Spotify‘s next round of licensing negotiations with the major music companies will be an interesting moment for the modern business.
As MBW recently reported, Spotify is on course to post its first-ever annual operating profit this year—and it’s not a small sum. Led by CEO Daniel Ek, Spotify is expecting to record FY operating income of USD $1.5 billion in 2024.
This will prospectively make any future request from Spotify to reduce the percentage of its revenue that it pays music rightsholders in royalties a more difficult ask.
We are a long way from 2017, when Spotify convinced the recorded music business to accept a lower royalty share of the streamer’s pro-rated net revenue. (It’s understood that labels and distributors now share a 52% portion of Spotify’s pro-rated net revenue; before that 2017 deal, they received 55%.)
Explaining how that royalty-rate reduction was possible, then-Spotify CFO, Barry McCarthy, said in 2018 that the “labels were acting in their own self-interest to shore up Spotify’s economically-challenged margin structure”.
Six years on from that statement, Spotify is no longer “economically-challenged”… but it is still keen to improve its margin.
Earlier this year, the streamer began paying US songwriters/publishers via a contentious “bundled” mechanical royalty rate; it’s expected to save SPOT approximately $150 million in royalty costs annually.
Said “bundling” move has caused widespread outcry in the music publishing community (not to mention a lawsuit from the MLC, which is seeking to reverse Spotify’s “bundling” royalty switch-up).
Meanwhile, Spotify continues to push ahead with its podcast and audiobooks businesses, leading to concerns in music biz-land that these ‘talk’ formats could eat into listening share – and ultimately royalty payouts – on/from the service.
All of which is important context for a new revelation: Spotify paid Warner Music Group, the third largest major music company, approximately USD $1.16 billion in royalties in the 12 months to end of September 2024, across recorded music and publishing.
We know this thanks to data contained within WMG’s annual SEC filings, showing that Spotify contributed 18% of Warner’s total revenues (which stood at USD $6.426bn) in its latest fiscal year.
YouTube was Warner’s second-largest partner, contributing 12% of its annual revenue, equivalent to $771 million, while Apple contributed 11%, equivalent to $707 million.
Collectively, Spotify, YouTube, and Apple contribute 41% of Warner Music Group’s revenues. (WMG specifically names these three companies in its 10K filing as they each account for over 10% of its annual revenues.)
Spotify paid Warner around $1.09 billion in royalties in FY 2023, according to calculations based on previous SEC filings.
Interestingly, Spotify’s total payment to Warner Music Group in the latter company’s latest fiscal year is only slightly larger than the amount absorbed via company stock cash-outs by Spotify execs/ex-execs in 2024 so far.
As MBW reported earlier today (November 27), Spotify executives (and former executives), including co-founders Daniel Ek and Martin Lorentzon, have collectively cashed out $1.10 billion in SPOT stock in the calendar year-to-date.
Spotify’s 18% contribution to Warner Music Group’s revenues is roughly in line with the streamer’s contribution to Universal Music Group‘s equivalent figure.
Within its annual fiscal report, UMG, like WMG, breaks out the contribution of any commercial partner that contributes more than 10% of yearly revenues (across music publishing and recorded music).
UMG’s latest annual report, covering the calendar year of 2023, reads: “In 2023, UMG had 3 customers that each individually represented over 10% of total revenues (3 customers in 2022) and which represented total revenues of 19%, 11% and 10% respectively…”
MBW assumes that the 19% contributor there is Spotify, followed by YouTube on 11%, and Apple on 10%.
Universal Music Group’s total revenues in 2023 stood at USD $12.01 billion (EUR €11.108 billion).
Ergo, MBW estimates that Spotify paid Universal Music Group approximately USD $2.28 billion in 2023 (i.e. 19% of $12 billion).Music Business Worldwide