Spotify in Talks Over Music Rights
August 23 2016 - 5:10PM
Dow Jones News
As Spotify AB gears up for a potential initial public offering
next year, the music-streaming service is missing one key component
in its pitch to investors: rights to play the music in years to
come, according to people familiar with the matter.
Spotify is now operating on short-term extensions of its old
contracts with all three major record companies, having been on a
month-to-month basis with at least one of the labels for nearly a
year. It is negotiating new deals that would make its finances more
attractive to investors.
Spotify, which saw its net loss increase to roughly $200 million
last year even as revenue doubled to more than $2 billion, wants to
pay a smaller share than the nearly 55% of its revenue that it
currently pays to record labels and artists, according to people
familiar with the matter.
It pays roughly an additional 15% to music publishers and
songwriters.
But some major label executives want Spotify to pay them as much
as 58% of revenue from both its free and paid tiers. That is what
Apple Inc. pays for Apple Music subscribers who aren't on free
trials, people familiar with the matter said. Apple has more than 5
million users on free trials, they said.
Some executives think Spotify should pay more than it did when
it was getting off the ground in the U.S. in 2011.
Other label executives said they may let Spotify pay lower
rates, but only if the streaming service grants them other rights,
such as the ability to make some music available only to the
service's 30 million-plus paying subscribers and not to its more
than 70 million free users.
Some also want Spotify to limit free usage, a move they hope
would drive more paid subscription.
Spotify is under mounting pressure to go public thanks to the
terms of its most recent round of financing: $1 billion in
convertible debt issued by a group that includes private-equity
firm TPG, hedge fund Dragoneer Investment Group and Goldman Sachs.
The debt carries an interest rate that increases the longer Spotify
delays an IPO, while the investors are also entitled to a 20%
discount on shares if they convert their debt into equity—a
discount that also balloons the longer Spotify takes to go
public.
The licensing disagreement highlights the tricky relationship
between Spotify and the major record labels, which all took
minority stakes in the Swedish outfit as part of their initial
licensing deals. As investors, the labels have a direct interest in
seeing Spotify succeed, while they are also counting on
subscription streaming in general to make up for a long decline in
record sales. Paid services yield far more per user than
ad-supported ones, and Spotify is the world's biggest subscription
service, with double the 15 million paying subscribers that
one-year-old Apple Music has.
But the labels and Spotify don't see eye to eye on some
fundamental issues. In addition to what Spotify should pay for the
music, record companies and their artists have also butted heads
with Spotify over its practice of making its entire 40 million-song
catalog available to both free and paid users at the same time. Pop
star Taylor Swift, British singer Adele and rocker Gwen Stefani are
among the artists that have withheld albums from Spotify because
they didn't want to make them available on the free tier, where
users can listen to entire albums, playlists or artist catalogs in
a random order they can't control.
Spotify has privately explored allowing several acts to release
music on the paid tier only for short windows of time, but hasn't
given the green light on adoption of such a practice, worried that
such a move would drive its free users to other sites such as
Alphabet Inc.'s YouTube where they might find unsanctioned,
user-uploaded versions of the new tunes free, people familiar with
the matter said.
Some label executives would also like Spotify to limit the time
that users can listen free, since most free listeners who convert
to paid subscriptions do so within their first six months on the
service, according to research by financial services firm Cowen
& Co. At the end of last year, roughly 35% of Spotify's free
users were converting to paid subscriptions, up from 25% two years
ago, according to Cowen's research.
To improve its margins ahead of an IPO, Spotify also could raise
subscription prices, which have been flat at $10 since it launched
in the U.S. in 2011. But with a host of deeper-pocketed competitors
including Apple Music, Alphabet's YouTube Red and Google Play
offering similar services for $10 a month subscription, Spotify
isn't keen on being the first to raise prices.
Write to Hannah Karp at hannah.karp@wsj.com
(END) Dow Jones Newswires
August 23, 2016 16:55 ET (20:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Alphabet (NASDAQ:GOOG)
Historical Stock Chart
From Aug 2024 to Sep 2024
Alphabet (NASDAQ:GOOG)
Historical Stock Chart
From Sep 2023 to Sep 2024