Spotify: seven reasons why Google might buy the streaming music service

Spotify Playlist

Streaming music service Spotify is thought to be preparing to go public later in 2014, but there's an alternative: getting bought by a bigger technology company.

One in particular is in the frame: Google.

Technology news site Recode reported on Monday that Google's current chief business officer, Omid Kordestani – who describes himself on his LinkedIn profile as the company's "business founder" – is joining Spotify's board of directors.

A day later, the Wall Street Journal claimed that Google has already tried to buy Spotify, late in 2013, before being put off by the company's desired $10bn+ price tag, as well as Google boss Larry Page's "lack of enthusiasm for subscription entertainment services".

Recode followed up with a dismissal of that report – "there have been neither formal nor informal discussions between the companies about an acquisition, directly or indirectly" – but the amount of smoke around the question suggests at least a spark, ready to ignite at some point.

Why would Google want to buy Spotify though? Here are a few reasons why this particular rumour is being taken seriously within the technology and music industries.

1. Spotify is the biggest subscription streaming music service

I've chosen those words carefully, because the world's biggest streaming music service is YouTube – a big chunk of its 1bn monthly visitors are watching music videos – while even if you discount videos, SoundCloud (which claims to reach 250m monthly listeners) is arguably the biggest audio streaming music service.

But Spotify has 40m active users and 10m paying subscribers, with the latter figure making it the biggest brand in subscription-based streaming music. That's double the paying customers of rival Deezer (5m), while rivals like Rhapsody (1.7m), Beats Music (unknown) and Rdio (likewise) are some way behind.

If a big company wanted to get into streaming music, snapping up one of those smaller fish – as Apple did with Beats Music – is a sensible option. But if someone wanted to make a splash and pick up the biggest brand, Spotify is the obvious choice.

Why Google might not buy: The biggest subscription music company comes with the biggest price tag: Google may be one of the richest technology companies in the world, but that doesn't rule out rejecting $10bn as too much to pay.

2. Google has been in the market for a streaming acquisition

Yes, even though it already owns YouTube and is working on launching a paid subscription option for music on it. Yes, even though Google also owns Google Play Music All Access, a direct competitor to Spotify launched out of its Android business.

Oh, and yes, even though Google paid a rumoured $39m for Songza, another streaming music service, earlier this month. That's three streaming music services and counting, even if Songza is different: a "personal radio" service based on themed playlists rather than Spotify-style "on demand" listening.

"Music industry sources say Google is in the market for a streaming music service and has been quietly surveying the landscape as the sector explodes," suggested a report in the New York Post in early June, citing fears within Google that "Spotify gets so big no one can catch them".

This month's Recode and Wall Street Journal stories both suggest that YouTube's new boss Susan Wojcicki – a Google veteran – may be most open to the idea of buying Spotify, while news this week that the executive in charge of YouTube's upcoming subscription service is leaving the company suggests that the company's strategy isn't as set-in-stone as you might expect.

Why Google might not buy: It could spend several billion dollars fusing its existing streaming services into a powerful single player instead. Songza could be the final piece in that puzzle, not a stepping stone to a Spotify acquisition.

3. Spotify has good relationships with the music industry

Google's relationship with the music industry has been challenging, to say the least. Industry bodies like the UK's BPI and US' RIAA have been attacking Google for years over the role its search engine plays in online piracy.

YouTube, meanwhile, has been taking lots of flak recently for the contract it sent out to independent labels for the upcoming subscription service. Indie trade bodies WIN and Impala have filed a complaint with the European Commission about this, claiming their members are being bullied into signing an unfair contract with the threat that their videos will be removed from YouTube if they don't.

Beyond these specific rows, though, there's a simmering distrust of Google within many quarters of the music industry, even though there is also recognition of the hard work being done by some within the company: the creator relations people at YouTube and the team running Google Play's music aspects.

Spotify? A number of musicians have criticised the company publicly, but when it comes to labels and publishers, it has a much better reputation. That includes many independent labels, stretching back to the way Spotify signed a deal with their licensing agency Merlin before it launched, including giving it some equity in the company.

Within the industry, Spotify is seen as a "good actor" by more people – not just major labels – than Google. Buying Spotify could be an (admittedly expensive) way of rebooting that relationship.

Why Google might not buy: Rather than improve Google's reputation, buying Spotify risks being seen in some quarters as an axis of music-value-destroying evil (see this piece from music industry attorney Chris Castle – one of Google's fiercer critics from the music world – for an early glimpse of that backlash.)

4. Spotify understands subscription-based entertainment

Larry Page may have a "lack of enthusiasm for subscription entertainment services", but it's also fair to suggest that his company has a lack of experience in making those kind of services work.

YouTube has had subscriptions available for individual video channels since May 2013, but they don't appear to have set the online world alight. Google Play Music All Access' figures are unknown.

