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The Spotify Acquisition That Nobody Talks About

From 1999 to 2015, revenue across the entire music industry was in a steady state of decline. However, since 2016, Spotify (NYSE: SPOT) and other streaming services have helped return the industry to growth once again. But there's one small company that's pioneering change, and Spotify owns a minority stake in it. Here's why DistroKid could be a massive game-changer for not only Spotify but the music industry at large.

Spotify for artists

In Sept. 2018, Spotify introduced a private feature that would allow artists to bypass the labels and instead upload their music directly to Spotify. However, after less than a year, the company decided to shutter the project. While management didn't explain why, it's no secret that a feature of that sort would compete directly with the major music labels who are responsible for providing the bulk of Spotify's content.

However, without making much noise, Spotify had also disclosed a minority investment in the digital music distribution service DistroKid. The service allows hundreds of thousands of independent artists to distribute albums or soundtracks to all of the major streaming platforms. In exchange, DistroKid charges an annual rate that varies depending on the number of artists under each subscription. This also allows the artists to keep the ownership rights to their music, so they can keep a bigger chunk of their streaming revenue. For independent artists, DistroKid provides the easiest path to widespread distribution.

Image source: Spotify.

What's the big deal?

A massive change is occurring in the music industry, albeit slowly. In 2018, 85% of the music that was streamed on Spotify's platform belonged to one of the major labels. In 2019, that number dropped to 82%, and by last year, it had further declined to 78%. While it might not seem like much, Spotify is incentivizing artists to keep ownership of their music by providing them with other means to ensure their music is heard, and DistroKid is a big part of that.

Labels can certainly help accelerate an artist's path to success by providing expensive equipment and high-quality recording studios, plowing money into marketing, or by using their extensive networks to book big events. But as distribution services like DistroKid and social media services like TikTok reduce the costs of gaining recognition, the value of working with a label shrinks. While the exact dollar figure of Spotify's investment in DistroKid is unknown, it's safe to assume that this investment will help finance growth for DistroKid in its efforts to make music distribution more accessible.

Spotify is also able to help independent artists thanks to its promoted playlists and the sheer size of its audience. Promoted playlists allow artists to pitch upcoming releases to Spotify's editorial team with the possibility of getting added to Spotify-curated playlists with millions of followers.

Artists can also increase their chances of getting recommended by Spotify if they choose to reduce their royalty rate, resulting in a larger payout for the streaming platform. With 345 million monthly active users globally, Spotify completely dwarfs all other audio streaming services and can leverage that scale to achieve greater profitability.

Right now, the biggest knock against the company is that Spotify siphons out most of its subscription revenue to labels in the form of royalty payments. If services like DistroKid can empower independent artists and reduce the company's overall dependence on those labels, it should ultimately boost Spotify's take rate from its subscriptions.

As for shareholders, the best way to track this effort is by monitoring what percentage of music streams belong to the major labels going forward. This number is published every year in Spotify's annual report, and as the figure continues to shrink, investors' optimism around this part of Spotify's future should grow.

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Ryan Henderson owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.


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