Spotify's Third Act: From The Locker Room to The Stadium
Making sense of Spotify's Locker Room Acquisition
Ten weeks ago I tweeted this as a response to a question about Spotify’s biggest challenge:
Four weeks later, Clubhouse (which I hadn’t heard of back then) went viral and promptly six weeks after, Spotify addressed my concerns by taking an important first step in turning this from a challenge into an opportunity.
Spotify’s acquisition of Locker Room this week was portrayed by the media in a similar manner as their other small deals: straightforward, stating mostly facts and with no strong opinions or implications about it. It sort of makes sense, it was reportedly bought for $50MM, a small deal for a ~$50B company, and it’s a young startup focused on Live Audio for Sports (what’s that?!). Also there’s the fact that now every Tech company is doing something in the audio space (Twitter pun intended).
Contrary to this view, I believe this acquisition is a new chapter for Spotify and represents a pivotal moment in their strategy, which I will call Spotify’s Third Act. This marks their official entrance to the Live Audio and Social verticals.
Matthew Ball1 has talked about the Three Stages of Media Services, which I will refer to as Acts (see my beautiful picture above)
First Act — Access: a real innovation in how content is delivered to and consumed by the user
Second Act — Content: focusing on creating unique and exclusive content
Third Act — Platform: not focusing on a single business but building out more expansive features and letting your users create content for you
In the First Act, Spotify single-handedly changed how music was consumed by innovating the access. They called the strategy “Stealing from Pirates” given that piracy was the primary way of listening to music and it was free or more bluntly put: being stolen from artists. Spotify was able to convince people to use their service instead, by either paying for it on a monthly basis or listening for free with ads; in exchange for the convenience of having the entire world’s music catalogue at your disposal. They also convinced people who loved owning their music physically that it was worth renting it out instead. All of this took place while dealing with an uphill negotiating battle with labels and artists. Pretty damn impressive to say the least.
In the Second Act, two things happened. First, it quickly became obvious to them that aggregating the entire world’s music and paying out most of your revenues to labels would not make a very profitable or sustainable business model. Spotify needed a way to build a real differentiator on top of a commodity service. Fortunately, it found itself sitting on top of vast amounts of user data. In order to differentiate its content, it leveraged its data analytics and product capabilities to solve a huge problem in music: Discovery. Playlists (editorial, algorithmic and user created) became one of the main reasons why consumers stuck around and spent more time on the platform; over ⅓ of listening time is spent in Spotify-curated playlists2 and users spend 2x+ more time on the platform versus its competitors. For the artists it became the Holy Grail of music promotion: if your song was included in a relevant Playlist, it was akin to being played in a NYC Radio Station in the 90’s - congrats you’ve made it. For Spotify, playlists became a huge moat and a positive feedback loop: the more people listened, the better it got, so the more people listened, etc. This eventually allowed them to achieve a critical mass of users where they would not be pushed around by the labels anymore. Spotify now represents over 20% of label revenues (and growing) with the relationship now being more symbiotic3.
Second, they realized there was still more they could do, so they decided to go after all of Audio. After successfully testing out Podcasts on the platform, they started acquiring originals and licensing exclusive shows to offer unique podcasting content4 and further diversifying away from labels. So far it seems to be working, many of their original and exclusive podcasts rank well in the U.S. and Global Top Charts. I’m sure you’re wondering so here’s the stat: Joe Rogan is currently #1 in the U.S., Canada, U.K., Australia, New Zealand and...wait for it… #3 in India. This suggests Spotify has a pretty good idea of the value of the content assets they are buying (again leveraging its data) and can amortize the cost of these acquisitions among ~350mm users. Aha! you’ve heard this one before, this is indeed straight from the Netflix Playbook — the former Netflix CFO (Barry McCarthy) and current Co-CEO and Chief Content Officer (Ted Sarandos) sit on the Spotify Board.
With some context in place, let’s now discuss how Locker Room5 will help them expand The First and Second Acts while giving them an entry into The Third Act.
For anyone that follows Spotify closely, this acquisition was not all that surprising. Live has been the natural next step given their large market share in music streaming, podcasting and their “Audio First” strategy. Both of these products are offered on-demand, and both have an obviously important live counterpart to them. In the case of music there are live concerts (off and online) and in the case of podcasts there are live talk shows (and casual conversations). It would have been foolish for Spotify to ignore this big part of the market, even more so after shifting their focus going after all of Audio. We also got a hint thrown at us recently when Live was included as part of their Total Market Opportunity in the recent Stream-On Event.