Android's Google Play app store might have paid out $5bn to developers in the last year, but Apple paid out $10bn from sales of apps and in-app purchases to a much smaller number of customers. In short, Google's strength remains making money through advertising, not subscriptions or purchases.

Spotify has nearly six years' experience in a subscription entertainment business, including figuring out how to turn non-paying ad-funded users into paying customers. That knowledge could be hugely valuable to Google beyond music, if the company is serious about these kinds of models.

Why Google might not buy: It has the resources to hire in a bunch of people who DO understand subscription entertainment. Also, there's the question of whether Google's CEO will rule out a move in that direction, as per the WSJ report.

5. Apple is preparing to make its big move in streaming music

Apple's big move in streaming music wasn't launching iTunes Radio, another personal radio service, and it wasn't agreeing to pay $3bn for the parent company of Beats Music. It's what happens next: how iTunes Radio and Beats Music sit alongside one another (or, as seems more likely, merge) and roll out around the world.

From CEO Tim Cook down, Apple executives have a mantra when it comes to music being "part of Apple's DNA", even if music is actually less important than apps nowadays in both direct revenues for Apple, and the indirect ability to sell more devices.

iTunes remains the biggest music downloads store in the world, but there is growing evidence that music downloads may have already peaked and tipped over into decline, hastened by the growth of streaming. $3bn spent on Beats suggests Apple's move to counter that threat will be big and bold.

Why does this mean Google might buy Spotify? Because if Apple throws its weight behind Beats Music – imagine the potential for bundling a subscription into every iOS device – one way for Android to battle that would be with the biggest streaming music brand in the world.

Why Google might not buy: Google Play Music All Access could and should be Android's launchpad to compete with Apple on music, if the smartphone war moves in that direction. Or YouTube's new service, of course.

6. If Google doesn't buy Spotify, Facebook might

Online chatter about a company's forthcoming IPO can be just what it seems: information leaking out about a forthcoming IPO. But it can also be mightily useful for smoking out potential acquirers who might want to whisk in with a big offer before it goes public.

So, Spotify. For several years now, Facebook has seemed the more obvious ultimate exit for Spotify and its investors.

The two companies have had a tight relationship since before Daniel Ek was the only digital music executive to appear on-stage with Mark Zuckerberg as he announced the company's new "open graph" platform in September 2011, and in tech mogul Sean Parker they share an investor and senior adviser.

There are two notable strands to Facebook's recent corporate strategy: its willingness to take big bets on acquisitions ($1bn on Instagram, $2bn on Oculus VR and $19bn on WhatsApp) and its moves towards "unbundling the big blue app" on mobile devices, launching what Zuckerberg has described as "single-purpose first-class experiences... the best tools to share with different size, groups and in different contexts".

If Facebook decides music is one of those single-purpose experiences it needs to own, Spotify would be the logical choice. And the prospect of a Facebook-owned Spotify might be just the thing to nudge Google into making its own offer for the company.

See former CEO Eric Schmidt's admission in 2009 that the company deliberately overpaid around $1bn for YouTube because "we believed that there would be a competing offer" for past evidence of its willingness to move quickly in these situations. And then think about why it might be useful to have your chief business officer on the board of the company you might want to acquire before rivals...

Why Google might not buy: Well, why Facebook might not buy – its appetite for multi-billion acquisitions may have eased for now. While Google's YouTube overpayment worked out well, that doesn't mean Page and co would stump up over the odds for Spotify in any bidding war.

7. Google might be the answer to Spotify's profitability challenges

Spotify is growing fast: up from 24m users and 6m subscribers in March 2013 to 40m and 10m respectively in May 2014. But the company still looks a long way from being profitable: it pays out 70% of its income to music rightsholders as royalties, and its losses increased from €45.4m in 2011 to €58.7m in 2012.

Streaming music is a financial sinkhole, as much due to the costs of expanding globally and the technical costs of hosting and streaming the music as to the royalties.

The companies involved – Spotify included – see this as a necessary step towards a future where the economics do start to work, but there is still a big debate about when (or whether) this will happen.

This is why Spotify might sell to Google, rather than why Google might buy Spotify. But if there's any sense that, several huge funding rounds down the line and with the prospect of going public bringing even more public scrutiny of its economics, Spotify might be open to an acquisition, that may nudge Google into action.

Why Google might not buy: It has plenty on its hands grappling with music industry economics with the YouTube subscription service. Also, struggling with profitability isn't a barrier to Spotify going public: in the US, personal radio service Pandora has made regular losses, while Twitter is a prominent non-music example.Five big challenges looming for Spotify and streaming music
Strong growth for streaming in 2013, but global music sales fell
What's next for Spotify? Going 'beyond the Play button'
Zoe Keating reveals iTunes, Spotify and YouTube payouts
Why aren't Swedish indie labels celebrating Spotify's success?

Powered by Guardian.co.ukThis article was written by Stuart Dredge, for theguardian.com on Thursday 24th July 2014 11.19 Europe/London

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