How Central Banks Destroyed the Music Industry (Not Spotify or YouTube)

How Central Banks Destroyed the Music Industry (Not Spotify or YouTube)


Hello! Bonjour! Bienvenidos, benvenuti,
Welcome! to the Music Polyglot channel Now, this being the Music Polyglot
Channel, you know you’ll find good quality subtitles down there. This is my
first video on the Economics of Music series, today we’re going to talk about
how Central Banks destroyed the music industry. Nope, it wasn’t the internet
it wasn’t Napster or Spotify or YouTube, it was Central Banks. Let’s start with the
official version, the one that you may have heard. Back in the late 90s the
music industry was amazing, record labels were flush with cash they had plenty of
money to invest in raw, potential talent all over the world. So chances are that
if you had a band and you music was half- decent in the late 90s, and you lived in
the right place, you could find a label to spend some money on recording,
producing, releasing, promoting your music. And then the unthinkable happened:
technology; Yes! and “the internet”, suddenly all these peer-to-peer platforms
starting to appear, the best-known was Napster in the late 90s and what
these platforms would allow you to do is to download music for free. You were
connected to the platform and so where other people and those were your peers, you could share the files on your computer and they would share the files
from their computer, hence a peer-to-peer network. Now think about
this. It was a big no no no for record labels because the whole
business model was around selling CDs. The CD was the center of the universe
for a record label and everything else was designed as a marketing tool to sell
records. Tours which was marketing to sell
records in a specific geography, music videos, interviews, everything was around selling the physical music and
here came these platforms who wanted to give that away for free? They were not
going to let that happen so record labels fought tooth and nail, one lawsuit
at a time against these platforms like Napster LimeWire etc etc and they
defeated them all, they don’t exist anymore, but they didn’t count on Steve Jobs coming onto the scene with his iTunes
Music Store. You see Apple saw this thing, this battle, they said okay so
what’s the problem here guys? labels: you don’t like people getting music for free,
and you guys, you want to get your music digitally, well you know I have a
solution for that: I’ll be the intermediary and you guys are
gonna have to pay a little bit for your music and then you guys, you labels don’t
have to be selling plastic anymore you can have your music on my platform and
that way everyone is happy. So labels didn’t really have an argument against
that, I mean they had to go with the flow and evolve with the times. But
consumers actually thought: well, Why would I go on to the iTunes music store,
which sometimes wasn’t even available in some countries, I think up to today
there’s some countries where it’s not available, so people thought why would I
go onto this platform and pay like $1 or whatever it was per song if I could just
go and download it for free… Piracy was still rife and during these
years no one was really sure as to how the whole model would evolve, what would
happen to the whole business model of selling the actual music etc etc and remember that during these years
because it took a while and a whole new generation came of age, of people who had
never owned a physical CD, for whom music had been essentially free by downloading
stuff online and then on to their mp3 players. The iPod was around by that
point, I mean the whole point of the iTunes music store was to sell music for
the iPod. The last nail in the coffin was Spotify. Spotify came about and they
combined everything that was really cool about all the other music platforms that
had been trying stuff out in the early 2000s,
especially one key feature, that music was free. So that was it! music was now
legally free and record labels didn’t really have a choice but to adapt to the
new reality, they had to flip the whole model upside down. Before the CD, the
music was the actual business . It’s called the record or the recording
industry for a reason the record industry if you wan, suddenly that was
now free, they couldn’t sell that anymore so they had to flip
everything upside down and use the actual music as the marketing tool and come up with other products that they could make money with. Now
they wanted to sell tickets, they had to sell merch, ads on YouTube etc etc. The music itself was now a marketing tool for everything else
because it was free. You may be sympathetic to these industry disruptors, they came in and took away the cake you may think: oh yeah record labels
were so greedy, you know they made so much money and
they didn’t even pay the artists and they were just making so
much money and now it’s great because everything’s free. Well, I mean there’s an
argument for that but let’s leave the moral and ethical considerations aside
for a second. Think about it this way: imagine that there’s this burger truck
on your street. There’s this guy and he’s got his truck and he sells
burgers, and that’s fine, they’re a bit overpriced, but there he is and he sells
his burgers, he’s fine and he makes a living and he’s got a helper,
he or she makes a living as well because he pays her or him, his providers have business because he buys stuff to make the burgers and it’s overall kind of a
sustainable business model. Then one day comes this other guy, he sets up shop,
again a burger truck next to this other guy that was there first, opens up and he
starts giving away his burgers, charges zero!
nothing! “take it away” OK let’s leave aside any sort of
moral argument as to whether that’s right or not, whether that’s good or bad
that now consumers have free burgers, but let’s think about this for a second. How
is it that this new guy can just set up shop and start giving away burgers. You and I know that burgers aren’t free to make: the buns
aren’t free, the meat isn’t free, if you have help they don’t work for free, if
you have to pay a license to have your cart in a certain place, well that’s not
free, you know making a burger isn’t free! How is it that this guy can
just give his product away for free… How is it that Spotify can just let people
consume music for free and remain a profitable sustainable company?
