Ep. 1 - Spotify's Business & Patent Strategy

Introduction and Hosts' Backgrounds

[00:00:00] Samar Shah: Hello and welcome to the Patent Strategy Scorecard I'm your host, Samar Shah, and with me is Ian Holloway. Ian, how are you doing?

[00:00:07] Ian Holloway: I'm doing well, Samar. It's bright and sunny outside today. So looking forward to this podcast and enjoying the rest of the day.

[00:00:15] Samar Shah: Yeah, this is pretty exciting.

I'm glad to be recording with you. This is something that we've talked about forever We talked about strategy business strategy and patent strategy all the time. So it's good to be able to talk about it in person In a more public format, I don't see a lot of content out there about this particular topic.

[00:00:34] Ian Holloway: It's such a unique space, right? Being able to combine both the business side of things, the technology side of things and the law. And it's nice to have, you here to explain that, lay that out to the

Overview of the Podcast's Focus

[00:00:46] Samar Shah: The idea is that we'll talk about tech companies and their patent portfolios and see how they're doing, right? We are going to try to grade them. I think we'll see how that goes. Hopefully it's going to be more than a gimmick, but but we'll try to grade how they're doing on their patent strategy relative to their business strategy and how we might do the same things or might do things differently.

And even if I think listeners disagree with us the goal is that they'll find the whole conversation interesting and hopefully take something away from it.

[00:01:16] Ian Holloway: I hope so. Yes.

[00:01:17] Samar Shah: Okay. So do you want to give our listeners a quick overview, maybe on yourself and your background? I think that might be helpful here.

[00:01:25] Ian Holloway: Yeah, I think that's great. So I graduated from Purdue University feels like too long ago now, in biomedical engineering afterwards I went to work at The United States Patent and Trademark Office in medical devices left after some time and went to obtain my MBA over at a Butler university.

It's been about a year working with you Samar at Outlier IP and learned a lot. Along the way and hope to share some of that information with people.

[00:01:55] Samar Shah: I'm really glad to have your insight on this both because you have that patent office background and also the business background and an MBA.

So I think that really helps rounds out our experience. My, my background and experience is more legal oriented. I'm a biomedical engineer as well. But I've spent a bulk of my career, maybe all of it in, at law firms and advising clients. I work with clients like Facebook and Google and a whole bunch of other companies and startups in the tech space in the world of software and sass to AI and robotics and drones and all sorts of stuff.

So I have that Kind of background from having worked on patent strategy and worked on patents. But I am an armchair business expert, so I'm glad to have a real professional on the call with us.

[00:02:40] Ian Holloway: Should be fun.

Spotlight on Spotify

[00:02:42] Ian Holloway: So we picked what Spotify for our first episode here today. I don't know if I can ask you, why did we choose Spotify?

[00:02:51] Samar Shah: I think Spotify is interesting. There are two reasons. One, I think it's a really interesting company in midst of transition, but two, it has a manageable patent portfolio that we could evaluate and look through. So there is that there, there are other companies that are also very interesting, like Apple and Google.

But they have, Tens of thousands of me, hundreds of thousands of patents. Much more difficult task to evaluate their patent portfolio and sift through it. So I thought this would be a good one for us to start with. There's a limited data set and and we'll get into whether that's good or bad later in the call.

I think it, primarily it's an interesting company and We can take this any direction you want, Ian. So where do you think we should start

[00:03:31] Ian Holloway: I think based on what we've been talking about, we're going to want to transition here to look at what Spotify is doing.

is providing and how it differs from other tech companies in this space. Obviously, like you said, that they're younger than some of these other companies, but they're in a state of transition, let's explain what Spotify is doing and how it's a little bit different than what All these other companies might be doing as well.

Spotify's Business Model Challenges

[00:03:56] Samar Shah: Spotify, a lot of people think of it in the same breath or vein as Google or Facebook or Netflix and some of these kind of internet high tech companies so they probably get evaluated in the same way as some of these other technology companies, but in many ways it's very different from other technology companies, particularly Google and Facebook and maybe they're closer to a utility or something like that.

One of the kind of key features of an internet technology company at scale is that they have zero marginal costs. All right. So the idea is that they can make an additional incremental sale without adding to their marginal costs. If you think of Google, for example, or Facebook, if they're serving an additional ad or additional search results it doesn't cost the company any additional money to serve that target.

Additional customer or that additional query. Certainly they have things like fixed costs and things like that to deal with. . But really there's no additional marginal cost. It's not like you had to go and buy a whole new server rack to be able to accommodate an additional search request.

It's not perfectly zero, marginal let's be clear, but it's close enough. I'd

[00:05:03] Ian Holloway: say based on the scale of it all, when you compare it to what some costs can be, so

Great for Google in that regard.

[00:05:10] Samar Shah: Great for Facebook. And the name of the game for these companies is to get as big as possible, right?

Which is why they take on so much venture capital investments. They just want to be big because scale has profitability attached to it. A lot of companies in the world of internet. Are not profitable and they still are very highly valued company. And I always used to scratch my head when I was evaluating these companies in college.

This is something I did for fun. And not very well, I should say, because I was like, ah, Amazon, I don't understand that business model. And Google, I don't understand that one. And I didn't invest in these companies to my own detriment 20 years ago. But scale is really important because I think of the marginal cost issue.

To serve the first 100 customers is probably insanely expensive for these companies, but to serve the hundred millionth or the 200 millionth or the billionth customer is zero marginal cost. It's the fundamental economic structure of internet technology companies at scale.

