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Spotify’s cost of revenue trend

02/05/2025 / / Comments Off on Spotify’s cost of revenue trend
A graph from 2014 to 2024, showing Spotify revenue in blue, and cost of revenue in green. A red graph line shows the % of COR to revenue.

A new era has arrived, one in which Spotify becomes profitable. I pulled numbers from Spotify’s annual reports going back 10 years and one thing stood out yet again: the falling % of cost of revenue to revenue.

Cost of revenue (COR) for Spotify “consists predominantly of royalty and distribution costs related to content streaming.”1 COR typically scales with revenue, so it’s worth looking at why the % may have dropped.

The top table shows available figures for annual revenue and annual COR, with breakouts for Premium and Ad-supported. Most of the revenue from the ad-supported tier went back out as COR, often over 90% and once even topping 100%. Premium tier’s % of COR to revenue has been dropping slowly, but until FY2024 was still hovering above 70.

However, things look very different when we look at FY 2024 quarterly numbers (table below).

In FY2024, COR/R for both Premium and Ad-supported were lower. Premium had already fallen below 70%, with a large drop in Q3. Ad-supported had an even larger drop. 2024 Q4 Shareholder deck showed that, for the first time in 10 years, the total annual COR to revenue, with Premium and Ad-supported combined, fell below 70%.

What happened in 2024 and would these developments already have affected the numbers for FY2024?

The Bundle

In March 2024, “bundling” came into effect, allowing Spotify to pay a discounted royalty rate to rights holders. In the U.S., there is currently no music-only tier for new users; it’s either ad-supported or bundled with audiobooks. Billboard wrote in May 2024, “By adding audiobooks into Spotify’s premium tier, the streaming service now claims it qualifies to pay a discounted “bundle” rate to songwriters for premium streams…To determine how great this loss in royalty value would be for the music business, Billboard calculated that songwriters and publishers will earn an estimated $150 million less in U.S. mechanical royalties from premium, duo and family plans for the first 12 months that this is in effect, compared to what they would have earned if these three subscriptions were never bundled. Notably, this change will not impact Spotify’s premium, duo or family pay outs for the first two months of 2024. Bundling kicks in starting in March, so this number refers to losses for the first 12 months after premium, family and duo is qualified as a bundle, not the calendar year of 2024.”2

MLC (Mechanical License Collective) filed a lawsuit in May 2024, which they lost this month. “Although the MLC claimed that Spotify had “unilaterally and unlawfully” cut its music-royalty payments via the bundle, a federal judge ruled that its move was supported by “unambiguous” regulations.”3

Then, a week ago, it was announced that UMG and Spotify has a new agreement. Music Business Worldwide reported the following:

“Our sources maintain that, in terms of royalty sums paid by Spotify to UMPG, the effect of the bundle-related discount over the past year will effectively be nullified going forward, and payouts to UMPG and its songwriters will rise;

However, within the private UMPG and Spotify agreement, there remains a value differentiation between a music-plus-audiobooks user vs. a music-only user.”4

And now, it seems that Warner too has joined the privileged circle.5

1000 Plays Threshold

In April 2024, Spotify stopped paying tracks which did not meet the 1000 threshold, i.e., “tracks must have reached at least 1,000 streams in the previous 12 months in order to generate recorded royalties.”6

Spotify Reaches Profitability

If the COR/R had stayed at around 74.4%, the annual COR would have been around 11661 million €, a difference of roughly 712 million €. Would the discounted royalty rates for “bundling” and 1000 plays threshold show up already in numbers, both implemented in early 2024? Too soon? In any case, by simultaneously raising subscription prices and aggressively cutting costs, including cutting its headcount by 20.4% from 9,123 employees at the end of 2023 to 7,261 over the course of the year7, Spotify finally attained its first full year of profitability since launching in 2008. At this point, it shouldn’t surprise anyone that a leading tech company could keep losing money for 15 years. Nor that, with money and power, a label can cut an advantageous deal with Spotify. But where does that leave the independent artists who may not have that kind of negotiating power?

