Let's Make a Deal: Spotify Negotiating With Major Labels, Looks Ahead to Japan Launch

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Daniel Ek, CEO of Spotify, speaks to reporters at a news conference on May 20, 2015 in New York. 

Spotify, the world's largest streaming service with 40 million paid subscribers and more than 100 million monthly users, has been engaged in protracted negotiations with the major labels after its previous long-term deals expired, sources say. Since last year, the company has been operating on month-to-month deals with Universal Music Group, Sony Music Entertainment and Warner Music Group that roll over, with both sides negotiating for improved terms and revenue splits.

Currently, Spotify pays out around 55 percent of its revenue to labels, a simplified number due to the complexity of the contracts and additional payments made to publishers, for instance -- but still lower than Apple Music's reported 57.5 percent. Moving forward, however, Spotify is hoping to lower that revenue share rate even further, with sources saying Spotify has shown it's open to softening its stance on windowing -- allowing certain albums and singles to be available only behind its $9.99/month paywall rather than on its free tier as well, among other considerations -- in order to secure better rates. Sources say the company won't be able to issue an IPO without long term content deals in place.

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By hiring Troy Carter in June as its new global head of creator services, Spotify seemed to signal a willingness to accommodate some of the labels' wishes. And sources say that Spotify has become more amenable to negotiations and working more closely with labels in the past six months as it looks to hold onto its market lead over Apple Music, which boasts 17 million paid subscribers. Reps for Spotify and Sony Music did not immediately return requests for comment; Universal and Warner both declined to comment.

There are several obvious reasons why Spotify and the labels want to get these deals done; stability, of course, as well as the mutually beneficial nature of their relationship: simply put, Spotify needs the labels' catalogs, and the labels need Spotify's reach as streaming revenue continues to explode worldwide. But the negotiations are not expected to be easy, or quick -- despite Spotify's desire to complete deals by the end of the year.

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But there is a deeper subtext to the relative urgency of these longer-term deals: Spotify's impending IPO, and its expected launch in Japan, both of which are approaching on the horizon for the Swedish company.

In March, Spotify raised $1 billion in convertible debt financing that can be exchanged for stock, in a deal that becomes less favorable the longer Spotify delays going public. But the company's revenue model has not yet seen it turn a profit; in 2015, despite growing its global revenue to $2.2 billion at an $8 billion valuation, Spotify still posted a $206 million net loss due to its cost of business -- largely revenue share and payments labels and publishers -- and it needs to have these content deals in place in order to make itself as enticing as possible to potential investors, preferably with a more favorable share. The clock, as MIDiA Research analyst Mark Mulligan puts it, is ticking.

The move into Japan will likely happen within the next month, according to one source, and could be an important area of growth and revenue for the company. But the region is generally carved out of global licensing deals and is usually negotiated individually, multiple people familiar with negotiations say, meaning Spotify would need to have separate deals in order to operate in Japan; while those are close, they are not done, said one insider.

The desire to expand to Japan is one that Spotify CEO Daniel Ek has been public about in the past, and for good reason. The country is the second-largest music market in the world, but it's still heavily reliant on sales; less than five percent of its industry revenue came from streaming in 2015, according to the IFPI's 2016 global music report, suggesting a huge area for growth on the horizon. Culturally, however, that reliance on sales over streaming is beginning to change, and streaming services like Apple Music and messaging/streaming company Line are gaining a foothold. Spotify, which is planning to offer both a free tier and a paid tier at approximately $10/month, is well-placed to expand in the region.

Both of those developments would be welcome for the major labels, which have a vested interest in seeing Spotify succeed, both as the market leader -- and as investors -- and to foster competition to avoid becoming beholden to one service, as they did with Apple's iTunes Store when downloads exploded. Now, the race is on.


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