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The Patent Strategy Podcast is a twice-monthly podcast where hosts Ian and Samar explore the patent tactics and portfolios of leading companies in tech, media, and beyond. Each episode breaks down a company's business strategy, analyzes their patent portfolios, and scores their patent strategy efforts. You'll gain valuable insights into the business landscape these companies operate within and learn how to effectively build a patent portfolio to support business objectives. Join us to deepen your understanding of patent and business strategy.
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?
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.
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.
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
Samar Shah: explain what the
podcast is going to be about.
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.
Ian Holloway: I hope so.
Yes.
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.
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.
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.
Ian Holloway: Should be fun.
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?
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
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.
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
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.
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.
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.
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?
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.
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?
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?
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.
Ian Holloway: And that's on top of what
the record companies are already taking.
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,
Ian Holloway: but they've tried
to fight against this too, right?
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.
Ian Holloway: Yeah, you don't want
to have those barriers up to be
able to sell your product to people.
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.
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.
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.
Ian Holloway: So perhaps we'll see
that pendulum swing back the other way.
Oh, be interesting.
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.
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.
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.
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.
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.
Ian Holloway: How do they how
do they acquire that cashflow
positive position here?
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.
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?
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
Ian Holloway: they've just they've created
a business culture that Would you describe
this kind of soft, in a competitive sense?
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.
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?
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.
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
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.
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.
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?
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,
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.
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
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.
Ian Holloway: Yeah, but that's
not exclusive anymore either.
I don't think so.
Samar Shah: Is that right?
Ian Holloway: Yeah.
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.
Ian Holloway: We got one
good thing out of it there.
Samar Shah: Okay.
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.
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?
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.
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.
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
Ian Holloway: 15 percent or
so of what you would file.
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.
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
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.
So we've looked at
Spotify's patent portfolio.
Yes.
We want to talk about what we found.
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
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.
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.
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.
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?
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
Ian Holloway: really
only in the car, right?
Like you're getting such a small snippet.
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.
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.
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?
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.
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.
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.
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.
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.
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?
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,
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?
Ian Holloway: About two thirds, I think.
Three quarters.
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.
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?
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?
Ian Holloway: That's true.
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.
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,
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
Ian Holloway: directed towards
this portion of their industry.
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.
Ian Holloway: Yeah.
If you want to go ahead, if
you've got the numbers here.
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.
Ian Holloway: So
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.
Ian Holloway: And that's their bread
and butter right there for Google side,
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
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.
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
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.
Samar Shah: Okay.
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.
Ian Holloway: Maybe a little
bit more, but yeah not much.
Samar Shah: And even the patents that
we found related to ad technology were
like, Really creepy and terrible patents.
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?
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.
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,
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
Ian Holloway: to say the car
thing is it, and yeah, they tried.
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.
Ian Holloway: All right.
Samar Shah: All right.
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?
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.
Samar Shah: Absolutely.
Yes.
Thanks everyone for listening.
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