Money for nothing

It’s no exaggeration to say that streaming has completely infiltrated our lives in recent years. Whether it’s music or video, most of us are regular, if not daily, users of services like Apple Music, Deezer or Prime Video.

Each of these industries has its leader. On the music side, Spotify. On the video side, Netflix. The models are similar, but not quite the same. In particular, Netflix owns part of its content – which means significant investment, amortized over time – whereas Spotify depends entirely on third parties for its music – which means paying royalties in proportion to the number of streams. In a nutshell, we’re in a landlord vs. tenant situation.

 Spotify has just announced a price increase of around +10%, with the base price rising from €10 to €11. Sounds wonderful, you may say, as it should get them out of the rut. Not so fast, though.

 Like all other music streaming platforms, Spotify is legally obliged to remunerate rights holders, to the tune of 70% of what it earns: when you pay €10 to Spotify or others, only €3 actually goes into its pocket. With this 3€, Spotify must 1/ pay its salaries, marketing, R&D…, and 2/ generate a profit margin that will “remunerate” its shareholders. For the moment, this is not the case: another €100m in negative (adjusted) operating income this quarter. Of course, the cards are far from being stacked – the industry structure is not yet set – and it is entirely possible that Spotify will reach the critical point where operating leverage will come into full play.

 Let’s get back to our price increase. The small euro increase, which should pass without any great elasticity, will boost Spotify’s sales, but will mechanically increase its bill to artists and majors: from €7 to €7.7 for the latter, and from €3 to €3.3 for Spotify.

As indirect shareholders in UMG via our investment in Pershing Square, we applaud this decision: after all, Money for nothing is a song we like to listen to.

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