It’s been nearly two years since Spotify fell out of a long-term licensing deal with Universal Music Group.
Since then, the service’s deals with UMG’s biggest two recorded music rivals, Sony Music Entertainment and Warner Music Group, have also expired.
MBW broke the news last year that Spotify was negotiating to drive down the share of revenue it hands out to record labels from 55% – closer to 52% or even 51%.
Since that point, repeated attempts at reaching an agreement between Spotify and the rights-holders have failed, while key Spotify licensing executives such as Francis Keeling and Petra Hansson have left the digital music company.
Today, the Financial Times is reporting optimistic news: it says that “licensing talks have picked up considerably” between the two parties – and even that “deals [with the major labels] could be inked within weeks”.
According to the FT’s sources, Spotify has buckled on one crucial point: finally agreeing to allow blockbuster album releases to be ‘windowed’ on its premium tier.
It would be a big step into the future for the music business if true, and would certainly help Daniel Ek breathe a sigh of relief.
A lot hangs in the balance: Spotify’s long-awaited IPO attempt is believed to be contingent on its ability to both reduce the revenue share it’s paying labels, while securing new long-term licensing agreements.
Ek’s team shouldn’t rush to pop champagne corks just yet, however…
MBW hears that, in order to get the majors to sign on the dotted line on a revenue reduction, a number of suggestions have been put forward by the ‘Big Three’ to soften the blow.
One of the most essential, as mentioned, is the ability to ‘window’ albums on Spotify’s paid-only tier – but that’s not the end of the requests.
The labels also want to see Spotify offer them (and their artists) more control generally over the availability of their music – giving each campaign more direct flexibility in balancing what goes ‘free’ and what goes ‘paid’.
(One highly senior major label figure in the US even told us they’d like to see Spotify’s free tier become the long-term home for official singles, but not for full albums – if consumers want permanent access to a full LP, they suggested, fans should have to pay.)
In addition, the majors are keen to secure marketing guarantees – whereby Spotify commits to promoting, via audio and visual ads, certain artist releases on its platform. Spotify’s active user base is currently believed to be in the region of 125m.
And at least two major labels, MBW hears, have also suggested that Spotify agree to hitting subscriber growth targets.
Presumably, if the streaming company does not meet these targets in future, any agreed revenue share reduction would be paused or reversed.
Finally, there’s the question of greater equity stakes.
Although no major label (on or off the record) has confirmed this to MBW as a possibility, you’d have to expect that Spotify offering up a bigger chunk of its pre-IPO shareholding would be a tempting bartering tool.
One senior major label insider told MBW today – after the FT’s story was published – that they were “confident a deal would get done” but “didn’t want to speculate with regards timing”.
Spotify recently announced it had surpassed 50m paying subscribers worldwide – representing growth of 10m in less than six months, for the second time in a year.
Recent Bloomberg estimates suggest that, in order to prove a path to profitability, Spotify will need to increase its paid subscriber base to 60m.
In addition, it will need to lift its annual gross profit margin (the difference between revenues and cost of revenues) to 30% – from the 16.6% gross margin it posted in 2015.Music Business Worldwide