  1. “Our royalty payment scheme is complex, and it is difficult to estimate the amount payable under our license agreements or relevant statutes. (p.15)
     
    …Cost of revenue consists predominantly of royalty and distribution costs related to content streaming. We incur royalty costs, which we pay to certain record labels, music publishers, and other rights holders, for the right to stream content to our users. Music royalties are typically calculated monthly based on the combination of a number of different variables. Generally, Premium Service royalties are based on the greater of a percentage of revenue and a per user amount. Royalties for the Ad-Supported Service are typically a percentage of relevant revenue, although certain agreements are based on the greater of a percentage of relevant revenue and an amount for each time a track is streamed. We have negotiated lower per user amounts for our lower priced subscription plans such as our Family Plan, Duo Plan, and Student Plan. In our agreements with certain record labels, the percentage of revenue used in the calculation of royalties is generally dependent upon certain targets being met. The targets can include such measures as the number of Premium Subscribers, the ratio of Ad-Supported Users to Premium Subscribers, and/or the rates of Premium Subscriber churn. In addition, royalty rates vary by country. Some of our royalty agreements require that royalty costs be paid in advance or are subject to minimum guaranteed amounts. For the majority of royalty agreements, incremental costs incurred due to unrecouped advances and minimum guarantees have not been significant to date. We also have certain so-called most favored nation royalty agreements, which require us to record additional costs if certain material contract terms are not as favorable as the terms we have agreed to with similar licensors. Cost of revenue also reflects discounts provided by certain rights holders in return for promotional activities in connection with marketplace programs. Additionally, it includes the costs of discounted trials. Royalties payable in relation to audiobook licenses are generally consumption-based. 
     
    Cost of revenue also includes the cost of podcast content assets (both produced and licensed). Amortization of podcast content assets is recorded over the shorter of the estimated useful economic life or the license period (if relevant) and begins at the release of each episode. We make payments to podcast publishers, whose content we monetize through advertising sales in SPAN, which are also included in cost of revenue. 
     
    Cost of revenue also includes credit card and payment processing fees for subscription revenue, advertising serving, advertising measurement, customer service, certain employee compensation and benefits, cloud computing, streaming, facility, and equipment costs.” (p. 44)
    Konstan, E. & Spotify Technology S.A. (2023). FORM 20-F. In UNITED STATES SECURITIES AND EXCHANGE COMMISSION [Report]. https://s29.q4cdn.com/175625835/files/doc_financials/2023/ar/26aaaf29-7cd9-4a5d-ab1f-b06277f5f2a5.pdf ↩︎
  2. Robinson, K. (2024, May 9). Spotify to pay songwriters about $150 million less next year with Premium, Duo, Family Plan changes. Billboard. https://www.billboard.com/business/streaming/spotify-songwriters-less-mechanical-royalties-audiobooks-bundle-1235673829/
    ↩︎
  3. Aswad, J. (2025b, January 31). Variety. Variety. https://variety.com/2025/music/news/spotify-wins-lawsuit-bundling-royalties-1236289823/ ↩︎
  4. Ingham, T., & Ingham, T. (2025b, January 26). Confirmed: Spotify and Universal have a new deal – including a direct agreement with Universal Music. Music Business Worldwide. https://www.musicbusinessworldwide.com/confirmed-spotify-and-universal-have-a-new-deal-including-a-direct-agreement-with-universal-music-publishing-group-in-the-us/ ↩︎
  5. Ingham, T., & Ingham, T. (2025d, February 6). Warner Music Group and Spotify ink new deal – overriding controversial CRB ‘bundling’ payment. Music Business Worldwide. https://www.musicbusinessworldwide.com/warner-music-group-and-spotify-ink-new-deal-overriding-controversial-crb-bundling-payment-structure-in-the-us/ ↩︎
  6. Modernizing Our Royalty System to Drive an Additional $1 Billion toward Emerging and Professional Artists – Spotify for Artists. (n.d.). https://artists.spotify.com/blog/modernizing-our-royalty-system ↩︎
  7. Spangler, T. (2025, February 4). Variety. Variety. https://variety.com/2025/digital/news/spotify-q4-2024-earnings-first-full-year-profit-double-down-music-1236296518/ ↩︎

Category: Media, Writings / Tags: , ,

Spotify’s fake artists vs. Endel

12/26/2024 / / Comments Off on Spotify’s fake artists vs. Endel

The fantastic article on Spotify by writer Liz Pelly in Harper’s Magazine (The Ghosts in the Machine1) felt like an apt summary at the end of the year. I appreciated the nuanced approach, especially since the writer makes efforts to follow and interview current working musicians on the scene, which is so often not the case in many of the other writings I’ve seen on this subject.

