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The Ledger: Rogan, Young and the Variable Cost Streaming Model

Music licensing's daunting cost structure encouraged Spotify's management to seek margin relief elsewhere.

One common knock on the economics of music streaming is the lion’s share of royalties go to content owners, not streaming platforms. That’s one reason why investors have warmed to Universal Music Group and Warner Music Group. Sony’s earnings for fiscal third quarter (period ending Dec. 31, 2021), released on Tuesday, showed Sony Music revenue grew 26.0% excluding the visual media & platform division. Streaming revenue rose in recorded music and publishing by 35.7% and 26.9%, respectively. Sony doesn’t break out label and publishing margins, but we’ll get a better view of music margins when Warner Music Group reports earnings on Tuesday (Feb. 8).


Gross margin — what’s left after paying content costs — is central to today’s digital music business. Most music streaming platforms only keep 25% to 30% of revenue after paying record labels, publishers and PROs. Spotify has grown to 180 million subscribers and over 400 million total listeners by keeping prices steady and focusing on scale rather than profit. Margins are less a problem for the subscription services of Apple, Amazon and YouTube, which benefit from the size and omnipresence of their corporate parents. Traditional media companies have the benefit of fixed content costs. So does Netflix, where content costs “are largely fixed in nature,” according to its 2021 annual report. Once fixed content costs are recouped, every dollar received can be spent elsewhere.

By some measures, Spotify had a solid fourth quarter — 2.7 billion euros ($3 billion) revenue, 180 million subscribers — but management spent a good portion of its Feb. 2 earnings call talking about the Joe Rogan-Neil Young dust-up. The Rogan row shows how Spotify must straddle the worlds of podcasting and music. CEO Daniel Ek has made podcasting a cornerstone of the company’s growth strategy. At the same time, Spotify is a music-focused product and Ek doesn’t want musicians to pull their catalogs in protest as Young did. Analysts understandably wanted to know what effect Rogan might have on Spotify’s podcasting advertising revenue — advertising is on a tear lately, having grown 22% from the third to fourth quarters to reach nearly 15% of total revenue (historically it’s about 10%). Ek said it’s too early to say. But any slowdown in podcasting will stunt its long-term ambitions.

Music licensing’s daunting cost structure encouraged Spotify’s management to seek margin relief elsewhere. Music licensing costs are, by a large, a steady percentage of revenue. But the advertising side of the business, where Spotify houses its podcast content expenses, is less constrained. And independent podcasters use Spotify to sell ads without charging content costs.

So Spotify is diving headfirst into podcasts to make music licensing costs more bearable. Licensing costs for The Joe Rogan Experience and Call Her Daddy are fixed, not variable. The costs of acquiring The Ringer, Parcast, Gimlet and Anchor, and producing their podcast content, don’t vary by subscriber count or revenue. The cost of building Spotify’s self-serve podcast ad tools is not fixed — R&D costs will vary from year to year — but is more advantageous than a strict percent-of-revenue model. All this means Spotify will gain financial leverage as podcasting revenues grow. Spotify management says podcasts have already paid off and will continue to do so. But if not, hard-won margin improvements must come from price increases (which is happening with some subscription plans in some markets) and licensing agreements (but record labels tend not to budge much on rates). There won’t be podcasts without music, and vice versa. Spotify needs both.


Through Feb. 4, the % change over last five trading days and year to date.

Spotify: +0.8%, -25.5% YTD
SiriusXM: +10.6%, +6.8% YTD
Warner Music Group: +1.7%, -2.8% YTD
NYSE Composite: +1.9%, -2.7% YTD
Nasdaq: -1.0%, -9.9% YTD


The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.