How does Locker Room enhance Spotify’s Three Acts? Some reasons are obvious, others not so much
The First Act will improve in terms of how the consumer has access to Live audio by leveraging the existing streaming platform and centralizing all of the audio content that users want to consume. It happened with music, it’s now happening with podcasts, and live audio will naturally follow along. Users will habitually associate Spotify with Audio and that will become a huge advantage. Never underestimate the power of focus.
The Second Act will also go through another major step change. This completely new audio consumption format will create vast exclusive and differentiated content that will put them at another great scale advantage: Live talk shows, Q&As, casual conversations, etc. Remember, Spotify owns (or has relationships with) a big part of the supply: Joe Rogan, The Obamas, The Kardashians, Prince Harry & Meghan, Bill Simmons, podcasters and very importantly: Artists (remember this one for later).
Additionally, they will focus on addressing the exact same problem they identified in music: Discovery. This happens to be a huge issue with podcasting and even more so in Live audio, especially if you are horizontal, i.e. going after the whole market. How do you recommend something if you don’t know what your users want? Spotify is once again in an envious position: having the data of millions of consumers and an immense amount of content in music and podcasting (live and on-demand) will drive the best personalized recommendations. It will take time, but my bet is both podcasting and live audio go the way of music discovery.
Back to Artists. On the Press Release there was very little mention of an important piece of the strategy of the acquisition: Live Music. I’m gonna take a stretch here and call this on-live (online & live) to not confuse it with physical concerts (which is a separate opportunity).
To be fair, it doesn’t benefit Spotify to be too vocal on this yet given their relationships with labels. But I am quite confident that this will be tested out soon enough, in many different ways and will create another new form of unique content consumption (First and Second Acts). Think of David Guetta charging for an on-live DJ set (remember people pay to watch gamers playing video games) or Taylor Swift performing songs on-live to promote her new album or to thank her biggest fans (which Spotify knows who they are). Most importantly and often misunderstood: Neither the labels or distributors get any royalties from this! Live performances pay the artist, the venue (Spotify/LiveNation), and other related parties such as Publishers, Managers etc. The revenues would be split mainly among the Artist and Spotify, a bigger pie for each to eat from.
Finally, as it relates to the Third Act, Spotify will finally become a Social Platform. Live will bring users the ability to create content by becoming a part of it through interacting with their favorite artists, podcaster, celebrity, influencer, etc. Social features in Spotify have been historically limited6 pretty much to following friends, saving their playlists and sometimes seeing what they are listening to. Most social interactions take place outside of the platform, a less-than-ideal scenario for Spotify (Instagram Stories, sending playlists or podcasts through messaging, etc.). This is about to change though:
What was once “Matt is listening to Love Story by Taylor Swift” will become “Matt is attending Taylor Swift’s Spotify On-Live Concert” or “Matt is hosting a Q&A Session breaking down the meaning of Love Story — Want to Join?”.
You get the point.
Putting all of this together, this acquisition will strengthen the relationship between the Creator and their Fans by creating more meaningful ways to connect them and eventually bigger, better and more ways to monetize (both paid and ads). It will not only apply to Music, but the entire Audio Market — a large part of which doesn’t even exist yet and is being invented in front of our ears right now.
Welcome to Spotify’s Third Act.
Disclosure: Not investment advice. The author owns Spotify shares and is a struggling musician.
If you don’t know who he is, do yourself a favor and go read some of his work before you read this amateur article.
Officially a 2017 figure (31%) which had grown from 20% in 2015. Not being explicitly disclosed anymore and likely higher now.
Side note: music exclusivity doesn’t work; see Tidal and the little success they achieved with this strategy (from a user standpoint), you need a critical mass in the amount of music selection to attract customers.
There’s a very valid question that is outside of the scope of this piece which is: “Why not just buy Clubhouse?” The quick and easy answer is they didn’t need to (keep reading to see why). Also price matters! Some tech companies actually care about this.
As part of the label agreements, Spotify has historically been limited to what “new business initiatives” it can pursue. As it gains more power over the labels this is likely to soften and this acquisition in part proves that theory.
Interesting to see what spotify does with this when they integrate it.
This was awesome. Thanks