1/ Did you know the US music industry is only about half as big as it was it 2000?
Business Breakdown [THREAD] with free full post at the bottom 🔽
Business Breakdown [THREAD] with free full post at the bottom 🔽
2/ Before getting into it, let's talk about the history of the music industry.
Before the invention of the phonograph by Edison in 1877, the music industry consisted of sheet music.
To listen, you had to play the music yourself.
Before the invention of the phonograph by Edison in 1877, the music industry consisted of sheet music.
To listen, you had to play the music yourself.
3/ The first record company was Columbia Records which actually started as a way to sell more phonographs.
It signed on a few opera singers and the modern-day record label was born.
Since distribution/marketing was so expensive, artists got very small royalties.
It signed on a few opera singers and the modern-day record label was born.
Since distribution/marketing was so expensive, artists got very small royalties.
4/ The music industry hit its peak with the sales of CDs before Napster entered the picture in 1999.
Napster (illegally) made file sharing easy so artists couldn't protect their copyrights.
Famously, Metallica sued Napster and won but at the cost of their image.
Napster (illegally) made file sharing easy so artists couldn't protect their copyrights.
Famously, Metallica sued Napster and won but at the cost of their image.
5/ Before the internet, because distribution was so tough, the industry consolidated into three big labels:
1. Universal Music Group
2. Sony Music
3. Warner Music Group
These three still hold the vast majority of music backlogs.
1. Universal Music Group
2. Sony Music
3. Warner Music Group
These three still hold the vast majority of music backlogs.
6/ Enter Spotify.
The company started out in Europe in the midst of the financial crisis and the downfall of the music industry.
This actually enabled them to get some licensing deals done. Three years later it expanded to the US.
The company started out in Europe in the midst of the financial crisis and the downfall of the music industry.
This actually enabled them to get some licensing deals done. Three years later it expanded to the US.
7/ Because of the stronghold of the "Big Three" labels, Spotify has to pay out roughly 30% of its premium subscription revenue.
Therefore, gross margins are only 26%.
But the company has done a great job of acquiring users. It now has 286 million.
Therefore, gross margins are only 26%.
But the company has done a great job of acquiring users. It now has 286 million.
8/ Spotify has sacrificed ARPU numbers for subscribers and it makes a lot of sense.
It needs economies of scale to make sure that labels don't take advantage of them.
It's all about leverage.
It needs economies of scale to make sure that labels don't take advantage of them.
It's all about leverage.
9/ Spotify has 130 million premium subscribers and this makes up 90% of its revenue. The other ad-supported users only account for 10% of sales.
A fun fact is that Pandora has 40% of the ad-supported user base as Spotify but has 50% more in ad revenue.
A fun fact is that Pandora has 40% of the ad-supported user base as Spotify but has 50% more in ad revenue.
10/ Read the whole post to understand the future of Spotify and how the economics will likely be more favorable from here on out:
businessbreakdowns.substack.com/p/spotify
Thanks so much for reading! 😁
businessbreakdowns.substack.com/p/spotify
Thanks so much for reading! 😁
