Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth
Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth

Streaming Services Not No. 2 Source of Label Revenue
Spotify may be the second-largest digital account for major labels, but streaming is hardly their second-largest source of revenue. In fact, it's unlikely that any single subscription service provides to labels more revenue than Walmart does in the U.S. alone.

A report this week at Business Insider cited "a source close to the company" as saying Spotify is now the major labels' second-largest source of revenue. That claim may be true, but one major label insider tells it's probably not the case. Not only is Amazon also a major source of label revenue across many territories, but brick-and-mortar retailer Walmart can generate more music sales in one country than Spotify can generate around the world.

Believe it or not, record labels got far more from Walmart's US sales in 2011 than they got from Spotify in over a dozen countries. estimates last year Walmart had about a 12% of the $4.37 billion (in trade value) U.S. market, or $525 million. Spotify had total revenue of $250 million in 2011, CEO Daniel Ek told Swedish newspaper Dagens Industri in April. Of that $250 million of consumer spending, Spotify returned to labels less than $175 million (based on previously disclosed content acquisition costs of 65% to 70% of revenue).

In other words, Spotify would need to grow three-fold across all 15 (and more to come) countries in 2012 to catch Walmart's U.S. sales. It could happen, although it seems unlikely. Spotify is indeed growing fast both organically and through expansion. Ek said in the interview that Spotify is aiming for revenue of $900 million in 2012. A nearly fourfold increase in revenues would be an incredible accomplishment.

A single company like Spotify becomes a big revenue source because most of the labels' accounts are specific to either a single or handful of countries. Although the #3 account in the U.S., Target has stores only in the U.S. and Canada. Tesco is a major account in the U.K. but has only a small footprint in the U.S. under the brand Fresh & Easy in three Western states.

As a result, a better way to judge Spotify and its peers is to compare revenue sources by business type rather than by individual business. This is where the size of the subscription market comes into clear view. In 2011, according to IFPI data analyzed by, subscription services accounted for just 9.7% of digital music revenue in the 15 countries where Spotify currently operates (it didn't even operate in all 15 last year). Labels in those 15 countries had subscription revenue of $349 million, just 3.5% of their total recorded music revenue (which cover sales, ad-supported revenue, performance royalties and synchronization royalties).

Some European markets have indeed warmed to services such as Spotify. Subscription services are a major source of digital revenue in Sweden (82%), Finland (64%), Norway (36%) and Denmark (27%). But don't let the big numbers fool you. Those four markets constitute a speck in the global market. The combined digital revenue in 2011 was $165 million, or 7.5% the digital revenue of the U.S. They have just 18.3% the digital revenue of Japan and 36.3% the digital revenue of the U.K., the world's second-largest and fourth-largest markets (the U.K. is #4 overall but #3 in digital revenue).

In fact, those four subscription-heavy countries were still dominated by physical formats in 2011. Digital revenue accounted for 44.8% of total recorded music revenue in Norway, 44.2% in Sweden, 32.5% in Denmark and 16.6% in Finland. And while it might be tempting to attribute subscription revenue in all four markets to Spotify, the service competes with WiMP in Sweden, Telenor Musikk and WiMP in Norway, and TDC Play and WiMP in Denmark.

In the U.S., the world's largest recorded music market and the biggest in terms of subscription revenue, Spotify ranks well behind iTunes, Amazon, a host of brick-and-mortar retailers (Walmart, Best Buy, Target) and is most likely on par with competing subscription services such as Rhapsody and Muve Music. Subscription revenue accounted for just 6% of digital revenue and 3% of total revenue in the U.S. in 2011. Those small numbers are certain to grow in 2012 and beyond, but nobody should confuse growth with absolute size.

Other revenue sources also exceed Spotify in the U.S. SoundExchange, which distributes digital performance royalties within the U.S., paid out $292 million to record labels in 2011, according to RIAA data. Subscription services as a whole returned only $132.7 million in 2011. Subscription services were also less valuable to labels than synchronization royalties ($196.5 million) and mobile platforms ($277.4 million).

Spotify-Yahoo Partnership Is Fraught With Complications
You may have read at that Spotify and Yahoo have entered into a global content partnership. The deal will put Spotify Play buttons on Yahoo pages to allow visitors to access Yahoo's on-demand service (as long as they first install the desktop or mobile app).

One key aspect of this partnership is the fact that Yahoo has parted ways with Rhapsody, Yahoo's previous on-demand partner. Rhapsody, a Yahoo partner since 2008, has a presence mainly in the U.S. and lacks Spotify's semi-global presence.

But Spotify can't match Yahoo's global presence, either. A "global content partnership" isn't truly global when Spotify operates in only 15 markets (16 if you include the Faroe Islands). Yahoo! has a presence in many important markets in which Spotify does not operate, such as Japan, South Korea, India, Mexico, Brazil, South Africa, Italy and Canada. Thus, Spotify won't be reaching all of Yahoo!'s 700 million monthly visitors any time soon.

An important part of the partnership was left out of the press release and missed by most media reports: a revenue-sharing agreement that will pay Yahoo! for generating new subscriptions, Yahoo! strategy SVP Jim Heckman told MediaMemo. This deal is all about eyeballs to Spotify. Being seen by tens of million of Yahoo! visitors can only help Spotify's user and subscriber numbers. The deal won't necessarily result in a big surge in numbers, but it won't hurt, either.