Spotify looks to squeeze record labels over streaming rights ahead of IPO

Posted:
in iPod + iTunes + AppleTV edited August 2016
Coming off a year of heavy net losses, Spotify, the world's largest music streaming service, is attempting to negotiate better terms with record labels as it prepares for a potential initial public offering next year.




According to a report from The Wall Street Journal on Tuesday, Spotify is streaming music on short-term contract extensions from all three major record companies as it tries to negotiate more appealing deals for potential investors.

A separate report from Music Business Worldwide claims Spotify's long-term contract with Universal Music Group expired more than a year ago, while similar deals with Warner Music Group and Sony Music Entertainment ended earlier this year.

Spotify is looking to balance a growing subscriber and free user base with slim margins on streaming rights. Last year, Spotify's losses mounted to almost $200 million despite an increase in revenue to $2 billion, double what it made the year prior, the WSJ report said.

The company wants to pay less than the current 55 percent share of revenue it hands over to content owners and about 15 percent to music publishers and songwriters.

Apple Music pays out 58 percent of subscriber revenue to record labels, a figure some music executives want Spotify to pay for both paid and free user tiers. That might be a hard pill to swallow for Spotify, which has more than 30 million paying users and another 70 million listening for free. By comparison, Apple Music had 15 million paying subscribers as of June.

Some labels are said to be willing to trade lower rates for other rights like control over content access, or the ability to release new music only to Spotify's paying subscribers. Others would like to see limitations on the free-to-stream tier, a strategy that would dissolve Spotify's core feature of offering both paying and free users access to the same music catalog. And of course there is the option of raising subscription pricing.

Spotify is under pressure to reach amicable agreements with all three major record labels to boost finances ahead of an expected IPO. Making the situation worse for the company is increased competition from deep-pocketed rivals Apple and Google, both of which can weather potential price bumps and industry headwinds.
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Comments

  • Reply 1 of 21
    This + Amazon's goal of a $5/month Echo Music plan = streamers' pressure to remove profit from labels and composers. It must make Apple Music attractive -- in comparison -- to these labels.
    cali
  • Reply 2 of 21
    calicali Posts: 3,495member
    Spotify is gonna collapse. And why was Giggle mentioned in the last paragraph? They're not even a thought.
    lostkiwijbdragon
  • Reply 3 of 21
    Amazon is willing to take losses in order to build a customer base. Spotify has no such option. 

    Apple is willing to give away services to sell hardware. 

    Spotify is in trouble. 
    lkrupp
  • Reply 4 of 21
    aylkaylk Posts: 54member
    Amazon is willing to take losses in order to build a customer base. Spotify has no such option. 

    Apple is willing to give away services to sell hardware. 

    Spotify is in trouble. 
    On top of that their product is not keeping up with the competition, in fact it gets worst with time. Lyrics feature: removed, new release notification feature: removed, Apple TV app: not existent. The value of their service is constantly decreasing, I'm sure I'm not the only one wondering if it is still worth paying for it.
    cali
  • Reply 5 of 21
    Rayz2016Rayz2016 Posts: 4,627member
    AppleInsider said:
    And of course there is the option of raising subscription pricing. 

    What? So the paying subscribers are subsiding the free tier?
    jbdragon
  • Reply 6 of 21
    jakebjakeb Posts: 557member
    Doesn't seem fair to pay artists less because you decided to not charge most of your customers. 
    calipscooter63lostkiwijbdragon
  • Reply 7 of 21
    Great time for an IPO.  I'm sure the market won't notice the company is bleeding to death.  And I'm sure the labels will be like "Yeah, great, pay us like half the chump change you're currently paying us so you can get rich.  Totally."

    With Apple Music, Amazon and so many other small timers offering alternative streaming ecosystems, what incentive does the record industry have to prop up the least healthy member of the herd?
  • Reply 8 of 21
    Amazon is willing to take losses in order to build a customer base. Spotify has no such option. 

    Apple is willing to give away services to sell hardware. 

    Spotify is in trouble. 
    But the service in question, Apple Music, is not given away. I don't see Apple doing anything other than being a legitimate competitor. They don't offer a free tier and the rates they offer (in developed countries) isn't cheap enough to be a "no-brainer".
  • Reply 9 of 21
    calicali Posts: 3,495member
    Amazon is willing to take losses in order to build a customer base. Spotify has no such option. 

    Apple is willing to give away services to sell hardware. 

    Spotify is in trouble. 
    Milk Music under Sammy folded. Imagine Spotify.
    lostkiwi
  • Reply 10 of 21
    If Spotify folded it might force the streaming industry into a rethink - artists are massively underpaid for music
    lostkiwi
  • Reply 11 of 21
    fracfrac Posts: 480member
    Labels: "OK...we will take less so Spotify can fleece the IPO buyers with an even more worthless share value that has less chance of any return and we won't tell Apple 'cos everyone knows they can afford it and they're greedy and anticompetitive and and....Yep, that should do it"
    Oh wait...
  • Reply 12 of 21
    lkrupplkrupp Posts: 7,153member
    Amazon is willing to take losses in order to build a customer base. Spotify has no such option. 

    Apple is willing to give away services to sell hardware. 