Apple on the other hand would be the corollary or it would be the opposite. They sell iPhones for the most part and for them to make each additional sale of the iPhone, there is real significant marginal costs associated with it. So if they sell a phone for a thousand dollars, but it costs them 200 to make it, they have to spend an extra 200 bucks for each additional thousand dollars in sale.

Whereas Google and Facebook will spend 0 in marginal costs for each additional thousand dollars of sale.

Comparing Spotify to Other Tech Giants

[00:06:38] Ian Holloway: But Spotify doesn't really fit into either of these necessarily. Quite as cleanly when compared to Apple or Facebook slash Google. They've got their own kind of situation going here with how they acquire or send out this music to their customers.

[00:06:53] Samar Shah: Spotify, although it sells digital goods, digital files, audio files or streaming audio. They don't have Google or Facebook's kind of zero marginal cost structure. And that's because they deal with record labels, music record labels, which are what is it called then?

Oligopoly. Is that right, Ian?

[00:07:13] Ian Holloway: Oligopoly. Yes, indeed. Couple big guys at the top. It's not quite a monopoly, but. It's not necessarily a great situation if you have to purchase from them.

[00:07:24] Samar Shah: Yeah. So they they're very powerful. They control a lot of the supply side of this audio content. So they actually charge Spotify something something very crazy.

The numbers are all over the place and it depends on how you compute them and how they're getting paid. But, I've read it's anywhere from, 15 to 30 percent of whatever Spotify makes goes directly to the record label and the artist maybe more based on some counts, depends on the power that the artist has and the record label itself has.

Spotify unlike Google and Facebook have very fixed marginal costs, right? So for them to make an additional thousand dollars in sale, they have to spend 300, right? Or 300 of that dollars goes to the record label companies. Scale doesn't really solve a lot of problems for Spotify, right?

Cause even if they get bigger and they sell to more customers, their marginal costs remain the same. So it's a tough spot to be in, Spotify famously still not profitable. But they can't get to profitability just by scaling because they have fixed marginal costs and those fixed marginal costs are actually pretty high.

The other side of the equation. Costs. Costs are fixed but their revenue in some way is also fixed because they have, it's a pretty fiercely competitive space to be in. You're competing with Apple and Google and Amazon. These companies are well funded and they're, holding prices down you Spotify would probably like to charge is my guess, right?

[00:08:55] Ian Holloway: Oh, I say just because they can have other divisions there that, you can take a loss in your music streaming division if you're Apple as long as you're still selling enough iPhones elsewhere to make up for it. So they can wait out this storm, but I think it is important to note Spotify is still the number one.

Of these groups. They're not an overwhelming amount, but they do have the largest share, right?

[00:09:19] Samar Shah: Yeah, and by all accounts is the best of the breed as far as a music streamer goes. There are lots of accounts of people who have switched over from Spotify to Apple Music, for example, and have immediately regretted it and complained about it very forcefully on Twitter and other places.

So there is some real benefits or real kind of UI, UX benefits, consumer benefits associated with Spotify. It is for sure. Best of best in class as far as the music streaming service goes, but it still doesn't change kind of the business world that they live in, the fixed marginal cost, and then there's a cap on what they're able to charge their customers.

And maybe that's, changing is Spotify famously also you announced a price hike A couple of days ago or a week ago and investors really liked it. The stock price went through the roof. There is some recognition of this but it's still a tough place to be from you know, price perspective because you have these competitors who are less less concerned about profitability, shall we say?

And then of course there's Apple music, which is its own set of challenges. For Spotify, a lot of the ways they sell their subscription is through the app store. That's changed. They have stopped doing that. They don't sell subscriptions through the app store, but the app store takes 30 percent of all the revenue that gets generated through the app store.

Right.

[00:10:39] Ian Holloway: And that's on top of what the record companies are already taking.

[00:10:42] Samar Shah: Yeah, exactly. So you, Spotify could be in a position where for every dollar of sale that it generates, it. Would send 30 cents of that to the record label and another 30 cents of that to Apple. And all that's left is the 30 cents.

So that's a really tough position to be in,

[00:10:58] Ian Holloway: but they've tried to fight against this too, right?

[00:11:01] Samar Shah: Yeah. And this is where some of that antitrust issues come up with Apple and particularly in the EU. This one to me is. Is it egregious, right? I got, I don't see how Apple didn't see this coming or didn't see this would be a problem.

They, so Apple music is also on the app store and you can purchase an Apple music subscription and Apple doesn't have to pay that 30 percent tax, right? For selling stuff on the app store. So it has 30 percent advantage over Spotify and basically all the other music streaming companies built in.

It's insane. I think Spotify recognize that and they're like, we're not going to sell you anything on the app store. So if you want to purchase a subscription, go online on your computer. But that's friction, right? If somebody wants, if somebody is in the app store and they want to purchase a subscription and they may end up buying, an Apple music subscription, just because it's easier.

[00:11:50] Ian Holloway: Yeah, you don't want to have those barriers up to be able to sell your product to people.

[00:11:56] Samar Shah: Yeah, now that has changed in the EU and I think Spotify probably was instrumental in, influencing the EU regulators they're smart about their legal spend here but those rules are getting reversed, or they're gonna be in a more equal balance, Playing field with Apple music going forward, which is a good news for their business model, I think.

Spotify's Strategy for Future Growth

[00:12:17] Ian Holloway: Now, I think when we were talking through Spotify, we compared them a little bit to Netflix and their streaming service and the growth of their company and things like that as well.

[00:12:28] Samar Shah: Yeah, I think Netflix might be an interesting analog for Spotify just because they're new media content delivery companies.

