The Ledger: Leaving Russia Will Have Little Impact on Streaming Services, Record Labels

The Ledger is a weekly newsletter about the economics of the music business sent to Billboard Pro subscribers. An abbreviated version of the newsletter is published online.

Strong steps taken by Western music companies to cease operations in Russia will have a big impact on the country but will do little damage to the global market. Russia is the 16th largest recorded music market in the world with a trade value $199 million in 2020, according to the IFPI. That was on par with Sweden, which has about 7% of Russia’s population, as well as Mexico, India and Switzerland. For the largest record labels, music publishers and music streaming companies, each with multi-billion-dollar revenues, Russia is a tiny part of their worldwide businesses.

Spotify’s decision to suspend operations in Russia, where it launched in 2020, will be immaterial to its 2022 results. On Wednesday, Spotify CFO Paul Vogel said the company’s decision to shut down operations in Russia will result in about 1.5 million lapsed subscribers. By Billboard’s estimate, those 1.5 million subscriptions are worth a maximum of $40 million of revenue and $12 million of gross margin per year — negligible amounts for a company that could reach $13 billion of revenue in 2022. From a purely financial point of view, Spotify stood to lose more by not pulling out of Russia if it caused half as many customers in Western markets — with higher average revenue per user — to cancel their subscriptions in protest.

In dollar terms, Spotify’s decision was far less costly than $40 million in 2022 revenues, however. At the beginning of the year, Spotify could have expected about $40 million from its Russian subscriptions in 2022 based on an individual Spotify Premium account price of 169 rubles per month — or $2.26 at the Jan. 1 exchange rate. But Western countries’ sanctions caused the ruble to lose about 46% of its value to the dollar since the beginning of the year (as of Friday), meaning a Premium subscription would be worth the equivalent of $1.22 today. Had Spotify remained in Russia after the ruble crashed, the value of its 1.5 million subscriptions would have been worth about $1.8 million per month and $18 million for the remainder of 2022.

Global businesses such as Spotify make most of their money from developed markets in North America and Western Europe. At $2.26 per month, a 30% gross margin — meaning the remaining 70% is paid in royalties to rights holders — and a 3.75% monthly churn rate, a Premium subscription in Russia has a lifetime value of roughly $17.60, less than half the LTV for Spotify’s average global subscriber. That would put the 1.5 million lapsed Russian subscriptions at a collective lifetime value of only $26.4 million.

Other foreign companies with music subscription services in Russia have also taken actions that will impact revenues. Apple halted sales of its products in Russia on March 1. Deezer discontinued service in Russia on March 1. And on Thursday, YouTube suspended all payment-based services in the country.

If the conflict’s economic impact is contained to Russia, DSPs and labels won’t see losses of any significance, as Russia accounted for just 0.9% of the global recorded music business in 2020. The total global market share of a handful of IFPI members bordering the conflict — Poland, the Baltics, Slovakia and Hungary — was also about 0.9%.

Russia’s most established music services remain offered by homegrown tech giants: search engine and web portal Yandex and social media company VKontakte. Yandex has 12 million subscribers to its unlimited streaming service, Yandex.Plus. In Russia, Yandex.Plus is available for 169 rubles per month, although the price also covers ad-free movies, discounts on taxi and car-sharing services and free delivery on e-commerce purchases. (Yandex.Plus is also available in Kazakhstan, Armenia, Azerbaijan, Tadzhikistan, Turkmenistan, Uzbekistan, Georgia, Moldova, Kyrgyzstan, Belarus and Israel.) VKontakte’s music service, VK Music, has more than 4 million subscribers, according to Russia’s Institute of Music Initiatives, and costs 149 rubles per month.

Despite the minimal financial impact on music companies in the short term, my colleague Rob Levine suggests the exodus could also have damaging long-term effects, as music companies pulling out of Russia hurts the potential of a young, growing market for legal music where piracy has the potential to once again run rampant.

STOCKS
Through March 11, the % change over the last five trading days and year to date.

Spotify: $124.29, -8.0%, -46.9% YTD
Universal Music Group: 20.40 euros, +12.1%, -17.7% YTD
Warner Music Group: $31.79, -3.7%, -26.4% YTD
Live Nation: $108.55, -5.1%, -9.3% YTD
Tencent Music Entertainment: $3.44, -24.7%, -49.8% YTD
Cloud Village: 157.20 HKD, -30.3%, -51.6% YTD
Anghami: $10.57, -21.7%, +3.5% YTD
NYSE Composite: 15,753.70, -2.3%, -8.2% YTD
Nasdaq: 12,843.81, -3.5%, -17.9% YTD