Spotify will ask record labels for help in turning a profit. And the labels just might grant it.
Major label sources have confirmed to Billboard the points in a recent report at the Verge: Spotify will seek lower licensing rates and an extension of free streaming to mobile devices when it meets with record labels for U.S. renegotiations in the coming weeks. Spotify did not comment for this article.
Spotify's inability to turn a profit and the possible pitfalls of its business model have been well documented in the media. The company's 2011 filing showed a net loss of €45.4 million ($35 million) on revenues of €187.8 million ($144.9 million). U.K. income statements showed an operating loss of £2.1 million ($1.4 million) on revenue of £91.5 million ($58.9 million).
One label source says Spotify is likely to get the lower rates they seek -- but at a price. Labels will want the company to give up something in return for lower royalty rates, such as some sort of structural change to its business while maintaining the quality of the service. Labels have no desire to have the same conversation under the same financial circumstances when negotiations begin anew in a few years.
What structural changes Spotify could make will undoubtedly be a major part of the upcoming negotiations. Spotify has separated itself from its peers mainly by putting an emphasis on engineering. Cutting back on staff and budgets related to the user experience could threaten the quality of the service that has become the most popular subscription service in the world (five million subscribers worldwide and 20 million active users). On the other hand, cutting back on marketing and customer acquisition costs would not change the service but could impede the company's growth in certain markets.
Lower royalty rates would help Spotify in numerous ways. Less expensive content would improve the company's chance of reaching profitability in the near future. It would decrease the need for another round of fund-raising to fuel its growth; the last round was reported to be $100 million at a $3 billion valuation. Profitability would make the company a more likely IPO candidate in the future.
Of course, granting Spotify lower royalty rates would bring up a number of questions. The most obvious question is whether or not competing services with similar financial situations demand the same treatment. Another question is if Spotify will seek lower rates in other markets as well. One source believes this topic will come up in other markets, too.
Another topic of discussion will also be how Spotify can best convert listeners through its mobile app. Mobile has always been a key component of the premium tier of on-demand subscription services and something off-limits to non-paying users. One source says people are trying to figure out a way to give Spotify users a longer experience than the current 30-day free trial that allows for mobile use. Possible options that are being explored are time limits, limits to the number of plays and semi-on-demand playlists.