They don't have the same kind of infrastructure. As Google or Apple much more established players, much larger companies, generally speaking. But yeah it's like that, Netflix is also in a similar thing. Because they purchase Netflix purchases video content from, studios, which are also very powerful and then they stream it.

So they are similarly kind of profitability challenged. But Netflix is. Just much better company than Spotify, just from a stock perspective. And I think there are a couple of reasons for that. Netflix famously used to purchase their video content outright. If they would purchase house of cards, for example, or stranger things, or one of these shows, they would purchase it outright.

Outright in cash, right? And initially the the artists the actors and the screenwriters loved it because you know There'd be millions of dollars of payout when these shows got purchased by Netflix which was very nice for everyone,

But that model is changing too, I think content creators and artists have figured out that these companies like Netflix are making a ton of money on the internet and they're missing out on revenues.

So Netflix used to, I would say, have zero marginal cost as well, historically, because they could serve house of cards to an additional viewer and it wouldn't cost the company any additional money. So they were able to get leverage on their cost. And. Operate much more like a Google or a Facebook that has changed.

I think everybody would probably prefer to get paid in royalties. So I think that's the model going forward, although, and this may be, for another episode Ian I think internet has this kind of barbell effect where there's content that's like hugely popular and then there's content that's hugely niche that does well.

And then everything else in the middle is niche. And I think a lot of artists will regret the royalty deals. They're probably better off with a, straight purchase that lump sum coming in because I think Netflix has started reporting their like viewership data and it's a lot lower than a lot of artists expected, except for those massive shows, or the really niche shows that do really well. Everything else in the middle is. Maybe not doing as well as people would have hoped.

[00:14:56] Ian Holloway: So perhaps we'll see that pendulum swing back the other way. Oh, be interesting.

[00:15:01] Samar Shah: It would be interesting. It is, it is always interesting to me that Spotify has never tried to acquire zero marginal cost content, right?

Like it's like, why didn't they, why don't they spin up a record label themselves and like fund artists and then purchase their rights outright? That, that was always something that was curious to me.

[00:15:22] Ian Holloway: We'll look at, I think and this may be as, is a good time to look at what Spotify's business model might look like in the future.

Based off of what we found.

[00:15:33] Samar Shah: I think that's right. We'll talk about this some more for sure. But I think it's also just just industry norm and practice. I think artists it's boom or bust for them, right? Like they either become Taylor Swift or like they'll have to find another job kind of thing.

So I'm sure every, all the artists are like, no, I'm not going to sell my music to you, Spotify or record label. I'm gonna. Retain some royalties just in case I turned into Taylor Swift, right? Maybe there's some of that why they don't. Actually have a studio to that makes content. But they have gone a different direction and clearly they're thinking about zero marginal cost content.

And I don't know if now's a good time to talk about it.

[00:16:11] Ian Holloway: Yeah, I think we can move towards that. Cause I think if you look at the benefits that, that some of these other companies have acquired with that, like we just talked about Netflix. Buying house of cards and doing really well with that.

Can Spotify acquire or have tried to acquire exclusive content for themselves that they don't need to spend any more money on to distribute to people.

[00:16:37] Samar Shah: That's right. That's right. Yeah. It is tough to be Spotify just because they're not making any money. The stock price actually doesn't really reflect that because in some ways they are cashflow positive, so they're not profitable, but cashflow positive.

[00:16:51] Ian Holloway: How do they how do they acquire that cashflow positive position here?

[00:16:55] Samar Shah: Yeah. One of the other features of a SAS business or a software business is that you have massive upfront costs, right? So you have to build the software and the infrastructure and serve that. And then eventually attract customers and then eventually attract.

Like it, it's like you have to spend so much money before you get to a revenue number before you become cashflow positive. And it's the life of a software business, but in Spotify's case, it's inverted. So they actually have all these customers who pay them a subscription revenue monthly, but Spotify doesn't pay out the record labels.

Ahead of time, right? Cause you gotta know the metrics and the listener, listener account and stuff like that. By the time Spotify pays record labels, it's like several months out relative to when they earn the income. So unlike other tech companies, they're very cashflow positive which.

is my guess is why the stock price has always been propped up relative to, their profitability numbers. It's a tough spot for Spotify to be in because there's no way out of this quagmire from a profitability perspective. Certainly growth and scale is not it.

So what do you do if you are Spotify? And you want to become more like like Google or Facebook or even Apple or Netflix tough, given the limitations on either side of that equation.

[00:18:14] Ian Holloway: I think we found what Spotify is going to try to maximize a different revenue source here.

It's not going to be subscriptions per se, but. Advertising which we've seen some of these other streaming platforms start to do. Including ads in their, things that traditionally have been ad free, right? Spotify, it looks like, are going to try to make a better profit off of the advertising they can provide to sellers.

without detracting from the user experience, right?

[00:18:49] Samar Shah: That's right. Google and Facebook or Meta are basically ad companies, right? They don't make any money off of their users per se. They make all of their money from advertisers. And that's a great business model to be in. It's certainly a much better business model to be in than what Spotify is in.

Currently. Some people say that. Advertising is the greatest business model to be in. So much so that if a company is an ad company, they, because the money is so easy they're doomed to fail on all the other ventures that they engage in because every other business model, relatively speaking is much harder, right? So like when people tell me, Oh, why doesn't Google make a great pixel phone? And I'm like they're not used to dealing with, things like cost and margin and all that stuff. Ads are just free money

[00:19:34] Ian Holloway: they've just they've created a business culture that Would you describe this kind of soft, in a competitive sense?

