Spotify’s deals with three of the largest record labels in the world have all expired, with Universal, Warner and Sony currently on rolling deals, according to reports. This could be a problem.
Spotify’s business model is pretty straightforward. It strikes up deals to host music on its service, which it then releases in full to its subscribers. It makes money on complementary ads, with those subscribers that pay more hearing less of them.
Though straightforward, it has so far proved unprofitable, with the company losing nearly $200m last year even after a near-doubling of revenues to $2bn.
This is despite its negotiations with major labels back in 2011 producing very favourable terms for the Swedish company.
While Apple Music is thought to pay 58pc of its revenues towards labels and artists, and other rivals pay up to 60pc, a new report suggests that Spotify negotiated a 55pc rate back in 2011.
There are additional payments paid out to artists and labels by all streaming providers, though Spotify is still reportedly on the lower end of the payback spectrum.
According to MBW, the company is seeking to drop that rate even further in current negotiations, which is helping to create an impasse with major labels.
Add to that the fact the company is widely expected to target an IPO in the near future, and the shifting sands could become a worry.
An issue Spotify is facing is how quickly it releases music onto its service, with suggestions that the immediacy is a problem.
Some artists hold back their music from Spotify due to this issue, with the logic being those who are only willing to stream the music should not receive the same treatment as those who shell out to actually buy albums or songs.
As The Wall Street Journal notes, artists like Adele (25 was released on Spotify 217 days after release) and Coldplay (A Head Full of Dreams, seven days) have held songs back in the past.
“If Spotify just windowed every new album for two weeks on premium, one rule for everybody, 90pc of their problems would go away,” MBW quoted a source as saying.
With Apple Music reportedly paying more, and Spotify already heavily advertising new pricing structures, getting concrete deals in place with major labels, rather than rolling contracts, should probably be the priority.
Complicating matters further is the shareholder make-up of Spotify, with the three major labels reportedly minority stakeholders in the company as part of the original licensing deals.
Therefore, it’s in their interest for the company to prosper. With competition from the likes of Apple Music, YouTube Red and Google Play, finding a new pricing structure, release programme and overall revenue model is a difficult thing to achieve.
“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 US in 2011,” said the The Wall Street Journal.
However, with the above competitors on the market, who really wants to be the first to raise prices?
Main Spotify image via George Dolgikh/Shutterstock