Spotify’s fake artists issue was a topic I’ve been following for many years, for the courses I offered at Bennington College. I was made aware of it back in 2016 when Tim Ingham, founder and publisher of Music Business Worldwide (MBW), started the excellent reporting on the subject. The first in the series was titled SPOTIFY IS MAKING ITS OWN RECORDS… AND PUTTING THEM ON PLAYLISTS2 published on August 31, 2016. I believe this was the first time the general public was made aware of this issue on a wider scale. MBW followed up with a story about Spotify’s denial – and rebuttal to that denial including a rough estimate of the $$$ these tracks by fake artists could rack up (July 9, 2017 SPOTIFY DENIES IT’S PLAYLISTING FAKE ARTISTS. SO WHY ARE ALL THESE FAKE ARTISTS ON ITS PLAYLISTS?3), continuing with a report on a possible effort by Universal Music Group (UMG) to ameliorate their situation (August 2, 2018 FAKE ARTISTS STILL DOMINATE SPOTIFY ‘CHILL’ PLAYLISTS. NOW UNIVERSAL IS FIGHTING BACK… WITH APPLE MUSIC.4) and a story about one of the production companies allegedly supplying this type of music to Spotify (March 28, 2022 REMEMBER SPOTIFY’S FAKE ARTISTS? THEY’RE STILL GOING STRONG – AND STILL ATTRACTING SCANDAL.5) along with a response from a well-connected reader.6 This year, MBW followed up with a portrait of one of the composers7 of this type of music.

If you haven’t followed MBW’s reporting, I highly recommend chronologically reading the above articles to get a sense of how the story developed. I also appreciate that MBW disaggregates the problems and reports separately on Spotify stock price/cash out8, a related but fundamentally different issue. Conflating the two only adds to the muddied landscape, fueling moral outrage about the wealth gap and generating a certain kind of interest, which may not be a bad thing, but ultimately putting the focus on the polarization and bringing us no closer to a solution.

Spotify is hardly the only platform offering functional music playlists. There is one company which offers ONLY that: Endel, the creator of AI-generated music which, according to its 2022 press release, is “a sound wellness company” with an “award-winning patented technology” which supposedly “creates science-backed, functional soundscapes that help people relax, focus, and sleep better.” As evidence of their effectiveness, Endel often cites the 2021 research paper9, which used technology developed by its collaborator Arctop Inc., research funded by both Endel and Arctop, with the support of UMG, Warner and Sony. Endel has partnered with UMG and Warner, and has also released through AWAL which is now a subsidiary of Sony10. As musicologist Ryan Blakeley writes in AMS Musicology Now’s article “Welcome to the Sound Wellness Revolution”: Endel’s AI-Generated Soundscapes and the Commodification of Passive Listening11, an overview of issues surrounding Endel, there are very clear financial incentives to offering functional music. Endel now has its own set of merch too, like the Endel Icon Hat described as “the classic dad hat never goes out of style”.

And here we see the outline: a land grab for the digital functional music space – by platforms, major labels, artists and AI-generated music creators. Currently most visible are the Spotify and “fake” artists, while the work by major labels with their collaborators like Endel remains less conspicuous.

So, what are the real issues here? Is it that the contributing human artists are using “fake” names? What if they don’t want to use their real names? Is it that the public is being duped by fake artists? But artists have always had the tradition of using pen names. Or is it that the human artists have entered into a “work for hire” agreement? That too has always been an option for us artists. Is it that the amount paid to artists is not commensurate with Spotify’s profits? Spotify has never turned an annual profit as of the writing of this post (12/26/2024) although this year may be different. 70%+ of its revenue has been paid back to rights holders. If there is a problem here at all, it would be between the rights holders and the artists.

