SPOTIFY NEGOTIATIONS:
A WIN-WIN SCENARIO?

A slightly smaller piece of a much larger pie—that’s how many rights holders are characterizing a potential dip in payments from Spotify, as licensing talks come down to the wire ahead of the streamery’s IPO.

In its ongoing negotiations with the music companies over new deals, Spotify, which continues to operate at a loss, is pushing for a nearly 15% decrease in its payment to the rights holders; That would be accomplished by cutting its royalty fees to about 52% of sales from the present 58%, which Spotify asked for in its most recent proposal a month ago, according to Financial Times sources. The dominant streaming service presently pays out 70% of overall streaming revenue, including ad revenue from the free tier.

But the labels and publishers want something in return for making this concession—and the option of an exclusive paid tier is considered by most to be not nearly enough. What’s more, if the music companies agree to cut Spotify a larger piece of the pie, Apple, which is believed to get a less than 30% cut, will almost certainly demand a comparable rate increase.

And what of the widely held belief that a $2-or-$3 cut in the standard $10/month subscription rate would lure millions of those presently on the fence about buying into premium streaming? Would a rate reduction cause Spotify and the other premium services to experiment with lowering the monthly fee?

Each side in the present standoff has real leverage: Spotify represents the tantalizing promise of future prosperity for rights holders, who in turn hold the key to Spotify’s IPO, which can’t plausibly happen until all the new deals are in place. But if, on the run-up to the IPO, Daniel Ek’s streaming colossus is able to announce to the financial media that the new deals not only are in place but also at a more favorable rate to Spotify, the resulting headlines would send the company’s valuation through the roof at the strategically optimum moment.

Each side in the present standoff has real leverage: Spotify represents the tantalizing promise of future prosperity for rights holders, who in turn hold the key to Spotify’s IPO, which can’t plausibly happen until all the new deals are in place.

Given all that, the most compelling concession Spotify could make to the rights holders would appear to be shares in the company—lots of them. With the possibility of increased equity participation for labels and pubcos, it seems likely that the reduced rate would be more than offset by what is shaping up to be the biggest entertainment IPO of the year. In addition to explosive earnings, Spotify’s public offering will almost certainly generate not just the aforementioned hype on the part of the financial media but huge mainstream PR as well, driving awareness and spiking subscriptions. Will a favored-nations policy give Apple, Pandora, Amazon and the newly SPRINT-fortified Tidal the same break? The smart money says yes, as growth in streaming overall has lifted all boats—Swedish boats in particular.

So there’s reason for optimism, but a pair of big questions remain: How much of the coming windfall, which many top execs believe could power a doubling of the biz within a few years, will flow to creators? In particular, will the compensation of songwriters—without whom all those billion-streaming songs wouldn’t exist—be significantly enhanced? The trickle-down process has been infamously gamed in the past, and it certainly hasn’t been working to the creators’ satisfaction to this point at the dawn of the streaming era.

Speaking of trickling down, in Spotify’s initial two-year contract with Sony Music, signed shortly before its U.S. launch in January 2011, the streaming service agreed to pay a $25m advance, with a $17.5 million advance for the optional third year. What will Spotify be willing to advance the major rights holders on this pivotal go-round?

In big-picture terms, then, it isn’t just about the expected windfall—it’s about how the booty in this pot of gold will be divvied up.