Spotify Bobs and Weaves Through a Big Week: Troy Carter, Radiohead and 'Free' Money
Troy Carter joins, Radiohead rolls down the window and Apple changes an important policy.
Cost of revenue -- and competition
This week, Apple announced that it would reduce the 30 percent "app tax" it charges to companies that offer month-to-month subscriptions. Currently, if a user signs up for Spotify from within Apple's prim content garden, Apple receives 30 percent of that transaction -- this is why Spotify subscriptions are $12.99 per month if begun from within the App Store, but $9.99 otherwise.
The new revenue split was accompanied by the announcement that, starting this fall, a new host of subscription options will be available to all developers. This means game makers, for instance, can now charge a monthly fee for regular updates or in-game items. If those subscribers stay for a year, that developer gets to keep an additional 15 percent of the subscription price, bumping them from 70 percent to 85. The year ramp-up rule incentivizes these companies to make their subs worthwhile, and ensures Apple a steady income stream.
The move was not an entirely altruistic one. According to its most recent financial filing, Apple's services grew, and its hardware business did not. (To be fair, the quarter falls within an off-cycle for Apple's hardware business.) Apple bundles revenue from the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store and Apple Music sales under the catch-all "Internet Services" in its financial statements -- and piles AppleCare, Apple Pay and licensing on top of that as well in that section of the document, making it utterly impossible to get a detailed look at that segment of its business. But a look at the surrounding figures paints a clear picture: iPhone, iPad and Mac sales contracted over the second quarter of this year, while its "services" were up 20 percent. In fact, "Services" were responsible for more sales revenue than the iPhone in this particular quarter.
If Apple can further monetize the App Store, by inviting the Store's largest revenue-driving segment, games, to participate in the subscription economy -- well, that's bully for them. "We wanted to reward [developers involved in subscription business models]... by helping them to keep more of the revenue," top Apple executive Phil Schiller told The Verge. That it rewards the world's most valuable company too is a pleasant side effect, and good business move.
Not to be outdone, Google quickly announced a similar change in its "app tax," to the same 85-for-developers, 15-for-us split -- with one important difference. Google's policy change will unlock immediately, not after a year. Google has less incentive, because of the money-printing machine of AdWords, to make this part of its business reliably sticky.
An important note -- and to return to Spotify -- is for those companies with apps which already have a subscription option. Apps with subscribers who have remained steady for a year will benefit from the new revenue split on Monday (June 13).
When Spotify filed its yearly financial statements in Luxembourg this March, one figure in particular was striking: its "cost of revenue." Cost of revenue is how much money it takes for a company to secure a sale. In 2014, Spotify's cost of revenue was €8.76 million (roughly $988,403). In 2015, it was €1.62 billion (roughly $1.83 billion). This is a company that pays 83 percent of the money it makes back to the music industry, so a jump in this line item was noteworthy.
"Over the last year, we've seen an increase in subscribers coming to us through iTunes," Spotify's head of communications, Jonathan Prince, told Billboard. "That drives up our costs, because it's around 10 times what normal payment processors charge, and it forces users to pay $12.99 instead of $9.99. None of that 30 percent goes back to artists, songwriters or the music industry, it all goes straight to Apple's pocket."
Apple doesn't charge itself a 30 percent premium when users sign up for its own streaming service, Apple Music, through the App Store; users pay $9.99 a month.
While subscribers through the App Store can't possibly account for the doubling of its cost of revenue, Spotify still stands to benefit greatly from the (retroactive, as mentioned) halving of this type of overheard. That said, Prince isn't entirely satisfied, saying in a statement that the new split “sounds like a nice gesture to developers, but it doesn’t get to the core of the problem with the Apple tax and its payment system. Unless Apple changes its rules, price flexibility is prohibited, which is why we can never provide special offers or discounts, and means we won’t have the ability to share any savings with our customers."
Clearly, Spotify stands to benefit financially from Apple's new policy change, but a dramatic shift in the streaming market is forcing their strategic hand as well. An askance glance at the first half of this year's releases shows that the streaming landscape has changed, and that Spotify's long-held "all-for-all" philosophy -- where product features, not content, marked the delineation between those that pay for the service and those that don't -- is going the way of the compact disc.
This writing has been on the wall for some time, but with nearly every notable release of the year having been exclusive to one service or another, Spotify has seen the writing on the wall, and is adapting to read it. (That these exclusives confuse and fragment the streaming market for both artists and users is another debate.)
This adaptation nearly manifested in a deal between Spotify and a band which characterized the company as little more than the anal vitiation of a decomposing carcass. Yes, apparently none other than Radiohead nearly struck a deal around its most recent record, A Moon Shaped Pool, through a windowed exclusive with Spotify. According to a statement given to Music Ally by Jonathan Prince, the only stopper was tech. “Some of the approaches we explored with Radiohead were new, and we ultimately decided that we couldn’t deliver on those approaches technologically in time for the album’s release schedule.” Regardless, the band has now made In Rainbows, the record that it famously released under a pay-what-you-like scheme back in 2007 (a year before Spotify launched), available on the platform. (It's also available on Apple Music.)
Add to this: Troy Carter. The artist manager and tech investor was hired by Daniel Ek's company to serve the same role that Jimmy Iovine does at Apple Music: music industry handshaker and rainmaker. What Troy will bring to the company is anyone's guess -- as a source told Billboard this week: "Troy is going to make things really interesting. He's smart enough to know the future is undetermined and what will differentiate these companies is not set in stone. Hopefully they listen to him." While exclusives bring (possibly fleeting) ears, it's not the only play in the game.