Why ingesting 100,000 tracks a day may not prove sustainable for Spotify’s business in the long-term.

MBW Reacts is a series of comment pieces from the MBW team. They are our ‘quick take’ reactions – through a music biz lens – to major recent entertainment news stories.

There are now officially over 100 million tracks on Apple Music. There are also now officially over 100 million tracks on Amazon Music – which are all available from today (November 1) on the free-for-Prime-members radio service, Prime Music.

In light of both of these facts, it seems impossible that there isn’t also now over 100 million tracks on Spotify.

Meanwhile, we’re told by those in the know that there are now 100,000 tracks a day being uploaded to various streaming services.

We can debate all day long (as I do regularly!) about the point at which this ocean of music stops adding value, and starts giving headaches, to music streaming consumers.

But for now we need to move the conversation on, somewhere specific, because of a memorable comment made by Sir Lucian Grainge, CEO and Chairman of Universal Music Group, to analysts last week.

“Where music platforms are ingesting 100,000 tracks a day the net result of this is a confusing experience for all of us, consumers, everyone,” said Grainge last Thursday (October 27). “They’re increasingly guided to low-quality content by an algorithm.”

He added: “We don’t think that’s sustainable for the platforms, nor is it sustainable for music fans.”

“We don’t think [This is] sustainable for the platforms, nor is it sustainable for music fans.”

Sir Lucian Grainge, Universal Music Group

Grainge’s use of “sustainable” in reference to streaming platforms here seemed to mainly be about consumer satisfaction: a warning that services like Spotify will end up “confusing” music fans – and ultimately driving them away – by not nudging them towards “high-quality” content. (Grainge gave the example of Taylor Swift’s record-breaking Midnights album as a “high-quality” release).

But there’s another angle on Grainge’s “sustainable” phrasing too: The increasing financial cost to Spotify – in particular – of already hosting over 100 million tracks on its service, and, potentially, adding 100,000-plus more tracks every day for years to come.

Spotify has, to the best of my knowledge, never printed a precise figure regarding how much it costs its business to host its massive music catalog in the cloud. We can, however, make some educated estimates.

Within each of Spotify’s quarterly and annual SEC filings – ever since it became a public company four years ago – the firm has revealed a monetary number for the annual increase in one notable cost for its business: “[Our] usage of cloud computing services and additional software license fees”.

This figure obviously isn’t an exact science: The “software license fees” part could affect it to varying degrees in each period.

Still, looking back from 2018 to now, there is a very clear pattern when it comes to this cost line at SPOT: It’s growing every single year, and it’s already spiraled into a nine-figure annual expense.

Here’s how we can be sure of that fact:

• Spotify’s first-ever annual report as a public company covered 2018. It described an annual “increase in information technology costs of €15 million” which was due to “an increase in our usage of cloud computing services and additional software license fees”;
• We don’t know how much this cost line was taking from Spotify before 2018, but we can be certain of one thing: It obviously cost Spotify at least €15 million in 2018 (i.e. if we consider the hypothetical possibility that it somehow cost zero in 2017);
• Then, in 2019, Spotify’s annual report revealed another increase in costs of €20 million, once again due to “an increase in our usage of cloud computing services and additional software license fees”.
• By this point, we know that this expense cost Spotify at least €35 million that year (i.e. if it was just €15 million in 2018, it had to be at least €20 million more in 2019).

This logic then continues:

• In 2020, Spotify’s annual report revealed another rise in costs of €20 million due to, yep, “an increase in our usage of cloud computing services and additional software license fees”. So that’s at least €55 million a year by this point;
• Then, in 2021, Spotify’s annual report revealed “an increase in information technology costs of €33 million due to an increase in our usage of cloud computing services and additional software license fees”. So that’s at least €88 million a year.

And that almost brings us up-to-date.

Except last week Spotify gave out a new number for how much extra this “cloud computing” expense cost its firm in the first nine months of calendar 2022: €42 million.

This means year-to-date, in 2022, Spotify must have already spent over €130 million (i.e. €42m + the €88m that was its minimum annual spend in 2021) on this specific cost line.

Yes, we should take into account the strength of the dollar vs. the Euro may have especially punished this cost line in 2022. (Spotify, as you can tell from this story, reports its fiscal numbers in Euros).

But that doesn’t account for a clear annual pattern, as depicted below – a now-serious annual cloud hosting expense for Spotify that is growing exponentially.

Remember that the furthest left bar in the above chart (in dark red) is the minimum amount we can be certain that Spotify spent on “usage of cloud computing services and additional software license fees” in 2018.

In reality, that figure should probably be far higher – as should the subsequent figures in later years.

Adding fun to this picture: Spotify uses Google‘s Cloud Platform for the vast majority of its media hosting.

So: Spotify now appears to be paying one of its fiercest music streaming rivals, Google, a nine-figure sum each year… so that Spotify itself can operate as a competitive music streaming platform.

The reason Spotify never gives away an exact figure for its “cloud computing services and additional software license” costs is that – within Spotify’s fiscal filings – this number is wrapped up in SPOT’s ‘Research and Development’ costs (see below).

In the first nine months of 2022, those R&D costs stood at €972 million, a figure that was up €313 million year-over-year.

In that context, a €42 million YoY increase in “cloud computing” costs during this period might not seem like much to write home about.

But the direction of travel certainly is: this “cloud computing” expense will now surely cost Spotify an additional €50 million-plus in the full 12 months of 2022 vs. 2021.

This already-serious – and fast-rising – annual cost attributed to “cloud computing” will surely soon start firing up some interesting questions at Spotify:

• What happens when, instead of 100,000 tracks a day being added to Spotify, we start to see 120,000 tracks a day being uploaded?
• What happens when, perhaps catalyzed by AI music generation, these numbers swell to 300,000-plus?
• What happens when Spotify’s current 100 million catalog mushrooms to 150 million or 200 million?
• What happens when increasing amounts of video content, with significantly bigger cloud hosting demands, are added to the service?
• How large will Spotify’s cloud hosting costs – and the annual increases in these cloud hosting costs – become in these scenarios?
• How will investors – already growing impatient with loss-making Spotify’s struggle to show growth that also improves its margins – respond if said costs continue to inflate?
• And the biggest question of all: Could Spotify soon see both its biggest partners – the major record companies – and SPOT’s biggest investors, both calling for a downsizing of its catalog, or more restrictions on the amount of so-called “low-quality” content being uploaded to its service?

Either way, we probably know where Universal Music Group stands.

Speaking on an earnings call to analysts last week, and backing up Sir Lucian Grainge’s points, UMG’s EVP, Michael Nash said: “The [streaming] platforms right now are flooded by a tidal wave of content as millions of creators [are] getting access. But these are essentially content uploaders; they’re not artists in the sense that we traditionally think of artists.

“Nearly 80% of this multimillion creator uploading pool has a monthly audience of less than 50 listeners. And, in fact, 90% of these creators have fewer than 400 monthly listeners.

“That’s 400 monthly listeners out of an audience of [over] 400 million [on Spotify]. So just to put a data point behind that: that means that 90% of these uploaders are engaging less than 1 millionth of the platform. These are hobbyists that are playing to an essentially empty house.”

“These are hobbyists that are playing to an essentially empty house.”

Michael Nash, UMG

Nash added: “When you’re talking about 100,000 tracks being uploaded every day, you’re not talking about 100,000 different songs. You’re not talking about artists that have populated these platforms with new music – you’re talking about noise.

“What we believe is that the value for the [streaming] platforms to their business model – and the value proposition for our artists – is based on focusing on real artists and their content, and how we’re giving them access to their fans on these platforms.”Music Business Worldwide