How Spotify is finally gaining leverage over record labels

The problem with Spotify going public has always been that the record labels own the music. They force Spotify to pay 70 percent or more of its revenue to them for royalties, and could jack up that price if Spotify got too profitable.

That’s why over the past few years, Spotify has been pushing five different paths to putting pressure on the labels to cut it a better royalties deal. They all hinge around the idea of making the labels need Spotify as much as it’s historically needed them.

When Spotify launched in 2008, it had no power in the relationship since it had so few listeners. It needed to raise over $180 million in its first few years and pay the labels a huge upfront advance on royalty payments to convince them to let it launch in the US. Spotify also had to sell the labels equity so even if it succeeded, they’d be financially protected.
But now that Spotify has grown to 50 million paid subscribers and a huge base of free ad-supported listeners, it’s emerging from the streaming pack including YouTube / Google Music, Pandora, Apple Music, and Amazon so rights owners can’t just favor them instead. Spotify has begun to gain some leverage over the labels so that it can make money without them and they need it to have a hit record.
Here are the five ways Spotify is weakening the the record companies’ iron grip on music:

Dictating The Top 40

Spotify’s Discover Weekly and Release Radar playlists aren’t just some of its most popular and differentiated features. They give Spotify newfound power to choose what artists and songs a large swath of its listeners hear. Instead of focusing on peer-to-peer sharing or direct channels between the artists and the fans, it’s prioritized music discovery methods that put it in control. Spotify wants to take the place of the thousands of radio stations that record labels typically kiss up to.

Spotify’s owned playlists like Discovery Weekly let it influence what gets popular

If Spotify can use its owned playlists to make or break different artists, it can use this influence to demand better deals from the labels. Record companies that offer it lower royalty rates, don’t do exclusives with its competitors like Apple Music, or get their artists to release special re-recorded Spotify Sessions of their hits could see their artists placed more prominently in Spotify’s playlists and their audiences grow. Labels that don’t play ball with Spotify might sublty notice they’re not getting the same playlist love. Spotify’s already been accused of this retaliatory behavior. Even though it denied the practice, the threat could be enough to coerce the labels.

Scale

Spotify needs all the major record labels to let it stream their content, otherwise its catalogue would be confusingly incomplete. Most listeners don’t know what artists are on which of the three major labels – Sony, Warner, and Universal. So the result of any one of them refusing to work with Spotify is that it would make almost a third of its music unavailable, and drive users to its competitors.
But that was when Spotify had so few listeners that the labels didn’t need it. Now Spotify contributes a big enough percentage of record labels’ total royalties that they have a lot more to lose from cutting it off. As we said above, their artists would suffer from the loss of distribution, but they’d also suffer a loss of revenue. Spotify’s size has made record labels pulling out into either a bad bet or a bluff.

Access Restrictions

The biggest driver of Spotify’s success has been its free ad-supported tier that serves as a subscriber acquisition funnel. But some labels don’t want their music available to listeners that earn them less per stream than paid subscribers, at least when it first comes out. Now the Financial Times reports Spotify is in negotiations with labels to allow them to withhold top new releases from the free tier in exchange for better royalty rates.
Essentially, Spotify has built its ad-supported audience to be so big that it can now restrict their access to content as a bargaining chip. Some artists like Taylor Swift have been arguing for this option for years, but now Spotify has the scale to demand a financial incentive in return.

Becoming A Label

If Spotify owns the rights to the music it streams, it’s who earns the royalty payouts. That’s why  resources tell TechCrunch that Spotify has discussed traditional record label-fashion offers with artists. Musicians who cut these offers may want to get a coins strengthen in alternate for Spotify owning a percentage in their recording sales.

Spotify CEO Daniel Ek

Those offers ought to probably include exclusivity clauses round whilst and where the artists should distribute their music somewhere else, however that’s now not showed. Apple already offers up-the front financial repayment in alternate for exclusivity, as Hazard The Rapper just discovered he turned into paid $500,000 and given a industrial to make his album Coloring E book and Apple tune exceptional for the first  weeks. Spotify on the other hand is asking into extra inclusive offers that align them with artists’ lengthy-term fulfillment.

Power To The IPO

Employing all these strategies, Spotify is now using its leverage with labels to negotiate lower royalty rates. TechCrunch previously reported that Spotify is considering delaying its IPO until 2018 to allow these sources of leverage to grow so it can score a better deal before going public. Spotify declined to comment on this story.
Whilst at the start glance, Spotify paying less for in keeping with flow may seem worse for artists looking to make a dwelling on track. But the achievement of Spotify and the path it can forge for streaming offerings is also in the hobby of those artists. Not best should royalty charges start to climb towards CD sale sales if it grows huge enough. Spotify is also incentivized to assist artists use streaming to promote their products and price ticket income where the majority of their earnings comes from Whilst it takes a cut. It’s becoming the portal to music.

Napster made track piracy mainstream and the document labels sued it to death without a replacement inflicting users to fragment across underground down load apps they couldn’t fight. Now 15 years later, comfort has yet again depowered document labels in favor of broad get right of entry to to the pantheon of track. But this time, 50 million human beings are paying for it.

Posted in: