A decade-long investor in Spotify said there is a big hint about how it will cut out record labels
- Spotify revealed its financials in its filings to go public on Wednesday.
- The numbers show that Spotify bleeds a huge amount of cash by paying out to rightsholders - and most artists don't see a lot of that money.
- Northzone partner and former Spotify board member Pär-Jörgen Pärson said Spotify's long-term goal is to cut out record labels to benefit artists more.
- Pärson said labels will still manage mega-artists who need big marketing power.
- But more niche artists could use Spotify's platform to reach paying consumers directly.
Artists will soon treat Spotify as a kind of DIY record label, uploading their music and having a direct financial relationship with customers.
That's according to Pär-Jörgen Pärson, a partner at Northzone Ventures with a 10-year track record as a Spotify investor. Pärson stepped off Spotify's board last year as the company prepared to go public, and spoke to Business Insider about its future direction.
Spotify is bleeding cash because it has to pay so much to labels
Spotify filed paperwork for a direct listing on Wednesday, giving prospective investors and journalists a detailed look at its finances and metrics for the first time.
One major worry from the filings: Spotify makes huge amounts of money from paid subscriptions - but almost all of that gets paid to record labels who own the rights to music.
Can Spotify just become a record label and cut out the middleman?
Sort of, Pärson told Business Insider, pointing to a particular section in Spotify's filings where the firm talks about building a marketplace.
"That better reflects the potential of Spotify, to be the place where creators can disintermediate all the middlemen who have taken 75% of their revenues historically," he said.
"They can go directly to the most powerful distribution channel. Spotify can provide analytics, insight, and support that helps creators in real time see how their work is being received by audiences."
That kind of live data isn't something labels can really offer, he added. "It's about making it possible for the artists to have direct relationships with customers financially, also. They don't today. In the long run, that's the biggest promise."
Here's what the filing said to back Pärson up (emphasis ours):
"We are building a two-sided music marketplace for Users and artists, which is powered by data, analytics, and software ... Given Spotify's large audience, we are able to provide artists with unique insights into their fan base. These insights enable artists to promote music their audiences are likely to enjoy, to plan concerts and events according to where their fans are, and to actively communicate with fans who are interested in their music. Because artists can target the Users who are most likely to enjoy their content, they are able to increase their royalty-based revenue and bolster revenue from ancillary services, such as concerts and merchandise. Providing this information to artists helps them to support themselves and to be able to live off of their creative work."
It all sounds like pretty hard work for the artist, who now has to take on the burden of marketing as well as making music. But then it's already hard work for artists who aren't as big as Ed Sheeran, Adele, or Coldplay, or as established as older bands.
Tom Fleming, the guitarist of Wild Beasts, an indie band which recently split up, put it like this to Dazed last year: "I feel like there's a lot of very young artists who are trying to make it and a lot of old guard who are sat on all the money.
"Like with festival headliners, it's always the same old names, so it is a slightly hostile climate ...when it comes to getting your stuff off [indie music platform] Bandcamp and across to a wider audience it's very difficult I think."
Spotify's marketplace would work for artists who are struggling to get out of that Bandcamp phase, Pärson said, especially if they're in genres where labels have little financial incentive.
"Going to my favourite music category, progressive metal, there's no business for a label in that," said Pärson.
"There isn't really a business either for prog metal bands, but they have small loyal followings who find their bands rather than being marketed to [by a label.]
"They're speaking directly to your customers - like a big band in that category, Dream Theater, they do their marketing themselves."
But Spotify won't kill off labels totally
There's still room for the machinery of big labels, Pärson said, especially when it comes to promoting genres that require a lot of marketing, like pop.
"I think the labels will have an artist discovery and talent development role going forward, maybe for pop and other genres that require marketing to become massively adopted in big markets," said Pärson. "They need the marketing engine of a label."
Both Pärson and another Spotify investor, GP Bullhound Partner Joakim Dal, downplayed suggestions Spotify would try and mimic Netflix with original content. Spotify rolled out original video in 2016, but its head of video content left in 2017, and its efforts in original programming have seemingly stalled.
"There could be some element to original content, but I think that content is more likely to be aspects of what the creator can do on the Spotify marketplace, rather than Spotify saying 'Ok, Rihanna, can you make a song that we will finance.' I think that's a different model," said Pärson.
Dal said: "[Growth] is the battle I would focus on, rather than trying to maximise profitability by creating your own content. Many years ago, people were very focused on content and not just being a 'dumb pipe.'
"What Spotify has shown is that being a 'dumb pipe' is in fact extremely valuable. Having that spot inside someone's phone and engaging people for several hours a day, that's very valuable and it's hard to replicate that."