[00:19:40] Samar Shah: Let's just say that Walmart and Amazon's business culture is very different than Google's business culture okay. So I think it would make sense for Spotify to be in the ad business, right? That's a great business model to be in much more scalable. We've already talked about how they're not profitable, but they also, curiously took on a ton of debt recently they, they took on over a billion dollars in debt during the pandemic to fund expansion and growth and keep up with hiring costs and a whole bunch of other things.

The carrying that cost is catching up to them, right? So they got to do something sooner rather than later to get on top of this. And to be an ad business, you have to do, I think a couple of things. One is you need to increase the inventory of where you can, of audio content in Spotify's case, where you can place ads, right?

If you have less inventory, you're just going to just the numbers equation. Part of this is that you're going to serve fewer ads. So you've got to get more inventory. Then you've got to get people listening more, to stuff that you are streaming. And then you have to get good at the targeting of the ad.

The better targeted your ad experience, the more you can usually charge. Most of these ad systems are auction based. So like people will bid higher. Advertisers will bid more if they're able to target their ads to specific customers. And Yeah, I think those are the two things. You also got to be able to measure ROI for these advertisers.

They will typically bid more if they know that they're getting an X amount of return on their investment. So I think those are the three main pillars of a good digital ad business.

[00:21:13] Ian Holloway: So if you're Spotify, you have to make sure you have enough content. To keep your customers around, you have to understand who your customers are so you can target that advertising to them and you need to be able to measure all this stuff.

And the question is Spotify doing that right now or are they going to be doing that in the future here?

[00:21:33] Samar Shah: Yeah. And that's right. They have to do all those things. One thing I will say that Spotify has in its favor is that they can serve songs as ads which is something that Facebook just cannot do and Google just cannot do because the ads that they're serving are actually very different from the content that the user is expecting to view right from these services.

If Spotify can get really good at getting at, songs as ads from record labels and placing them in front of users, it can be a very like seamless experience. It may even be a positive experience to be served with an ad song, right? Cause if it's if it's a great song and you love it and you discover a new artist or something new, a new genre that could be a very positive experience to As far as like ad companies go.

I think Spotify has a huge advantage in that they can serve songs as ads and people are actually listening to songs, right? Like they're a very seamless transition.

[00:22:34] Ian Holloway: And then you don't feel like your experience as a customer is ever really truly interrupted, right?

I'm just streaming a bunch of free music Not knowing That somebody is trying to get me to buy their song or album or what have you

[00:22:48] Samar Shah: Yeah, they actually ran into some hot water on the internet about this as well. The people called it the pay to play model a lot of artists were like really into it Rightfully upset about this.

Actually, they were like okay, so like you, if if you want to get listened to on Spotify, you got to pay money to Spotify. And that was also not palatable to artists. So there is like a, uh, history here with the record labels and artists and expectations that Spotify can't just come in, Google and Facebook, it's not like they had a lot of legacy media to deal with.

Like they just, they could write on a blank canvas and create a model that made a lot of sense for everyone. Spotify is running into some issues with that. It's a very old industry.

[00:23:30] Ian Holloway: Old industry with, as we've seen a lot of competitors in it, right? Since you don't have every customer under the sun, it's not like you can say if you're not playing on Spotify your listeners aren't going to hear it.

They can go somewhere else still pretty easily.

[00:23:44] Samar Shah: I think that's right do you want to talk a little bit Ian about how Spotify is increasing its audio content inventory?

Expanding Audio Content Inventory

[00:23:54] Ian Holloway: Sure, so Spotify in general, I think has been associated with traditionally music streaming, but for Spotify to expand you're only going to listen to music so much out of the day, but that isn't the only thing you're going to listen to either. People have found podcasts or audio books as other avenues of something you're going to listen on. So Spotify is looking to become the.

Location to go for audio. It's not audible. It's not whatever podcast streaming service you might be on. It's let's just go to Spotify in one location. And so to do that, they're going to need content in that space as well. And I think what we've seen Spotify do very famously acquired the Joe Rogan podcast However, many millions of listeners and hours upon hours of content that Joe Rogan brought with him there.

If you were going to listen to him, you had to go to Spotify. It's that they became their own record label or podcast label in that regard. Same thing with some other sports related podcasts and the Gimlet Media Group to try to get some more exclusive things to attract listeners to their space.

That's on the podcast front that we've seen Spotify it's more than just dipping their toe and they've tried to make a splash with that and then on the audio book side, it's interesting to see Spotify into this space in a little bit different method than traditional audio book services,

used to be you would pay for the entirety of a book, whereas Spotify based on their technology and user interface, is able to give snippets and charge portions of books, which really hasn't been done. So they can make it a little easier for people to start into the space and then hopefully convert them to somebody that's buying more and more, which I think is really smart on Spotify's plan.

In general, it looks like they're very good at retaining users and upgrading them along the way. It doesn't necessarily fix the fixed marginal cost side of things, but it does help we can do these things where we can raise prices because we are such a good, So, yeah, just looking at the audio content side they've expanded areas where they can put their ads.

Yeah,

[00:26:32] Samar Shah: I think it makes sense. If getting people to listen to more music doesn't necessarily help them, right? Because it still has a fixed marginal cost associated with it. So what can you serve to people that has zero marginal costs associated with it? It's free, everybody can listen to it.

So that's a great great place to be. Audiobooks also interesting. They've done some interesting business model things there, like you said, reducing the barrier to entry. It used to be that if you want to listen to a audiobook, you'd have to pay for the whole audio book is 24 bucks or something like that.

But Spotify has introduced this model where you pay per hour, that you listen to and you can listen to you can purchase six hours of audio book content and, spread that across six different books if you want it to, you'd be limited to one hour per book, something like that.

