Inside Track: Will Spotify Stay Independent — and Should It?
Spotify's Discovery Mode is causing issues among industry insiders, while its independent status is an open question. Meanwhile, DistroKid is now worth $1 billion.
Billboard will soon launch a newsletter highlighting the unfiltered thoughts of the CEOs, decision-makers and power players at the intersection of technology and music, written by Billboard’s director of technology coverage, Micah Singleton. This is an early look at what to expect.
Edited by Dan Rys
Spotify’s Discovery Mode Causes Drama
Discovery Mode, a new tool from Spotify that lets artists and labels accept a lower royalty rate on singles in exchange for prioritization within Spotify’s algorithm, has been controversial to say the least. Congress is probing, with House Judiciary Committee Chairman Rep. Jerry Nadler (D-NY) and Subcommittee on Courts, Intellectual Property and the Internet Chairman Rep. Hank Johnson Jr. (D-GA) raising concerns in a June letter to CEO Daniel Ek that the product could lead to a “race to the bottom” as artists look for ways to break through an increasingly competitive field.
Spotify has been on the offensive, enlisting distributors including DistroKid (more on them later) and Believe Music, along with its subsidiary TuneCore, to sing its praises as a tool for independent artists to gain marketing without the upfront costs.
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Much like the public’s perception, industry executives are split on Discovery Mode, with as many supporters as detractors across the spectrum. “Spotify has consistently expressed a pattern of devaluing music” one CEO says. “If they were a creator-friendly company it would be judged more benign.” Another C-suite executive said transparency is key for Spotify to overcome the doubt in the industry. “Unless they are entirely transparent about how the algorithms and percentage of revenue work, it’s very hard to buy in,” they said.
Others call it a great move for new artists, with one founder pointing out artists don’t have to spend on TikTok to break a song if Discovery Mode works as promised. “At Tower Records, you used to be able to pay to have your CDs face out or on the end-cap,” one investor notes. Discovery Mode is “more like the retail marketing function, it’s important for letting records get a start,” they say.
Expect to hear more about this in the coming months as Congress gets back to work after Labor Day.
Will Spotify Stay Independent — and Should It?
Spotify is growing slower than it has in previous years, its profitability is negligible, and the company’s main competitors are loss-leaders for their respective corporations (Apple and Amazon), which can pump millions into them at any time. Ek would also really like to buy Arsenal, an English soccer team valued at $2.8 billion by Forbes that would cost Ek around 75% of his net worth if he wanted to own it by himself. This all leads to the inevitable question of whether the biggest independent music streaming service in the world will stay that way for the foreseeable future, and whether the music industry needs an independent alternative to keep the streamers innovating.
“A year ago? I could see Microsoft buying Spotify,” one CEO says. “Now? That’s very hard with M&A. It’s becoming harder and harder to buy it.” The newly-emboldened Federal Trade Commission — led by chair Lina Khan, a longtime proponent of breaking up the big tech conglomerates — would likely raise hell if a tech giant tried to buy Spotify, but multiple executives brought up Netflix (whose co-CEO Ted Sarandos sits on Spotify’s board of directors) as a potential partner for an “untraditional merger based on streaming economics,” as one investor put it.
“The industry needs them not to be bought by a tech company,” another CEO says of Spotify. “We need competition, and we need a big player that is not Apple or Amazon.”
DistroKid Joins the Billion-Dollar Club
Independent distributor DistroKid — which more than 2 million artists use — is now worth $1.3 billion after raising funds from Insight Partners in mid-August. This raises two main questions: is DistroKid a tech startup or a music startup (which are traditionally valued lower than tech companies)? And what happens to the power dynamics within the industry over the next decade if indie distributors like DistroKid and Believe Music (valued at around $2 billion on Euronext Paris) continue to garner tech company valuations?
“It does feel like a tech startup. I don’t know why we don’t call it a tech startup,” one CEO says about DistroKid, noting that “it speaks to the enormous amount of music consumption going on right now.”
“Power dynamics will change with these valuations,” a longtime music investor says. “If the music industry hasn’t realized the power dynamics have shifted, they’re blind. If [DistroKid CEO Philip Kaplan] is distributing a third of the music in the world, he’s one of the most powerful people in the music industry.”
Another investor says power dynamics won’t change in the near term but declares, “We’re in the early stages of a new era of institutional companies.”
Startups like DistroKid still have a long way to go before becoming institutional organizations in the music industry, but the rate at which tech startup valuations increase makes music startups look glacial. Last year, when the Trump administration was trying to force Chinese conglomerate ByteDance to sell off TikTok, investors valued the short-form video platform at around $50 billion, according to Reuters.
TikTok launched in 2017.
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