Spotify's Leaked Email Projects $1 Billion in Royalties for Universal, But Does It Square?

Kevin Mazur/WireImage
Daniel Ek, CEO of Spotify, talks during a presentation at the 2012 Spotify press event on December 6, 2012 in New York City. 

A report in the New York Post says Spotify told Universal Music Group in an email it would pay the music company $1 billion in royalties in the coming years. The leak of the email indicates Spotify and Universal are continuing to fight over the future of free streaming. The numbers in the email indicate what Spotify thinks will happen to Universal's future revenue.

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Spotify claimed it would account for 11 percent of Universal's revenue through March 2016 and 16 percent in the April 2016-March 2017 period. The service also claimed it will account for 28 percent of Universal's "pretax earnings" in the next 12 months and 39 percent in the following 12 months. These estimates were based on Spotify's projections of its growth rate and Universal's market share, according to the report. Billboard cannot verify the accuracy of the numbers.

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As the chart shows, Spotify's numbers imply Universal Music Group will have revenue between $7.07 billion and $7.67 billion over the two-year period ending March 2017. That's an average of $3.54 billion and $3.84 billion per year. The latter is nearly equal to the $3.89 billion of revenue in Universal's recorded music division in 2014 (which presumably excludes intracompany transfers between the publishing and recorded music divisions).

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The four blue rows in the chart show the "habitable zone" of probable pairs of numbers that would pay Universal $1 billion over two years. In each instance, the second year's payout is larger than the first. Growth rates range from 27.3 percent ($440 in year 1 to $560 in year 2) to 50.0 percent ($400 in year 1 to $600 in year 2). 

Universal's numbers show losses in each of four instances. Spotify estimates its share of Universal's revenue will climb from 11 percent to 16 percent. Because we have to assume Spotify's payouts will increase from the first year to the second, the rows of the habitable zone show Universal's implied revenue growth ranges from 1.1 percent to -12.5 percent.

The high end of the range is a reasonable growth rate. This implies Universal's revenue falls 1.1 percent. Given the flattening of global recorded music revenues, this is a fair bet. However, the corresponding growth in Spotify payouts is 43.9 percent. That's an extraordinary rate. Exactly how fast Spotify is growing right now is not publicly known, but that growth rate could suggest Spotify will be growing faster in two years than it is likely growing today.

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The other end of the habitable zone is also worth considering. While -12.5 percent growth seems implausible, it corresponds with a more plausible 27.3 percent growth in Spotify payouts. Even that would be impressive. One wonders if Spotify factored in Apple's upcoming subscription service into its model. 


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