Programmatic Is 25% Of Spotify’s Revenue, Growing Twice As Fast As Direct

If Spotify’s third quarter earnings are any indicator, programmatic audio is taking off with buyers.

The digital audio platform told investors on Thursday that 20%-25% of its revenue comes from its self-serve programmatic platform and other automated buying features. That’s up from 18% in February, when the company went public.

The market is moving aggressively toward programmatic solutions, especially in Europe and the United Kingdom, said CEO Daniel Ek.

“We’ve made it a point of tactical emphasis from a product development standpoint,” he said. “The market is heading there and we’re driving there as fast as we can.”

Spotify rolled out a self-serve programmatic platform in September 2017 and will continue to see benefits from the shift toward that buying model for “many years,” Ek added.

Ad supported revenue at Spotify was up 30% in Q3 to $162 million, while ad-supported monthly active users grew 20% to 109 million. Overall revenue grew 31% year over year to $1.54 billion, and monthly active listeners were up 28% year over year to 191 million.

Average revenue per user (ARPU), however, declined in Q3 by 6% to $5.39.

CFO Barry McCarthy predicted that the rate of decline in ARPU “will continue to decelerate” as Spotify generates more growth through its student and family plans.

As Spotify pushes for more programmatic sales, the company is also ramping up its podcasting efforts, which it sees as a major opportunity. The majority of radio listening has not yet shifted online and it’s still early days for the podcast market overall. Spotify is experimenting with both fixed and variable deals with publishers.

“Our opportunity is gigantic,” Ek said. There aren’t too many companies in the world focused on that opportunity to bring audio online.”

Improving the user experience for podcasting is one way to help Spotify increase its share of podcasts, Ek said, including by fixing podcast discovery as well as adding functionality, such as the ability to fast forward through content.

Spotify, which spends a significant portion of its budget on negotiating deals with music labels, is also looking to podcasts as a way to diversify its revenue.

“If podcasts become a significant portion of the business, that will add its own margin structure and revenue stream separate from the music business,” McCarthy said.

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Welcome to the ‘Royalty Black Box’

Delve into the music industry’s sordid past, and you’ll find tawdry details of mobbed-up labels and Soprano-style venues. Indeed, crooners like Frank Sinatra were notoriously implicated with organized crime. But the way he explains it, there wasn’t any alternative.

So who’s replacing the mobsters in the digital economy? Welcome to a more sophisticated racket that’s just as lucrative. And it involves billions in unclaimed, unmatched, delayed, or otherwise unpaid digital royalties. And holding the golden bag is a mish-mosh of well-positioned middlemen, including a gaggle of PROs, mechanical rights licensing administrators, and others who mysteriously can’t figure out where that check should be sent.

So who’s holding all this cash?

Like the problem itself, the answer is complicated. And it’s hard to pick out the bad guys. Many times, it’s just simple incompetence instead of actual malice.

Like SoundExchange. Over the years, we’ve blasted SoundExchange for holding hundreds of millions in unclaimed royalties. Indeed, the deeper we clawed into SoundExchange’s unclaimed database, the more we found glaring examples of obvious copyright owners not getting paid. We’ve even found fraudulently claimed royalties — lots of them — fueled by disorganization and maybe even purposeful obfuscation.

Intentional or not, the result ends up being the same. And it turns out that’s just scratching the surface. Now, as Spotify battles hundreds of millions in unpaid royalty claims, a little startup in London wants to shine the light on this dirty butt-crack of the business.

The company is called Paperchain, and their mission is to clean up an estimated $2.5 billion in blocked funds. They’re ready to seriously rock the boat.

+ Live Concerts + Streaming = 73% of the US Music Industry

Paperchain was started in Sydney, Australia, and migrated their HQ to London. That’s still far from the epicenter of the music industry (pick one: New York or LA); though its closer to the rat’s nest of overlapping European PROs (more on that cesspool later).

Here’s just some of the depressing info that Paperchain emailed Digital Music News this morning.

More than 46 million instances of unidentified songwriters or unknown copyright owner ‘Notice of Intents (NOIs)’ have been digitally filed with the US Copyright Office by streaming services since April 2016.

Royalties are unpaid and go into “royalty black boxes” until the owner is identified or dispersed into the industry.

The global value of these royalty black boxes is estimated to be $2.5 billion.

That’s right: $2.5 billion, with a ‘b’. And given an absolute avalanche in plays and associated metadata, this is a problem compounding exponentially every year.

So ask yourself: where’s this $2.5 billion going?

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Radio Is Dead In 10 Years. This Study Proves It.

A new study by Musonomics will make you wonder how many years radio has left.

Larry Miller, Director of New York University’s Steinhardt Music Business Program, performed the study. He grew up in the radio industry and started his career as a DJ.