They've reduced that barrier to entry Added a lot more users to their platform because of it probably. And pretty smart business moves, I think generally, although the Gimlet media and the, the ringer and a lot of their kind of podcast acquisitions don't make a ton of sense to me cause they're not exclusive, right?

So I listened to Gimlet media podcast from time to time and Bill Simmons's podcast from time to time, and I don't use it as a Spotify to listen to them. So they spent all this money to acquire all this content. But they didn't get people onto their platform. Not sure what the thinking there was.

I think they made some mistakes along the way. Same with audio books. When they first introduced the audio book stuff, they offered. The same pricing plan as as audible does or as Kindle does. So you had to buy a book for 24, 24, nine, nine. That didn't really work. So I think they're getting there.

They're starting to figure it out, but they spent a ton of money acquiring these podcast companies, which may not have been the best use of their money.

[00:28:14] Ian Holloway: Yeah it's Their head's in the right space. The execution might not have been there the whole way, right? I think the the intent is correct

[00:28:22] Samar Shah: Maybe You are much more generous than I would be.

But yeah, I mean because that's part of the challenge, right? They took on all this debt a billion dollars of debt to fund their acquisitions And I would say probably 80 of those acquisitions Don't make any sense to me, right? They don't get people onto their platform. So I don't know. But some of it, the Joe Rogan, that seems like a home run, right?

That seems like a really great move.

[00:28:46] Ian Holloway: Yeah, but that's not exclusive anymore either.

Spotify's Rise in the Podcast World

[00:28:48] Ian Holloway: I don't think so.

[00:28:49] Samar Shah: Is that right?

[00:28:50] Ian Holloway: Yeah.

[00:28:52] Samar Shah: So very interesting. Although I think Spotify is now the number one podcast listening app in the world. It has work, whatever they have done. Apple used to have cornered the market.

But Apple is so big and profitable. Podcast is like a drop in a bucket for them. So they really didn't curate or support this community and this format very much. And Spotify has come in and really gone from zero to the largest podcast listening app in the world, which is a credit to them.

[00:29:24] Ian Holloway: We got one good thing out of it there.

[00:29:26] Samar Shah: Okay.

Challenges in Spotify's Business Model

[00:29:26] Samar Shah: So given all this this is a long way to set the stage here. Spotify, a tough business model to be in tough business to be in generally ad business is where they want to be. They need to do. Some execution to get there from a scalable business model perspective.

Patent Strategy for Spotify

[00:29:41] Samar Shah: But given all these things that Spotify has to do from a business execution perspective, what would you file patents on? If they were to hire you in and said, Hey, help us like figure out our patent portfolio, what would you tell Spotify? How should they allocate their resources?

Focus on Ad Targeting and Personalization

[00:29:57] Ian Holloway: I would say just based on what we've seen and where they're moving, we need to focus on ads and that's, like we said, twofold here, where it's making sure we know how to put them in the right place so that people can see them.

And. Also to be able to personalize those ads. So you can go to McDonald's and say, Hey, I know a user here. That's going to want to buy a cheeseburger soon. If you put your ad in here and lo and behold, we can show that person went and bought that cheeseburger after hearing that ad. So the more and more we can maximize that, the better.

Importance of UI/UX for Spotify

[00:30:35] Ian Holloway: A little bit else that I would focus on is deals with making sure you're still making your customers happy. Making sure that your UI is still the best in the business. Cause that's what has got you to this place. And It's what's going to keep you being able to retain your customer base, right?

I don't know how that matches up with what you would say, Summer.

[00:30:58] Samar Shah: Yeah, no, I think that's right on. I would say that, the ad targeting and personalization is going to be a huge thing for Spotify moving forward, right? So I would be heavily investing in those patents and that technology.

Being able to compute an ROI on the ad technology is also important. And that's AI and ML, right? Because Apple had released this ATT, the App Tracking Transparency Program, where you can't track. So if somebody clicks on a thing from, Spotify or Instagram and purchases it somewhere else you can't track that across apps anymore.

It used to be very easy for these companies to be able to You know, compute ROI for their advertisers, but it's not so anymore. So they are using AI and ML models to figure that out. When somebody might have purchased based on a bunch of different data points that they extract.

So that's where my focus would be as well. I would spend maybe 60 percent of my portfolio would be on ad targeting and personalization as well as AI and ML models that help you figure out when somebody has actually made a purchase based on your ad and computing that ROI for your advertisers.

The other, so if that's 60 percent of my portfolio, the other 30 percent would be half of that, maybe 15 percent would be on all the UI UX things that you mentioned Spotify is the best of breed audio streaming platform. And there's a reason for that. People love using Spotify as we talked about.

So I'd spend some time there. And we also talked about how Spotify is at a 30 percent disadvantage relative to Apple, right? So you want to lock in those benefits and prevent Apple or Amazon or YouTube from encroaching on that user experience. You want to make those exclusive and specific to Spotify.

So I would spend a bunch of time there. And there's probably some nuts and bolts of advertising, right? Content delivery and distribution. Podcasts, it's famously difficult to insert ads, right? Cause podcasts are uploaded as MP3 files which are static in nature. So there's probably some technology and and infrastructure that you need to build out if you want to.

Insert ads on the fly there. And so yeah, there's some probably nuts and bolts of building an ad delivery network that has to happen as well, but that's, and you'd say that's like

[00:33:18] Ian Holloway: 15 percent or so of what you would file.

[00:33:21] Samar Shah: That's what I would do. Yeah. Probably harder to file patents there because there's probably only so many ways to do it and so much innovation.

