Spotify quietly sells two-thirds of its stake in Distrokid for $ 167 million

DIStrokid + Spotify (circa 2018) (Photo: Digital Music News)

It was the deal that made music distributors tremble. Now, three years later, Spotify is quietly getting rid of the majority of its stake in Distrokid – and ostensibly bidding farewell to its plan to “disintermediate” the game from distribution.

It was perhaps one of the most shocking and groundbreaking chords of recent years – and that says a lot for the music industry. As first reported by Digital Music News in 2018, Spotify abruptly planted its flag in the distribution game with a “passive minority investment” in Distrokid. Business had been comfortable allies for years, but now that relationship was about to get more comfortable.

The music streaming industry was about to change upstream and downstream – for distributors, streaming platforms, labels and artists. It was all part of Spotify’s impending “disintermediation” strategy that promised to revolutionize the traditional industry.

Or maybe not.

Fast forward three years – that is, this morning – and Spotify quietly revealed that it has given up most of its stake in Distrokid. Buried on page 26 of his last filing of quarterly results with the SEC, Spotify shared details of its divestiture.

“On October 1, 2021, the Group finalized the sale of two-thirds of its stake in DistroKid, realizing a capital gain of 132 million euros, reflected in an unrealized increase in fair value on September 30, 2021. the sale amounted to to 144 million euros.

Distrokid is not publicly traded, although its off-market value has recently skyrocketed – to put it mildly. In January 2020, about a year after its initial investment, Spotify announced that its “long-term investments,” “the largest of which is our equity investment in Kid Distro Holdings, LLC,” was valued at € 16 million. ($ 18.6 million at current conversions). That valuation jumped to 29 million euros ($ 33.7 million) in just nine months, to reach 205 million euros ($ 235.6 million) before the October 1 sale.

Other things are mixed in with this high-level rating, although the ratings do provide some approximation of Spotify’s involvement in Distrokid.

And if you think it’s dazzling, consider that Spotify’s initial purchase price at the end of 2018 was probably significantly lower than the 16 million euros reported in early 2021. As noted above, Spotify has announced a gain of 132 million. euros, or $ 153 million at the current exchange. rates.

This is enough for any investor to smoke a rare Cuban. But why is Distrokid worth so much these days?

The answer lies in a very intoxicating investment in Distrokid by New York-based venture capital firm Insight Partners. This agreement, which we first reported in mid-August this year, valued the former Distrokid at $ 1.3 billion. Yes, the somewhat boring background chore of digital distribution is now a billion dollar industry on its own – thanks to a company’s nosebleed assessment.

The popping deal also revealed a few more details about Distrokid’s size. At the time of the investment, Distrokid revealed a client base of two million artists, with the company estimating “that it distributes over a third of all new music in the world.” At the time, Distrokid founder Phil Kaplan sent politely urgent emails to Digital Music News reminding us that his business was now one-on-one with legacy distribution stalwarts like CD Baby and Tunecore, if not ahead of them.

Fast forward to 2021, and such emails would be like reminding people that “Los Angeles is actually a pretty big city.”

Clearly, Spotify has invested in a winning horse. And if its strategic goals have moved away from consolidated distribution and “disintermediation”, then liquidation is imminent.

For starters, Spotify still needs to make money. At present, the business remains largely unprofitable with massive cash spending for its expansion. Case in point: The company recently gave up around $ 100 million to acquire an exclusive deal with Joe Rogan, which says a lot about its changed strategic direction.

The Spotify empire has changed course. And empires are very, very expensive to build.

And with a continued competitive assault from Apple Music, Amazon Music Unlimited, and YouTube Music, the divestiture of Spotify makes sense if distribution isn’t the competitive wedge required to remain number one.

Perhaps the consolidated ‘distribution + platform’ game was a loser from the start. But it certainly looked threatening at the time.

Spotify was actually working on a direct download feature before its investment in Distrokid. Spotify for Artists, a platform designed to give artists more control over their songs and insight into their engagement on Spotify, once had to have one particular advantage: direct download distribution. The breakthrough feature threatened to severely undermine CD Baby, Tunecore and others by potentially offering free downloads on the largest streaming platform on Earth.

There were rumors that Spotify was also insisting on disintermediation as part of a much larger strategy. According to New York Times, Spotify was is preparing to offer a bigger financial cut to certain artists in addition to ownership of their recordings. The agreements would also remain non-exclusive. This meant that not only would the selected artists and management companies receive a significant cash advance for signing with Spotify, but they could also license their songs on other music streaming platforms, including Apple Music and Amazon. With that kind of deal, who needs a label?

But even without a special advance, it would suddenly make less sense for artists to pay for a distribution platform when Spotify was offering the service for free. With Spotify’s investment and a close partnership, Distrokid’s Kaplan was poised to change the game of music distribution forever – potentially ‘disrupting’ the entire space by putting established players out of business and out of business. helping Spotify consolidate its lead forever.

But it never worked like that.

In July 2019, Spotify abruptly shut down its direct download feature, giving artists 30 days to transition. The departure was as sudden as the arrival, with even less explanation.

But why the about-face? One of the possible reasons is that Spotify just isn’t the only game in town. Artists have to be everywhere to win, including Apple Music, Amazon Music Unlimited, and others like SoundCloud, TikTok, and YouTube. But if Spotify had enabled direct downloads through its exclusive Distrokid + Spotify pipeline studded with exclusive offers, which was an imagined iteration, it could create issues with other platforms, not to mention competing distributors and emerging launches. distribution + platform.

The repercussions were unknown – we’ll never know how things would have turned out if Spotify had persevered with this strategy. But a distribution war between the streaming giants seemed problematic and balkanizing – not just for artists, but also for Spotify. Was this a war worth fighting? For artists, labels, and content owners, it seems much better to have one distributor that plays uniformly across all platforms, rather than being owned by just one.

There were also rumors that Spotify was over its head on the nuts and bolts of music distribution. A source said Spotify naively hopes to learn the ropes of distribution in record time, something established gamers have more than a decade of experience in refining. And learning came at a steep cost, with Spotify employees earning annual salaries in the order of $ 150,000.

Maybe just “finding out” wasn’t a winning plan; it was perhaps a serious underestimation of the task at hand.

And for various reasons, the exclusive agreements concerning recording artists never took off.

In the early days of streaming, Spotify experimented with exclusively distributed artists (check out Spotify’s deal with Swedish EDmers Cazzette for a fun history of the industry). But long-term exclusives around artists – be it Ed Sheeran or an upstart indie – are for the most part the exception these days.

These days, exclusives are instead reserved for mega-podcast personalities like Joe Rogan (price: $ 100 million) and Meghan Markle and Prince Harry (price: $ 25 million). But even with heavyweights like Joe Rogan, there’s evidence that platform exclusives are shrinking overall audiences. For modest artists, who typically can’t attract multi-million dollar (or none) advances from streaming platforms, a Spotify-only deal may have limited benefits – and could amount to career suicide at the decrease.

Either way, Spotify’s disintermediation has withered in the face of a more diverse industry structure that still offers multiple labels, multiple streaming platforms, lots of IP-owned publishers, and plenty of distribution options. And in this context, the sale of Distrokid makes perfect sense.

Ironically, artists aren’t being courted to join Spotify exclusively these days. Instead, they’re charged for promoting the playlist in a structure similar to the old-fashioned payola. But that’s a whole different story.

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Victor L. Jones