In the executive summary of the study, Miller highlights eight dangers that the radio industry currently faces.

1. Digital services are severely crowding traditional radio.

2. Music charts once driven by AM/FM broadcasts are increasingly driven by digital.

3. Generation Z listeners prefer streaming platforms like Spotify and Pandora over AM/FM stations.

4. Younger music listeners have increasingly turned to sites like YouTube to discover new artists and songs.

5. Digital services, including streaming platforms, have become an important source of revenue.

6. Carmakers have started to marginalize radio on their dashboards, decreasing radio listenership.

7. Smart speakers have begun shaping consumer practices and preferences.

8. Radio’s rating system fails to deliver on specifics that advertisers demand.

Vintage Radio

Radio lacks the innovative features found in streaming platforms.

In a recent MusicWatch report, only 53% of respondents said that they felt “very satisfied” using the radio in the car. Just 27% said that they felt satisfied with the quality of sound. 25% said that AM/FM stations played the best music. 13% felt satisfied with radio’s integration with social media.

Summarizing MusicWatch’s data, Miller writes,

“ Music fans today have many choices for access to music and are becoming increasingly dissatisfied with AM/FM radio’s traditional service offering.“

Car companies have started to abandon the terrestrial medium

Looking at newer vehicles, Miller notes that in-car media screens allow easier access to platforms like Spotify, Pandora, and iTunes. This, in turn, “[relegates] radio…from the center of the dashboard,” decreasing listenership. He explains why.

“AM/FM controls are often found below this screen, rendering them less prominent and less accessible than in the past.”

Why did you buy a smart speaker? To listen to “better music.”

According to Edison Research, 7% of Americans 12 and over now own a smart speaker in their homes.

70% of smart speaker owners said that they listen now to more audio. 62% of those surveyed said that the smart speaker allows them to “hear better music than on AM/FM radio.” Only 38% said that they still continue to listen to music through the terrestrial medium.

Why has radio fallen behind in the American home? Miller writes,

“[It] has not meaningfully invested in new programming or advanced digital services for smart speakers.”

Pandora Radio’s Glenn Peoples writes how broadcasters could take advantage of the rise of the smart speaker.

“With established brands in local markets associated with certain genres and formats, radio stations could earn a key place in the smart speaker market by building out their digital presence.“

To survive in the digital age, broadcasters must invest in “strong and compelling digital services”

At the end of his report, Miller notes that music remains the lifeblood of the radio industry. However, today’s listener has access to “virtually unlimited choices for audio and music consumption.” So, what can broadcasters do?

For the terrestrial medium to survive, broadcasters will have to “embrace a new vision for their content.” That includes moving toward a “more communicative experience in line with millennials and other younger generations.”

In addition, Miller writes,

“[The medium] needs to invest in strong and compelling digital services. If it does, [broadcasters] can look forward to a robust future built on the strong foundation it already has in the marketplace…“

Speaking about the terrestrial medium, Scott Burnell, Ford’s Global Lead of Business Development and Partner Management, has a simple message for broadcasters.

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Music Industry Predicts a Major ‘Wake-Up Call’ on Streaming

BMG says its artists receive more than 75% of music streaming royalties. Why are other artists getting 0%?

In the past few years, all three major music labels have posted higher financials thanks to one magic word: streaming. Revenue from music streaming has pushed major labels to their highest revenues in years. It’s off the charts!

So why exactly are artists still receiving such tiny royalty payments?

According to Hartwig Masuch, CEO of BMG, the reason may lie behind a “complex” excuse major labels use.

Streaming has provided a strong growth boost after sharp declines due to piracy and declining CD sales. Just two months ago, in Warner Music Group’s Q1 financials, CEO Steve Cooper proudly says:

“Our strong momentum continues with excellent first-quarter results including 11% constant-currency revenue growth on top of 11% growth in the prior-year quarter. While streaming continues to drive industry growth, we are outperforming the market thanks to extraordinary music from our artists coupled with first-class execution from our operators around the world.”

However, the BMG CEO warned that as major labels continue to report higher financials thanks to streaming, artists will soon demand a greater cut of royalty revenues. The simple reason is that the cost base can’t reasonably be justified.

Speaking with the Financial Times, Masuch said,

“I believe there will be some wake-up calls. I am very cynical about the view that the good days have returned. Every renegotiation [with an artist] will cut down massively on the margin.”

Artists have long complained about poor payouts from streaming platforms, including Spotify and YouTube. Citing one example, Chris Difford co-wrote hits like ‘Up the Junction’ and ‘Tempted’ with his band Squeeze. Yet, he has only received £1.50 ($1.87) for every 6,000 streams.

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Access overwins ownership for UK home entertainment

The digital revolution in the entertainment business has reached a new tipping point with Britons now spending nearly 80 per cent of their expenditure on entertainment online, according to the Entertainment Retailers Association.