Yet, there is a fundamental inequality which needs to be addressed. Monopsony and oligopsony have unfortunately become par for the course. Everyone is pursuing a share of their listening time for profit and artists are losing out.

Despite all of the above attracting attention, it’s important to remember that we are actually dealing with a small section of music: digital music which is not performed live. It’s easy to forget that so much music exists outside of this paradigm. If we look back on the history of music, the recent research on why it exists and its possible roles, and how music has been participatory for most of human history, we can perhaps find alternative paths for the next generation musicians who desire to work in both the digital and acoustic world, creating music for sync licensing as well as cultivating spaces where artists and audiences can mingle over live music. There are so many paths.

When working musicians are kept out of the conversation, the picture becomes a version of the simplified binary argument: is Spotify good or bad? The situation is so much more complex than that. We creators are not a monolith. Our relationship to Spotify runs the spectrum, depending on where we are on that particular commercial totem pole. As a former reporter who still has a foot in media, I am always perplexed as to why musicians’ viewpoints are so often left out of the coverage surrounding the music industry. Liz Pelly’s writing was all the more impactful to me because of the lengths the writer went to capture the voices of the creators. I look forward to reading the book.

This will be posted on Bluesky and Mastodon. Happy holidays everyone!

  1. Pelly, L. (2024, December 18). The Ghosts in the Machine. Harper’s Magazine. https://harpers.org/archive/2025/01/the-ghosts-in-the-machine-liz-pelly-spotify-musicians/ ↩︎
  2. Ingham, T., & Ingham, T. (2017b, July 8). Spotify is making its own records… and putting them on playlists. Music Business Worldwide. https://www.musicbusinessworldwide.com/spotify-is-creating-its-own-recordings-and-putting-them-on-playlists/ ↩︎
  3. Ingham, T., & Ingham, T. (2017d, July 10). Spotify denies it’s playlisting fake artists. So why are all these fake artists on its playlists? Music Business Worldwide. https://www.musicbusinessworldwide.com/spotify-denies-its-playlisting-fake-artists-so-why-are-all-these-fake-artists-on-its-playlists/ ↩︎
  4. Ingham, T., & Ingham, T. (2018, August 2). Fake artists still dominate Spotify ‘chill’ playlists. Now Universal is fighting back… with. Music Business Worldwide. https://www.musicbusinessworldwide.com/fake-artists-still-dominate-spotifys-chill-playlists-now-real-artists-are-fighting-back-with-apple-music/ ↩︎
  5. Ingham, T., & Ingham, T. (2022, March 28). Remember Spotify’s fake artists? They’re still going strong – and still attracting scandal. Music Business Worldwide. https://www.musicbusinessworldwide.com/remember-spotify-fake-artist-theyre-still-going-strong-and-still-attracting-scandal/ ↩︎
  6. Stassen, M., & Stassen, M. (2022, April 6). An MBW reader just blew open the Spotify fake artists story. Here’s what they have to say. Music Business Worldwide. https://www.musicbusinessworldwide.com/an-mbw-reader-just-blew-open-the-spotify-fake-artists-story-heres-what-they-have-to-say/ ↩︎
  7. Stassen, M., & Stassen, M. (2024, March 19). This ‘secret’ composer is behind 650 fake artists on Spotify. His music has been streamed 15bn. Music Business Worldwide. https://www.musicbusinessworldwide.com/this-secret-composer-is-behind-650-fake-artists-on-spotify-his-music-has-been-streamed-15bn-times-on-the-platform-report/ ↩︎
  8. Ingham, T., & Ingham, T. (2024, November 27). Daniel Ek just cashed out $35.8 million in Spotify shares. But that’s nothing compared to his co- Music Business Worldwide. https://www.musicbusinessworldwide.com/daniel-ek-just-cashed-out-35-cashed-in-384-million/ ↩︎
  9. Haruvi, A., Kopito, R., Brande-Eilat, N., Kalev, S., Kay, E., & Furman, D. (2022). Measuring and modeling the effect of audio on human focus in everyday environments using Brain-Computer interface technology. Frontiers in Computational Neuroscience, 15. https://doi.org/10.3389/fncom.2021.760561 ↩︎
  10. https://static.endel.io/presskit/Endel-PressRelease-AmazonSleepPlaylist.pdf ↩︎
  11. “Welcome to the Sound Wellness Revolution”: Endel’s AI-Generated Soundscapes and the Commodification of Passive Listening – Musicology Now. (2024, January 18). https://musicologynow.org/welcome-to-the-sound-wellness-revolution-endels-ai-generated-soundscapes-and-the-commodification-of-passive-listening/ ↩︎
Category: Media, Recent Posts, Writings / Tags: , , , , ,

