Anti-scale in music licensing: The Spotify example

More often than not, startups are in pursuit of venture dynamics that exhibit benevolent economies of scale: cost per unit, or per user fall as the number of users increases.

When licensing key inputs, rational startups pursue ceilings and not floors: license terms that place limits on the obligations rather than really high minimums for the obligation.

Music service startups face their own very special sort of “anti-scale.” Really high minimum obligations alongside ceilings that scale 1:1 with user growth or music use.

Eric Eldon of Techcrunch claims to have otherwise “secret” information on the license terms accepted by Spotify:

Its deal structure with the labels requires either a $200 million annual payment, like what it had to do last year, or around 75% of total revenue (whichever is higher)

That “whichever is higher” aspect of the licensing context says it all: Anti-scale.

First, by agreeing to such a significantly large upfront and guarantee, Spotify hopes to develop a barrier to entry– to offer a similar model any new service may have to match the scale of this payment.

Second, rather than license costs quieting with user growth, these costs get louder. In other word, once the risk of whether Spotify can acquire users dissipates a bit such that the guarantee can be paid, the total cost pool proceeds to expand linearly with that user base–a floor for the obligations rather than a ceiling.

In contrast, major radio stations will offer a large fixed pool of money for their royalty pool, enabling costs per user (listener) to decline once revenues exceed the size of this pool (which they do by many multiples).

Perhaps, someday, music service startups will not have to be completely irrational to operate. I guess it’s all for the fame, and they will just make money selling t-shirts and autobiographies.

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