Here’s the mind-blowing bit…IT CAN’T Spotify doesn’t make a profit! it makes
zero… it’s actually a lot worse than that and I’ll show you in a second “Andres, What the hell are you talking
about?” I hear you say. How is that even possible? Spotify has
business in over 75 countries, they have 126 million paying subscribers,
if they each pay like 10€ a pop so what’s that… 10€ x 126M that’s 1.26 Billion Euros in billings a month
and you’re telling me that Spotify makes no money? Yes my
friend! that’s what I’m telling you and I’m telling you that it’s actually even
worse. Spotify has never turned a profit. Ever! Here’s where central bank’s come
into the picture: This is the part of the story that you haven’t been told
and this is why Spotify can come in and destroy a viable albeit imperfect model
and a whole industry by giving away things, in this case music, that actually
costs money to produce. Unlike record labels, Spotify doesn’t need to make
money… wohhh woo I mean Andres, that’s one too many
unfounded claims. You’ve been saying that Spotify doesn’t make any money and
now you say that Spotify doesn’t have to doesn’t need to make any money. I know,
let’s backtrack a little bit and I’ll show you exactly what I mean.
I’ll show you some numbers on the screen, let’s go do that. Let’s see, I’m on
Investopedia which is a fairly serious investment encyclopaedia
and they have plenty of very useful information. So look, they have an article
called “How Spotify Makes Money” and they tell you about how it’s the premium
service that generates a larger share of its total revenue blah blah blah 90% of revenue is people who actually pay but what we actually
want to have a look at is how much money they actually made. So let’s have a look
at this… all right look here it is: Despite the strong revenue growth, so
despite they actually billed more money, the company recorded a net loss of 186
million euros for 2019. While relatively low compared to the past four years… OK
so that means that in the past four years they lost even more money. That loss was
more than double the losses experienced in 2018. OK so in
2018 they lost a little bit less but they didn’t make money they still lost
money. But you know what? This is Investopedia. Let’s actually go
on to what Spotify themselves have to say about that. If you go to Spotify.com, and if you
come all the way down, there’s a section here for investors. So here we are,
financials: So here we have press releases, financial statements: this is
everything that pertains the money for 2019. Let’s have a look at that…
This is what they have to publish in the US because they are a listed company
in the US and the New York Stock Exchange, they have to make the financial
statements public, that’s what it means to be a public company. So let’s
see, let’s go down I want to get to the financial statements so
the numbers, here we go. Let’s make sure that this is the right thing, we’re
looking at 2019 year to December 31st, so this is 2019.
Great! Let’s have a look, revenue cost of
revenue profit blah blah blah blah net tax. Net loss attributable to
owners of parent. this is it! so this is how much the company made or in this
case lost The numbers here are in parentheses because that’s a loss,
so here it is: 186M like investopedia said. 186 million
euros in 2019. What was 2018? yes, as they said less than half but look at the
previous few years! a billion 1.2 billion euros they lost in 2017, half a billion
euros in 2012 look at. This company has never made money and you know what’s
more interesting? One thing that I found as well look this.
This is a press release for share holders is a letter to the shareholders
in which they tell them how much money they are planning to make, 2020 outlook and here’s the guidance let’s go over the full year, What do they expect is going to happen? they expect to lose between 150
and 250 million euros! They don’t plan to make any money at al!l I mean they’re
gonna lose probably about the same as this year if not more!… So there you have
it… Spotify has lost about half a million
euros every single day last year! Since they launched essentially, they’ve never
turned a profit not only that but they don’t actually foresee turning a profit
ever! I mean their forecast this year 2020 is to lose even more money.
