Peter Kafka

Recent Posts by Peter Kafka

Why The Big Music Labels Won't Burn All Of Spotify's New Money (Right Away)

Spotify is set to cash a very big check. What it’s going to do with that money?

The streaming music service is going to raise something like $100 million, at a valuation of $1 billion or more, very shortly, according to TechCrunch, the Financial Times, the New York Times and Sky News (?).

People who tell me they’re familiar with Spotify’s plans also tell me all of those publications are wrong. But they won’t be specific about why they’re wrong. So my hunch is that some combination of the total amount raised, the valuation and the investors may still be in flux. Or not.

Whatever. Sooner, or later, Spotify is set to cash a very big check. What’s it going to do with that money?

The easy assumption is that the company will turn around and redistribute its new investors’ funds to the big music labels, as part of the distribution deals it is cutting to get into the U.S.

Spotify already has deals with Sony and EMI, and is supposedly closing in on one with Vivendi’s Universal Music Group, the world’s biggest label.

And as I wrote last fall, Spotify is willing to pay the labels real money over the life of these deals to get them done. But I don’t think the bulk of this cash goes immediately from DST, or Kleiner Perkins, or whomever, to UMG, Sony, et al.

For starters, I don’t think Spotify’s backers would be happy to serve as a direct funding source for the flailing labels. And remember that Spotify is a money-losing startup, so it would likely need cash to fund operations even if it was staying put.

But I think that Spotify is going to have to spend real money to break into America, which already has plenty of streaming music services, and doesn’t seem very interested in them.

A rough guesstimate is that Rhapsody, Napster, MOG, Rdio and Thumbplay have a total of about a million subscribers–about the same that Spotify has on its own. So in order to really make the case for music you rent by the month, Spotify is going to have to lay out serious marketing cash to get people to pay attention.

It will need to staff up, too: The company, based in Sweden and London, has a handful of people working in a small corner of Google’s New York City office, but that won’t be nearly enough to tackle the States.

The other big variable, which wasn’t on Spotify’s radar when it started looking for cash last year but certainly is now, is the impact of Apple’s new subscription plan. As described in Apple’s press release, that plan will lop 30 percent off of every subscription Spotify sells through Apple’s iTunes store.

Spotify, like every other music service, can’t live with that. So if Apple doesn’t back down, and U.S. or European regulators don’t force it to back down, Spotify will have two choices:

  • It can market the heck out of the service on everywhere but Apple’s platform, and hope that the overwhelming majority of its signups happen via some other outlet, where they won’t have to pay Apple’s tariff.
  • And/or it can spend a lot of time fighting Apple in court.

Either way, some extra cash might be handy. Good thing the company has some lined up.

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