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FORTUNE.COM // NOVEMBER 2019
(Universal, Warner, and Sony declined to comment for this story.)
“The major labels kind of sat on their hands at the advent of
streaming,” says Errol Kolosine, former head of the record label
Astralwerks and a professor at New York University’s Clive Davis
Institute of Recorded Music. “The music industry went through
a period of relative uncertainty, driven by not understanding the
permanence of streaming. That reality has set in now.”
Part of the industry’s reality check was to realize that Spotify,
especially in the era of smartphones and speedy Wi-Fi, offered
a superior experience—one that customers would now demand.
“What it provides for the listener is amazing,” says Jeff Peretz, a
studio musician, producer, and music teacher in New York who
has worked with acts such as Mark Ronson and Lana Del Rey.
“They have access to everything.”
But giving listeners so much control meant that the way art-
ists and labels made money had to be completely rethought.
Adds Peretz: “The average listener doesn’t care about how
money moves through the industry and where it winds up.”
Spotify makes its money in just two ways. It generates less
than a tenth of its revenue, or $291 million in the first half of
this year, by selling advertising against its free listening service,
which offers limited, on-demand access to its audio catalog. It
generates the vast remainder—91% in the first half of the year, or
$2.89 billion—from fees for its paid subscription service, which
offers unlimited access to the catalog, online and off. The com-
pany has long held that its free service serves as a funnel to its
paid counterpart, and it has the data to back up the claim: More
than 60% of new paid subscribers to Spotify upgraded from its
free tier. Most of the company’s growth has been the result of
working within these two categories: more effectively monetiz-
ing its free customers, and attracting more paid subscribers. An-J
UST HOW HARD has Spotify rocked
the record industry? Consider
where the business was at the turn
of the millennium. In 1999, still
riding a multi-decade wave of growth, the
global recorded music industry logged a record
$25.2 billion in revenues, all of it via sales
of physical media like vinyl records, cassette
tapes, and above all, compact discs. (For per-
spective, Starbucks had just under $25 billion
in sales last year.)
Then Napster came along. The launch of
the notorious file-sharing platform that very
same year took the homegrown piracy that has
always been part of the music industry and put
it on steroids. Cue the slide: By the time Apple
launched its iTunes Music Store in 2003, an-
nual music industry revenues had dropped by
some $4 billion, according to the IFPI.
By the time Spotify launched in 2006,
music sales had fallen another $1 billion. But
the record companies were still wary of the
streaming service, which Ek was pitching as a
solution to piracy. The industry cut a deal with
Spotify for music rights outside the U.S. in
2008, but it took until 2011 for Spotify to ne-
gotiate its way into the U.S. market. Alarmed
by the sudden erosion of their business, all of
the major record labels finally signed licensing
deals with Spotify and quietly took an esti-
mated 14% combined stake in the company.SPOTIFY QUARTERLY REVENUES QUARTERLY PROFITS/LOSSES STOCK PRICE SINCE IPO
0
0.5
1.0
1.5
$2 billion–30
–20
–10
0
10
20
30%
NASDAQ INDEX
SPOTIFY
Q1 2017 Q1 2018 Q1 2019 Q1 2017 Q1 2018 Q1 2019 APR. 3, 2018 OCT. 10, 2019
1.9 B.
–86.5 M.
-23.9%
15.0%
SOURCE: S&P GLOBAL
$600 million4002000–600
–400
–200
T HE FU TURE 50 —SPOTIF Y
Spotify’s growing paid subscriber base has helped its revenues reach new heights, but the company’s lack of
control over its costly content supply has made consistent profits elusive.on the spot