So yeah, I would say 60 percent would be related to ads and then 15 percent related to UI UX and another 15 percent maybe related to the actual distribution of ads.

[00:33:40] Ian Holloway: I'd say I might spend a little more on the UI UX, but I think we're pretty much on the same page here. We have talked about it for a little bit too, but

[00:33:47] Samar Shah: And I guess maybe the difference there is what would be your forward going patent portfolio versus your historical portfolio, right? So if we're talking historically, what has made Spotify is the UI UX, right? So like my backward looking portfolio would be much more than 15 percent on UI UX.

But forward looking it's the ad, ultimately if Spotify is going to win, it's because it's a much better ad platform than Apple music or Amazon music. And. Probably has less to do with the UI UX. So that's probably true of that. So I think we're in agreement or general agreement about this.

Analyzing Spotify's Patent Portfolio

[00:34:25] Samar Shah: So we've looked at Spotify's patent portfolio. Yes. We want to talk about what we found.

[00:34:31] Ian Holloway: I'll put a caveat up here. Patents are still published 18 months later after, after filing. So we are. a little bit delayed, but we took that into account. When we talked about these strategies and things like that, if Spotify was talking about this, four or five years ago even two years ago, we should start seeing some sort of increase in advertisement based patents.

We looked through about 2000 records and looked for overall trends and things like that. And what we found

[00:35:05] Samar Shah: And just to clarify on that point, it's not that we only looked at 2000. That's just how many they have. They file 2000 total patent filings. And that's not 2000 families of patents.

I can't remember how many families of patents they have specifically. And but I would say they probably have. A thousand families, maybe 800.

[00:35:24] Ian Holloway: Yeah, I think it was in that range. So we're not talking, like I said, a very large amount. But of those patents and then includes the history of Spotify's filings, we're looking at a lot of stuff dedicated to that.

 UX, we're talking about 60 percent of the patents that we saw. We're dedicated to that. On the other side of it, I think we were about 20 percent on things dedicated to the actual circuitry and software to be able to deliver streaming music. So you have to be able to deliver this stuff, the underlying, as you said, nuts and bolts.

To the customer base to be successful here. But what was most worrying? I think we saw only about 7 percent of their patents 2 percent towards advertisement delivery, 5 percent towards actual advertising Of what we saw. So they're not focused on advertising very much right now. A little concerning.

And part of that might be we found a lot of patents and obviously a lot of their R and D budget. It looks like it went to the car thing, which if you haven't heard of the car thing, don't worry, you don't have to know about it for much longer. I think December 9th they're going to completely discontinue this I think we can call a boondoggle of an investment on Spotify's part.

Essentially a streaming speaker for your car. It did not sell well, and it's not going to sell well in the future. And so it looked like they spent a good 10 percent of their and even more so recently focus on this car thing. And that, that focus, that energy is coming from somewhere. And it's not going into.

More useful ventures.

[00:37:20] Samar Shah: That's unfortunate to say, although I don't mind it so much in I, I like companies taking a shot especially when you're trying to get out of the business model that you got sown into over time, you do have to take some shots to get out of it.

I just don't know if this was the shot that I would take.

[00:37:38] Ian Holloway: I was about to say, do you think the car thing would align with it? Moving forward on a advertising, on a understanding your customer basis is it going to enable that?

[00:37:49] Samar Shah: Not at all. I'm trying to be as generous as possible here to Spotify, but your whole goal is to be an advertising platform.

And maybe the car thing helps you advertise better, but I just don't see how your cell phone is the best way to collect data on a user and figure out like what to serve them get contextual data. You can't get any of that with the car thing, right? You may be, you may You can't even get location data with the car thing.

It doesn't have a GPS radio as far as I know. So it's basically just a device that just tells you what somebody has listened to and like, how does that help you? And

[00:38:25] Ian Holloway: really only in the car, right? Like you're getting such a small snippet.

[00:38:30] Samar Shah: Yeah. So in many ways you're like handicapping, capping yourself.

You're making your ad program worse. So I, I didn't understand that at all. There is some value to having a hardware platform. Apple has leveraged this iPhone to great extent to build a really successful software business. But this seemed really misguided to me. I couldn't really give them a generous a generous explanation on that.

[00:38:53] Ian Holloway: Sometimes it would be interesting to see what the discussions were like. When they were planning this out what benefits they truly tried to reap from this.

[00:39:04] Samar Shah: Yeah. And even if they thought, Hey, maybe there's a business case here. Let's take a shot at it. Fine. Fine by me. That's a fine business outcome.

But if I was advising them on the patent side, I would be like, How is this aligned with your stated objective of being an ad company? If we were working with them and we do this with clients all the time Ian, where we're like, we wouldn't file patents on this. We're like, Hey, this is a great business model.

Go for it. But. We'll file one patent, any patents, but they filed what? 20, 30?

[00:39:34] Ian Holloway: Yes. Yes. There was a good amount of effort. A lot of billable hours. I'm sure that were put into this thing. Yeah.

So that's the overall what we saw from Spotify at this point. But I think we found that it lacked a little context.

Comparing Spotify with Competitors

[00:39:47] Ian Holloway: I don't know if you want to talk about Amazon and Google and those guys to see how does Spotify's patent portfolio compare to to, To some of its analogs and competitors.

[00:39:58] Samar Shah: Why don't we do that? Why don't we go to our rubric since we're coming to the end of the podcast anyways, and maybe this will give us an opportunity to talk about the Spotify patent portfolio in a bit more detail, but it will also give some context to our listeners, hopefully. So do you want to walk us through.

Maybe the rubric that we've come up with, this is subject to change as we do more of these podcasts, but I think this is how I would evaluate patent portfolios.