And for the first time, entertainment has gone ‘pay monthly’ with expenditure on access to entertainment via services such as Netflix, Spotify and apps such as Pokemon Go exceeding expenditure on ownership models such as discs or permanent downloads for the first time.

The figures are included in the latest edition of the ERA Yearbook, regarded as the definitive statistical source on the UK games, video and music markets.

In 2016, online and mobile-generated digital and home delivery entertainment revenues accounted for 77.7 per cent of the £6.32 billion (€7.24bn) spent on music, video and games, with physical stores accounting for just 22.3 per cent.

ERA figures also indicate that for the first time in 2016, Britons spent more on accessing entertainment via subscription services from Netflix, Amazon, Spotify, Google Play, Sky and Apple Music and mobile apps like Pokemon Go than they did buying it permanently on disc or download.

Access services accounted for 51.3 per cent of entertainment expenditure in 2016 with 48.7 per cent spent on discs and downloads. A key factor was booming expenditure on music and video streaming services.

“We are seeing the rise of a ‘pay monthly’ generation in entertainment, noted ERA CEO Kim Bayley. “Rather than buying music, video or games outright, the British public is being won over by rental or all-you-can eat services which are available 24/7. If downloads represented the first digital revolution in entertainment, we are now at digital 2.0, the subscription age.”

Despite the broader trend, affection for physical formats still remains strong. Music fans remain devotees of ownership formats, with sales bolstered by the boom in vinyl (up another 54.4 per cent in 2016 to £65.6 million) and deluxe CD and box set editions.

Even in previously declining markets, the introduction of a hot new product can generate substantial new physical sales.

The handheld games software market saw a surprise sales boost in the fourth quarter of 2016 after Nintendo released two new Pokemon titles for its 3DS platform. With each selling around a quarter of a million units, it was enough to see the entire sector grow by more than 20 per cent compared with 2015.

“Digital may grab the headlines, but we should not underestimate the fondness of the UK public for physical formats in particular,” added Bayley. “While the vinyl revival has been well reported, millions of people still regard DVDs, CDs and console game discs as the best way to access entertainment. Discs are durable, convenient and are still probably the best entertainment option for gifting.”

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Are Hundreds of Thousands of People Using Spotify Premium for Free?

Millions have watched tutorials on how to get Spotify Premium for free. Google and YouTube are fuelling the fire. So how much money is being lost here?

Last week, Digital Music News wrote about a potentially disturbing development. After years of seemingly non-stop growth, Google search traffic showed a troubling trend. According to search engine optimization (SEO) leader SEMrush, searches for ‘how to cancel Spotify premium’ had tripled since late last year.

Even more surprising, people were searching DMN (and undoubtedly other sources) for a how-to. Maybe it was the bundling with the New York Times, or people tightening their belts after Christmas. Maybe it’s competition from Apple Music, whose subscribers are well past 20 million, according to the company’s latest reports.

Or, maybe it’s a blip, with paying subscribers continuing to soar.

But while we’re finding that out, there’s another trend we spotted. Searches for ‘how to get Spotify Premium for free’ are also going strong (though not increasing). So DMN poked around, and found a stunningly high number of guides and YouTube videos dedicated to this exact topic.

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Is Spotify Going Bankrupt In 2017?

Wall Street is rejecting their IPO (again). A $1.5 billion debt pile is now a ticking time bomb. Major labels are taking 70+% of revenues. Is this the year that Spotify implodes?

Spotify is a damn good streaming music service. And they’re beating almost everyone at this game. That includes some of the largest companies in the world: Apple, Google, Amazon, and Microsoft. In fact, Spotify has double the number of paying subscribers that Apple Music has. Spotify may also have more customers than all of these competitors combined.

But at what cost?

Now, it looks like Spotify is postponing their long-awaited IPO. Again. According to details leaked by TechCrunch, the mega-streamer won’t be going public until at least 2018, thanks to continued Wall Street rejections. “The delay would give Spotify more time to build up a better balance sheet and work on shifting its business model to improve its margins,” TechCrunch reports.

“The financial climate has changed…”

A major problem is that Spotify simply isn’t making enough money. Go figure. They’re growing fast, but the underlying financials are rotten. “Three to five years ago, you could have an IPO based solely on user growth and promises of the future,” a TechCrunch source relayed.

“But the financial climate has changed now. Today you have to show some path to profitability, especially at the valuation that Spotify has been targeting.”

That might explain why Spotify is frantically trying to renegotiate its major label licenses. Currently, the company is paying at least 70% to the big three: Universal Music Group, Sony Music Entertainment, and Warner Music Group. According to data released last year, Spotify has paid a cumulative $5 billion in royalties since inception, none of which includes overhead, taxes, and guaranteed equity shares (if an IPO occurs).

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