How is it possible then that they can lose so much money year in year out
and still be in business? Well you see the thing is that the money they lose is
free! courtesy of the central banks! You see? When Spotify launched it was 2008, something else happened in 2008. Do you remember? If you’re old enough you’ll
remember the Great Financial Crisis of 2007-2008. When that happened, in order to save the financial system, Central Banks all over the world lowered their
interest rates down to zero or close to zero. What does that mean? That means that Central Banks said to commercial banks, you know the banks that we see on
the Main Street on the High Street. They told them: Guys look, if you want to borrow money
from us that’s free. What they were hoping to achieve was that then banks
would lower the interest that they charged on to their customers like you
and I to borrow money and in turn they hoped they would encourage people like
you and I to go and get a loan from the bank to buy a house or to start a
business or just to spend it. They didn’t care as long as that money
was being pumped out of the banking system. The important thing for
us to understand is that for large financial institutions it was
essentially now free to borrow money, and they could invest it in things that they thought one day could
turn a profit, any profit as long as that was higher than zero.
That’s how Spotify funded its operations from the beginning and that’s how they
continue to do so. To understand this logic imagine the following:
Imagine that I go to you and I say: “Look dude, I’ve got a thousand euros, have them
I lend them to you, you can go and you don’t have to pay me any interest, just
go out there and do something productive. You go: “all right, yes sure and borrow
your thousand euros and you go home thinking: What can
possibly go wrong? The worst that can happen is that I don’t think of
anything profitable to do with this money and I’ll just put it away my
drawer and then I’ll just pay it back. I don’t have to pay any interest so
what’s the risk? if you’re a bit entrepreneurial you’ll go: “Maybe I can do something with this money and you would, if you’re a musician, you would go and buy a vintage synth or a
limited-edition guitar or some rare piece of gear that you knew would gain
value in the future. You would buy that thinking: “Well whenever I need to pay back this 1,000€ loan all I need to do
is to sell this thing that I invested in and it probably would have accrued in
value, so I pay my loan back and I can even pocket the difference! I can pocket
the profit! and worst case scenario if my investment isn’t that great and it
actually hasn’t gone up in price as much as I thought, I can go and borrow
another thousand euros to pay back my initial loan. It’s free to do that,
I’m not paying any interest so there’s no drawback for you.
If you have the speculator’s bug you’ll instantly
notice that there’s a thing that you can do here. If you borrow not only a
thousand Euros but as much as you possibly can because it’s free, you can
just go around investing in whatever you think might turn a profit even if it’s
just margina,l tiny, because it’s free for you to invest that money and any profit
is better than zero. That’s exactly how financial institutions have been
behaving since the great financial crisis. That’s how Spotify remains
float, because investors who invest in Spotify don’t have to make any money, at
least not now, in the hopes that one day Spotify will be big enough, large enough
and they will have streamlined the processes enough so that they would turn
a profit maybe one day. That’s the trap of zero interest rates, that the
incentive is for large financial institutions and speculators to go out
and borrow as much money as possible and invest it in seemingly unprofitable
companies that never turned a profit ever and that have no forecast of ever
doing so. One thing to realise though is that zero interest rates are a monetary
experiment, it’s never been done before. In the 5000 years that we have records
for, interest rates have never been zero, have never been this low, this is
unprecedented, we’re in uncharted territory, we just don’t know what’s
going to happen next. You may think from the point of view
of the consumer: “This is amazing” because you have access to all this free
music. Yes! but music isn’t free to make. My question really more than a moral
questioning of whether companies like Spotify and the destroying of previous
industries is a good thing or a bad thing, my question would be: So under
normal circumstances a company like Spotify or some other
disruptors as Airbnb, Uber you name it, they wouldn’t exist under
normal monetary circumstances. So I wonder what happens to all these
companies, to all the people that invested in these companies, and to all the
industries that were destroyed by the advent of these companies
when we eventually go back to more normal monetary conditions. What happens
then? and you may say: “Oh Andres for that to happen the whole system would
have to collapse”… well my friends, it’s March 2020 look around you, How stable
does the global financial system seem to you? What about you? What do you think
about Spotify? is it a good thing? is it a bad thing? Do you think it killed the
industry? do you think it revived it if you’re a musician: How do you take
Spotify? Is it a good thing for you? is it a bad thing? Has it been a
good for your career? Bad for your career? Let us know in the comments below! Thank
you for staying till the end don’t forget to subscribe and hit and the bell
bottom below, well actually the subscribe button and then the bell button
next to it so you can be notified when more videos come up! Check out my Patreon page, especially if you play guitar, there’s loads of extra material for all my
guitar videos! Until next time! ¡Hasta la Próxima! Arrivederci! Au Revoir!

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