trading on the New York Stock Exchange in April 2018, UMG resisted the temptation to dump its reported 3.5% holding in the streaming company. Its rivals bailed: Within 90 days of Spotify going public, indie label group Merlin sold its entire stake, worth around $100 million; Warner Music Group sold its entire stake, worth $504 million; and Sony Music Entertainment hedged by selling 50% of its stake, collecting $768 million. Universal held on, and its stake is now worth $1.74 billion, while Sony Music’s remaining stake (around 2.9%) is worth $1.42 billion.

But while Universal and Sony might be getting rich off Spotify’s rise in the short-term, they’re doing so for reasons that could be harming their own businesses in the long term — because Spotify’s buoyant run in the market actually has nothing to do with music.

Spotify’s stock price has doubled in three months for a simple reason: It’s doubled down on its podcast play. Within this, there have been two key catalysts: 1. Spotify’s May acquisition of exclusive rights to the Joe Rogan Experience, Apple’s biggest podcast of last year, in a reported $100 million deal; 2. Spotify’s June success of two more exclusive deals, one with Kim Kardashian West for a program focusing on criminal justice, and one with superhero giant DC Entertainment and Warner Bros, which will hand over scripted podcasts set in the DC universe.

Top analysts immediately nudged up their price targets for Spotify, driving investor enthusiasm and sending the market cap spiraling ever-upward. One of the most telling of these analyst notes came on June 19th from Rosenblatt Securities analyst Mark Zgutowicz, who increased his Spotify share price target to $275. (Shares had hovered around $140 pre-COVID.) In addition to “attractive monetization potential” from these podcast deals, Zgutowicz suggested that Spot could also create “future leverage to premium subscription pricing and label negotiations.”

Zgutowicz is hinting that, as podcasts become an increasingly bigger entity on Spotify, they could loosen record labels’ command of future deal terms — i.e. how much Spotify pays the music industry. Interestingly, Spotify’s previous global licensing deal with Universal Music Group expired early last year, and a successor agreement has still not been announced. One sticking point: What happens to a Spotify subscriber’s cash if they’re solely listening to podcasts and not music on the app? Another inevitable question: What share, if any, should the labels get of Spotify advertising dollars associated with podcast plays? Especially those generated via Spotify’s own ‘Streaming Ad Insertion’ technology?

Other Wall Street analysts have chimed in with similar rosy outlooks, all linked to the streaming service’s big-spending podcast strategy. Last Wednesday (June 24th), Goldman Sachs’ Heath Terry upped his price target to $280, espousing his optimism over Spotify’s “stream of exclusive podcast deals, acquisitions, and new podcast monetization functionality” — and contributing to a 7% boost in market cap. In his research note, Terry added: “We believe the exclusivity potential in the category creates a meaningful opportunity to differentiate [Spotify] in a way that has proven more difficult in Recorded Music, even though it may take years to generate meaningful financial returns.”

I have written at length about the serious threat podcasts pose to music royalties on services like Spotify, which ultimately comes down to talk content’s growing share of listening hours on the service. Per an oft-cited Edison study, more than 100 million Americans listened to a podcast in the last month; according to MusicWatch, just 79.7 million Americans were paying for music streaming by the close of 2019.

Spotify’s aim with podcasts, as pointed out by Zgutowicz, is to improve its profitability by tilting the balance of power away from the record labels, which today suck out so much of Spotify’s revenue via royalty payments that the streaming company still isn’t consistently profitable. Spotify’s key tactic in this mission is to draw listening away from royalty-bearing content (music) towards non-royalty-bearing content (podcasts).

But will the labels put up with it much longer? That depends on leverage — specifically, how dominant Spotify can stay in the music marketplace while storming ahead with podcasts, and whether Universal, Sony and Warner will continue considering the company peerlessly essential to their own bottom lines.

Spotify’s big advantage: It remains, by some margin, the largest subscription music service on the planet. Recent stats from Midia Research suggest that, at the close of March this year, Spotify claimed 32% of 400 million paying music streaming subscribers worldwide. That was not far off double Apple Music’s haul (at Number Two, with 72 million).

For the record labels to gain negotiating power with Spotify, they need its dominance gradually ebbed away by a fiercely competitive global marketplace. So they will doubtlessly be pleased that — according to my reading of Midia’s numbers — Apple Music, YouTube Music and Amazon Music combined grew by 38 million paying subscribers in the year to end of Q1 2020; in the same time period, according to its own financials, Spotify grew by a lesser volume of 30 million.

Playing on Spotify’s mind will be the fact that the record labels also have unused emergency tactics to call on. They could each decide to pull their content off Spotify’s free tier in certain countries, for example, suddenly slowing down SPOT’s subscriber growth potential. Or even choose a more nuclear option.

In 2018, Sony Music Group chairman Rob Stringer was asked whether a Sony-owned music streaming platform could ever enter the global market to challenge Spotify. Stringer replied: “Do we want to take all our stuff off a major streaming platform? No — we have an arrangement that is working for both of us. But the next chapter might be in five years. Who knows?”

Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a weekly column for Rolling Stone.

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