Spotify, DistroKid and the Two Sided Marketplace

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by Mark Mulligan

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Spotify has taken a minority stake in DistroKid. In itself, it may be a slightly left field but relatively insignificant move, except that it is in fact one small but important step on a much bigger journey. Back in September, Spotify announced that it was enabling artists to upload their music directly to Spotify, simultaneously aggravating record labels, distributors, DIY platforms and Soundcloud all in one fell swoop. This raised an intriguing possibility of a ‘coalition of the willing’ forming against Spotify from slighted partners and competitors. But that’s another blog post. Right now, though, DistroKid’s role in this performance is as an enabler for Spotify in its path to becoming a next generation label / creating a two-sided marketplace (delete as appropriate depending on how all this affects your business).

Bringing efficiencies into the supply chain

Spotify’s DistroKid deal will enable Spotify’s direct artists to “seamlessly distribute their music to other platforms through DistroKid”. So, instead of putting all their streaming eggs in one basket, Spotify’s direct artists now get to stream their music on Apple, Amazon, Deezer and the rest too. What wasn’t made clear in the announcement is whether Spotify will have visibility of the streaming data from those other platforms and / or whether the revenue will be recognised as Spotify revenue and then distributed to its artists. If these statements were to be the case, then Spotify’s competitors would be feeding it data and revenue…

UPDATE: A Spotify spokesperson clarified that "Spotify has no rights to see data from other digital service providers and DistroKid will not share confidential information."

Why this relatively small announcement matters, is that it is another piece of Spotify’s strategy of shifting its way up the value chain by a) removing some of the distribution component and b) entering into direct relationships with artists. It’s what west coast tech firms call ‘bring efficiencies into the supply chain’. If it all works, Spotify will get more margin, artists will get more margin, but middle players (labels, distributors etc.) will get squeezed.

Treading a subtler path

This is how Spotify can edge quietly towards becoming a record label without going nuclear from the get go. It is a strategy we predicted by in April ahead of Spotify’s DPO:

“As much as the whole world appears to be saying Spotify needs to do a Netflix (and it probably does) it just can’t, not yet at least. In TV, rights are so fragmented that Netflix can have Disney and Fox pull their content and it’d still be a fast growing business. If UMG pulled its content from Spotify, the latter would be dead in the water. So, Spotify will take a subtler path to ‘doing a Netflix’, first by ‘doing a Soundcloud’ i.e. becoming a direct platform for artists and then switching on monetisation etc.”.

The challenge for Spotify is whether it can execute on the strategy quickly enough to excite investors (and thus drive up the share price), but slowly enough to keep record labels on board…so that when they realise where things are heading then it is too late for them to do anything about it.

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Anthony
If Spotify can distribute your client's music on the other platforms, then who cares if he/she pisses off his/her current distributor? They won't them, right?
Anthony
Great article. Two questions: How might this affect distributors that offer label services? It seems like they're better positioned than distributors and aggregators that don't. Medium and large artists will always need "label services," whether from a label, agency or distributor that offers them. How might this affect SoundCloud? It seems like it's bad news for them, as they've been playing up the "direct upload" aspect as the primary reason for what differentiates them from other streaming services.
Wendy Day
The direct deal with spotify is exactly that—a direct deal. My understanding is that the split is not that different from what the distributors are receiving, so my artist client is saving a distribution percentage (that’s 5% if he’s at STEM) and potentially pissing off my distributor. Is it worth it? Apple Music is the bigger platform for another one of my clients, so that’s a definite no for him. I have another client going direct currently, so we will see what the actual benefit is in about 60 days. DistroKid seems like a great company. But their business model is the music upload fee, NOT having the best distribution split possible. Not to mention that I heard Phil say on an A3C panel that Data doesn’t matter so I question how entrenched he really is in music as a tech guy. As the leader of the company, what he thinks matters.