Spotify is out of contract with all three major labels – and wants to pay them less

Spotify is out of contract with all three major music companies, MBW has learned, with a dispute over revenue splits bringing disharmony to negotiations.

The Swedish streaming company has been out of a long-term deal with Universal Music Group for more than a year, say our sources.

Its contract with Warner Music Group expired in early 2016, while its licensing agreement with Sony Music Entertainment ran out of juice a few months ago.

In practical terms, this isn’t a huge problem.

Spotify continues to be licensed by all three majors on a rolling month-by-month basis, and the possibility of UMG, Sony or Warner catalogues being pulled is widely regarded as out of the question.

The majors, have, however, gnashed their teeth a little over Spotify’s recent promotional deals – not least its new family plan, which matches Apple Music‘s equivalent by offering up to six people premium access for just $14.99 per month.

Some parties within Universal, Sony and Warner are believed to be uneasy about Spotify’s decision to announce such promotions without any long-term licensing agreements in place. (The situation was described by one senior major source to MBW today as a “very grey area”.)

Spotify’s investors, meanwhile, must be concerned about Daniel Ek‘s chances of pulling off an IPO without long-term major label deals: the majors own around 75% of global recordings market share.

The bigger story here, however, is the reason behind the licensing impasse.

MBW understands that previous Spotify licensing deals with the majors, struck by the likes of Universal’s Rob Wells, were softer – revenue share-wise – than contracts agreed with rivals such as Rdio.

This was initially justified as a ‘marketing discount’ for Spotify, with Daniel Ek committing to spending a portion of the money saved on swiftly growing his company’s footprint.

So far, however, that agreement hasn’t budged.

MBW understands that the Swedish streamer continues to pay a revenue share of around 55% to labels (not including publishing money).

The now-bust Rdio, for comparison’s sake, paid around 60%.

The major labels, unimpressed with some of Spotify’s recent spending decisions, believe that now’s the time to up this figure. So where do they want to take it?

Well, it’s common knowledge that Apple Music is paying 58% of revenue to labels – after users’ free trial periods have finished.

The majors want Spotify to move its revenue share up towards that point.

Loss-making Spotify, though, is attempting to push this revenue share down, say MBW’s sources.

Yup: that means paying labels and artists a smaller slice of the proceeds.

How far down Spotify want to push this rev share is a matter of debate: one label source told us today that Spotify has asked to go below 50%, but a senior Spotify source flatly told us this is untrue.

(Apple is also believed to pay publishers 13.5%-15% of revenue depending on the territory – slightly higher than Spotify.)

Regardless, the idea of Spotify paying labels – and artists – a lower portion of its income is bound to be highly contentious.

In recent years, Daniel Ek’s business has worked hard to turn around its reputation amongst acts previously seen as anti-Spotify, such as Pink Floyd, Metallica and Placebo.

Spotify’s negotiation team – including former UMG exec Francis Keeling and Chief Content Officer Stefan Blom – have some strong arguments in their corner.

For one thing, they have pointed out to labels that Apple Music’s 58% rev share figure only applies after its three-month free trial. A blended rev share rate, therefore, wouldn’t be as impressive.

In addition – and this is really the crux of the debate – Spotify needs the majors to cut it some slack if it’s going to be able to compete on any level with Apple’s spending power, let alone that of Google and Amazon.

Across 2015, Spotify posted a $194m loss from revenues of just over $2bn.

84% of this revenue figure – or $1.83bn – went back out the door in ‘royalty distribution and other costs’.

The precise amount that went to labels and publishers combined is believed to be just under 70% of revenue.

The negotiation between the majors and Spotify, according to numerous MBW sources, remains optimistic on both sides.

The likely outcome, said one, would be a licensing deal stuck at around the same level it has stood for the past three years.

There are, however, other flashpoints.

Spotify has recently explored the possibility of locking down artist exclusives – and come close with at least one major-signed act.

The streaming company is philosophically opposed to this kind of deal, say insiders, but is equally sick of watching Apple and TIDAL lock down artists such as Drake, Frank Ocean and Kanye West for varying periods.

The major label point of view: if we give Spotify a break by reducing our rev share, and that extra money then goes direct to a blockbuster artist who is signed to us as an exclusive payment, haven’t we just stiffed ourselves?

An interesting balance of power.

Another big talking point: windowing. (Aka: the locked exclusivity of some records on Spotify Premium – and off Spotify’s free tier – for certain periods of time.)

According to MBW’s rock solid sources, this is now on the table in Spotify’s negotiations with major labels.

One powerful rights-holder, who works outside the major label world, recently told us: “If Spotify just windowed every new album for two weeks on premium, one rule for everybody, 90% of their problems would go away.”

However, a senior major label figure told us today that the majors weren’t necessarily all dead-set on Spotify making hard-and-fast rules on windowing.

“Spotify’s free tier is one of its only real effective advantages over tech giants with masses of resources,” they told us.

“We all understand that – and the last place most of us want streaming to end up is a straight fight between Apple and Google.”Music Business Worldwide

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