Evaluating Spotify's Patent Strategy

[00:40:23] Samar Shah: And these are some of the things that I think about when I advise clients on portfolio strategies. And I think you do too, Ian. Do you want to walk us through that?

And then we'll tackle these individually.

[00:40:32] Ian Holloway: Sure. First up here we have, does it cover the base technology? Yeah. That mean, are you going to prevent somebody else from coming along and copying what you're doing? Essentially being a second mover and benefiting from all the time and effort you spent on R& D.

Are you going to be able to prevent somebody else from copying you there? In Spotify's case we're looking at their UI and things like that. And the hardware, the nuts and bolts that enable this content delivery.

[00:41:02] Samar Shah: And I think we've given them a pretty generous grade there.

And I think they have done a good job of this, of capturing this like a lot of the content delivery patents, I think are good patents. The UI UX patents are good patents. They filed a lot of patents on the, Actual screens and the display and some of the analytics that they pull and how they, introduce new playlists to people.

All that stuff is innovative and keeps makes for a very sticky product, right? Or customers stick around. And I think they've done a good job of capturing that in their patent portfolio as well. What do you think, Ian?

[00:41:37] Ian Holloway: Yeah, I think they've done, it's been their focus. It seemed like from what we saw in the portfolio.

So, Yeah, I think they've done a good job there. So let's move on then. I guess they got a grade of A for this one. Does it compete cover a competitive differentiation? So I guess this is the question is the patent valuable? Is it something that's going to put you above your, of your competitors or did you just get a patent on something that you can't actually not something of any value at all,

[00:42:10] Samar Shah: I think they do a good job here too. I think in one of our charts, we have that the Actual content delivery, the circuitry and the servers and all that stuff is about a thousand of their 2000 patent filings. And then the UI and the user experience stuff is another thousand.

So probably that's a hundred percent of their portfolio, right?

[00:42:32] Ian Holloway: About two thirds, I think. Three quarters.

[00:42:33] Samar Shah: They, I think they have done a good job of covering these two things the actual delivery of the content, they've done a good job.

Capturing the UI UX benefits relative to other streaming platforms. I think they've done a good job is like you said, Together. It's about two thirds of their portfolio, maybe a little more. So plenty. Plenty of filings there and focus there, which I think is a good thing.

[00:42:55] Ian Holloway: Indeed. Does it include important competitors?

Are we going to step on the toes or prevent them from stepping on our toes of Google, of Apple from Amazon? I guess part of this is between seeing how much litigation they might have been involved in and also seeing how well the landscape is Is it crowded? Is it not crowded?

Have they staked out their spot here?

[00:43:20] Samar Shah: I would say yes and no. Because I think they have done the UI UX stuff, which is their competitive differentiation. So I think they have done a good job there, but they haven't done a good job of this. And maybe this kind of dovetails into our next set of things, but will it.

Prevent, Apple music from using a similar system to serve ads to users. And on that front, they have done a pretty terrible job, right?

[00:43:44] Ian Holloway: That's true.

[00:43:44] Samar Shah: So let's say Spotify stumbles on this system for serving ads. That's like highly profitable, they make. Money hands over fists over on their ad platform, Apple can come in or Amazon music can come in or title or whoever, any of their competitors can come in and be like, yeah, we'll just do the same thing and we'll charge just as much.

And, all this experimentation and time you spent in the wilderness building an ad platform doesn't, Exclude your competitors anymore, right? I would say yes and no, I would maybe give them a C there.

[00:44:14] Ian Holloway: We're going down to a C on that one. How much do they align with their goals going forward? And we'll get to that here. We'll benchmark against the competitors next. I got a little ahead of myself, just got excited. Talking about the,

[00:44:25] Samar Shah: yeah, I might have led us down this road. No. So sorry about that.

But yeah benchmarking against competitors. Pretty terrible job here as well, I think. And maybe we shouldn't be too harsh on them here, because they're not as big a company as Amazon or Google or Apple, certainly. We can't expect them to file the same amount of patents, but I think you've done the search, Ian, and you found that Amazon has about 4, 000 patent filings

[00:44:51] Ian Holloway: directed towards this portion of their industry.

[00:44:54] Samar Shah: Do you want to walk us through it? Or I don't know if you have the numbers in front of you, but I can, I certainly have them in front of my my screen here.

[00:45:00] Ian Holloway: Yeah. If you want to go ahead, if you've got the numbers here.

[00:45:02] Samar Shah: Okay. Yeah. Amazon music, roughly 4, 000 patent filings, a lot of their patent filings are about speech recognition and data analytics.

analytics around that.

[00:45:11] Ian Holloway: So

[00:45:12] Samar Shah: of course, Amazon music's big goal is to distribute content through their Alexa speaker line. So it makes sense that they would file a lot of patents there. Double the number of patents that Spotify has filed and Google has. 15, 000 patents related to music and their YouTube platform.

6, 000 of those are related to ad targeting and another 4, 000 of those are related to building up a marketplace for the ads and auction system.

[00:45:38] Ian Holloway: And that's their bread and butter right there for Google side,

[00:45:43] Samar Shah: one of the most profitable companies in the world, and it is all Because of this.

Relative to Spotify, just 10, 10 X more than 10 X. So, nuts. And a lot of those patents, I think are related to advertising, which is What Spotify needs to do if they want to be in, in that same breath Apple music also about 14.

5 K patents, a lot of them related to data analytics. These other companies are blowing Spotify out of the water. So their benchmarking score it should be lower, but I don't want to ding them too much because they're, these are big companies. Behemoths. These are giant companies, right?