    Spotify is in trouble. 
    But the service in question, Apple Music, is not given away. I don't see Apple doing anything other than being a legitimate competitor. They don't offer a free tier and the rates they offer (in developed countries) isn't cheap enough to be a "no-brainer".
    Well that’s the thing people refuse to understand about Apple. Apple has never used the “loss leader” style of marketing. They are in the game to make money while producing great products and services. Apple has demonstrated over and over that market share bragging rights are secondary to keeping margins high enough to make a good profit. What benefit does Spotify get from having supposedly 70 million free subscribers other than claiming it’s the biggest service? How do they monetize those leeches? Sell their data like Google? They still LOST $200 million. Apparently they think those free subscribers are going to give them leverage in negotiating lower rates from the record labels. Good luck with that.
    lostkiwi
  • Reply 13 of 21
    evilutionevilution Posts: 1,360member
    So, Apple came in, offered to make more money for the music companies by getting them more money for what they make.

    Sounds similar to the ebook thing that cost them millions in fines.
  • Reply 14 of 21
    gatorguygatorguy Posts: 20,722member
    jakeb said:
    Doesn't seem fair to pay artists less because you decided to not charge most of your customers. 
    It doesn't seem fair but neither Apple nor Spotify is paying artists anyway (for the most part). They pay the labels a fee along with a much smaller percentage to whoever wrote the song. If you're worried about the "poor artists" then it's the labels that need to be in the spotlight as that's who most often is supposed to make sure the performer gets a fair share. Of course some of the very biggest names may be both artist and label or have unusually good contracts which is why we get comments from those rich performers like Ms. Swift and Mr. West. 

    Regarding the percentages that Apple and Spotify pay out I think they're near identical from what I've read, perhaps varying no more than a percent or two if that? I believe both supposedly pay out around 70% in total of the gross revenues. In any event I personally would be surprised if Spotify was able to negotiate smaller fees but who knows? Amazon may have somehow finagled better terms, otherwise I don't see how they could possibly do anything for $5 or less as the rumors say. 
    edited August 2016
  • Reply 15 of 21
    holyoneholyone Posts: 389member
    Amazon is willing to take losses in order to build a customer base. Spotify has no such option. 

    Apple is willing to give away services to sell hardware. 

    Spotify is in trouble. 
    Should have sold themselves to Apple when they could
  • Reply 16 of 21
    holyoneholyone Posts: 389member
    cali said:
    Amazon is willing to take losses in order to build a customer base. Spotify has no such option. 

    Apple is willing to give away services to sell hardware. 

    Spotify is in trouble. 
    Milk Music under Sammy folded. Imagine Spotify.
    Is Apple this disruptive ? Even when they are sub-par ? Maybe the Ausi have something to panic about then
  • Reply 17 of 21
    larz2112larz2112 Posts: 286member
    I've been saying this for a few years now. Most streaming music companies are built around a business model that DOES NOT WORK. Plain and simple. Spotify already pays content owners, music publishers, and songwriters ridiculously low royalties compared to competitors, and NOW they want to pay EVEN LESS. Sorry Spotify. Time for you to find something else to do and let those who know how to make streaming music profitable for ALL parties involved take over.
  • Reply 18 of 21
    larz2112larz2112 Posts: 286member
    gatorguy said:
    jakeb said:
    Doesn't seem fair to pay artists less because you decided to not charge most of your customers. 
    It doesn't seem fair but neither Apple nor Spotify is paying artists anyway (for the most part). They pay the labels a fee along with a much smaller percentage to whoever wrote the song. If you're worried about the "poor artists" then it's the labels that need to be in the spotlight as that's who most often is supposed to make sure the performer gets a fair share. Of course some of the very biggest names may be both artist and label or have unusually good contracts which is why we get comments from those rich performers like Ms. Swift and Mr. West. 

    Regarding the percentages that Apple and Spotify pay out I think they're near identical from what I've read, perhaps varying no more than a percent or two if that? I believe both supposedly pay out around 70% in total of the gross revenues. In any event I personally would be surprised if Spotify was able to negotiate smaller fees but who knows? Amazon may have somehow finagled better terms, otherwise I don't see how they could possibly do anything for $5 or less as the rumors say. 
    Even in cases where the content owner (label), publisher, songwriter, and artist are the same person, the royalty payouts are ridiculously low. A "fair share" or "unfair share" of practically nothing is pretty much nothing. As Billy Preston said, "Nothin' from nothin' leaves nothin'."
  • Reply 19 of 21
    gatorguygatorguy Posts: 20,722member
    larz2112 said:
    I've been saying this for a few years now. Most streaming music companies are built around a business model that DOES NOT WORK. Plain and simple. Spotify already pays content owners, music publishers, and songwriters ridiculously low royalties compared to competitors, and NOW they want to pay EVEN LESS. Sorry Spotify. Time for you to find something else to do and let those who know how to make streaming music profitable for ALL parties involved take over.
    I don't think that's the case. You might look into it a bit more to see compare royalties between the different streaming services. 
  • Reply 20 of 21
    linkmanlinkman Posts: 916member
    Spotify is either poorly managed (paying employees too much/paying too much for everything/gouging VCs/the like), paying content providers too little, and/or not charging enough for ads and subscriptions. Their business model is currently a money pit for their investors.

    This graphic is quite telling about how well they pay (or at least used to pay, it's a bit old) vs. the competition and other media: http://www.informationisbeautiful.net/2010/how-much-do-music-artists-earn-online/


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