The Sportification of Politics

11/01/2024 / / Comments Off on The Sportification of Politics

[This has been edited on 11/6/2024 to reflect the election results. This post is now a list of links to articles relating to media leading up to the election, continually updated.]

The Republican sweep was decades in the making, and a win for unbridled capitalism. The markets are elated, for now.

What role did the media play, including Roger Ailes and Fox News? Elon Musk who controls the platform X? The cumulative advantage given through media exposure to a particular individual, party or agenda? The Apprentice ran fifteen seasons from 2004 to 2017, a time period which coincided with the rise of social media in the mid-2000s and the prioritization of algorithmic feeds in the mid-2010s, further amplifying polarization. Republicans also took advantage of podcasts in ways Democrats could not.

Media exposure, including information shared on social media, favors the rich and the powerful regardless of party affiliation. Media platforms are for-profit, and their gatekeeping works in tandem with technological advances which also favor the rich and powerful. By keeping our eyes glued to the spectator sports of the presidential election, were we missing something important?

Selected further reading/listening:

The relationship of the election and the media:

Jon Stewart Looks Back with Sanity and/or Fear (NYT 11/04/2024)

A Master of the Media Evolved Yet Again in 2024 (NYT 11/07/2024)

Joe Rogan and the Fifth Estate: How the Podcaster and a Group of Cable News Exiles Became More Powerful Than Traditional Media (Variety 11/13/2024)

Pro-Harris TikTok felt safe in an algorithmic bubble — until election day (The Verge 11/14/2024)

I Didn’t Want It to Be True, but the Medium Really Is the Message (Ezra Klein, Opinion, NYT 8/7/2022)

On Elon Musk:

Elon Musk’s Unmatched Power in the Stars (NYT 7/28/2023)

Elon Musk could be the biggest winner of a second Trump Term (NBC News, 11/5/2024)

On technology, prosperity and the wealth gap: Power and Progress by Daron Acemoglu & Simon Johnson (Daron Acemoglu is 2024 Nobel Laureate)

Books:

The Paradox of Democracy Free Speech, Open Media, and Perilous Persuasion. Zac Gershberg and Sean Illing. “Though freedom of speech and media has always been a necessary condition of democracy, that very freedom is also its greatest threat…The Paradox of Democracy captures the deep connection between communication and political culture, from the ancient art of rhetoric and the revolutionary role of newspapers to liberal broadcast media and the toxic misinformation of the digital public sphere.”

 The Increasingly United States: How and Why American Political Behavior Nationalized. “Dan Hopkins, associate professor of political science at the University of Pennsylvania… explores how politics in the U.S. have largely become a spectator sport. That is, politics have become more nationalized—issues are more likely to be argued and adjudicated at the national rather than local level. This stands at odds with the historical intent of our framers, who envisioned that political power would favor states and municipalities.” [1]

[1] French, C. (2022, December 11). Democracy from the Sidelines: How U.S. politics became a spectator sport – behavioral scientist. Behavioral Scientist. https://behavioralscientist.org/democracy-from-the-sidelines-how-u-s-politics-became-a-spectator-sport/

Category: Media, PR and Communications, Recent Posts, Teaching, Writings /
 
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