It's just part of Netflix is an interesting comp though, from a patent filing perspective for them, Netflix has 3000 patent filings. And most of their patents are related to content distribution, content video distribution. And content delivery multiplexing and deplexing video files and so on and so forth.

Circuitry at servers for distributing this content which is what Spotify has done as well, historically speaking. But, I'm not the expert here, but I imagine delivering audio content is a lot simpler than delivering video content. I'm

[00:46:50] Ian Holloway: sure it is a lot smaller of a stream needed.

So you can be, we say a little less efficient in your compression and decompression. Algorithms, I'm sure.

[00:47:01] Samar Shah: And Spotify has forever tried to distribute like high res audio files and they have failed and they just keep pushing the launch date back further and further back. Tidal, one of their competitors has been offering it for 10 plus years, right?

That's why Tidal launched. So yeah, you filed all these patents about delivering content, but like, why can't you deliver high res audio files at scale? Okay. So yeah, so I, I don't know. I would probably give them a B or C on the benchmarking front. I

[00:47:29] Ian Holloway: think that's fair without being overly harsh like you said they're just, they're music streaming, whereas all these other companies that are in this space, it's a division, a different business unit that They're fighting against the larger, as you said, behemoth.

 In, in their space, I think they're doing okay. Not a pat it's a pass, but eh, not great.

[00:47:51] Samar Shah: Okay.

Spotify's Missed Opportunities in Advertising

[00:47:51] Samar Shah: So the next one this is the one that I would wait the most, right? This is, I think the most important part of your, Portfolio development strategy. Does it align with your forward looking business plans or R and D spend?

And we talked about this already in so this is a foregone conclusion for our listeners at this point, Spotify wants to be an ad business, right? That's the model that they have chosen to move forward with and model that makes the most sense to me given all the Kind of economic realities on the ground.

And their portfolio, as far as we could tell, it's, what is it? 2 percent of their portfolio is focused on advertising technology.

[00:48:27] Ian Holloway: Maybe a little bit more, but yeah not much.

[00:48:29] Samar Shah: And even the patents that we found related to ad technology were like, Really creepy and terrible patents.

[00:48:35] Ian Holloway: Oh, I liked this one. I like this one. They're going to, they're going to listen into your environment that you're in through your phone and then make recommendations for both music and like what genre you're going to listen to.

So I guess if you're in a library, it's going to. Assume that you're going to enjoy some nice classical music played at volume level one. And if you're walking by a construction site, I don't know what you're going to get, but it's going to be loud. Would you have recommended filing a patent like that summer?

[00:49:09] Samar Shah: No, I would tell them to file. Patents on ad personalization all day, every day, but this one's creepy. Like this is just a PR nightmare, right? Somebody can pull up this patent and turn it into a story and be like, Spotify spying on you, you know, not a good look.

Yeah. So I think they get a definitive F there. I think that's probably where I would make the most amount of changes if I was a Spotify's patent counsel. But yeah, really underweight there. Particularly compared to Google and YouTube, right? Like Google is spending 8, 000 patent filings on their ad platform and the ad program for YouTube and Spotify, which is It's just peanuts compared to that.

[00:49:53] Ian Holloway: So I guess we can revisit in two years to see if they've done any, anything else. But yeah, for now, it's something of concern,

[00:50:00] Samar Shah: yeah. And then the last metric we have is does it anticipate potential horizontal or vertical integration in the industry? I talk about this with my clients all the time where.

We look ahead in the industry and we say, okay, is there going to be horizontal integration or vertical integration? If there is often the patents at the intersection of those integration points tend to become the most valuable. I always get my clients to look forward in that way. So this, vertical integration would be like all the steps.

Steps or layers that go into delivering audio content to a user. So that would be, from, acquiring content prioritizing content actually processing the content and then distributing the content. Not just over the internet, but also on a particular device, right?

Like Alexa devices or the car thing device. I don't think, I didn't see a ton of patents there from a vertical integration point of view, except for the car. I was about

[00:50:56] Ian Holloway: to say the car thing is it, and yeah, they tried.

[00:51:00] Samar Shah: I didn't see many patents related to horizontal integration.

Either, although I don't think I've judged them harshly there too, because they have done acquisitions from a business perspective to get there. And maybe there's no way to patent stuff at that, those intersection points, because they're much more business oriented than technology oriented. But I would certainly have looked around to see also, I don't think there's going to be a lot of horizontal integration in this space.

Anyways I would love to see them. File patents on a vertically integrated system or those integration points, because as AI becomes a thing user experience becomes much more important. And if you can deliver an AI driven user experience from start to finish, that's maybe where the future is going to be.

If I were advising Spotify, we would spend a lot of time on how AI plays into this story, and I think it plays into the vertical integration story eventually. And. I would try to be there ahead of the business from a patent perspective.

[00:52:00] Ian Holloway: All right.

[00:52:02] Samar Shah: All right.

Conclusion and Final Thoughts

[00:52:03] Samar Shah: So I think I think that covers it.

Hopefully we've done a comprehensive, but not a boring job on covering Spotify and their patent portfolio. Thanks everyone for listening in. Do you have any other parting thoughts before we close off?

[00:52:17] Ian Holloway: No, just a big thank you. And I hope this is the start of many, dives into the intellectual property side of some of these businesses.

[00:52:27] Samar Shah: Absolutely. Yes. Thanks everyone for listening.

The Patent Strategy Podcast is recorded for informational purposes only and should not be considered legal, business, or professional advice. We are not responsible for any lost damages or liability that may arise from the use of this podcast. The podcast is not intended to replace professional legal advice and should not be treated as such.

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