The Stockholm-based service isn't the only streaming company scouting talent with which it can ink direct deals. Apple Music is exploring similar models, according to one attorney familiar with Apple's strategy, and is also supporting a new record label, 12 Tone Music, helmed by 79-year-old industry veteran Doug Morris, a close friend and mentor to Apple Music leader Jimmy Iovine. The Apple-backed label's first big release is slated for July: the first of three albums it will issue by Anderson .Paak. Apple has thrust the artist into the spotlight in 2018, casting him in a commercial for its HomePod speakers and scoring a TV ad for its Beats by Dr. Dre headphones with his latest single, "Bubblin."
"For a long time, the labels had a stranglehold on advances, but nowadays, the labels are not the only ones that can spend that money," says a management executive. "Wait until Spotify starts moving beyond signing direct artist deals and then going to signing producers who can develop artists and bring them aboard the service, too. That will create a sea change."
Spotify is still somewhat limited in the types of deals it can sign with talent: Its current licensing agreements with the majors explicitly prevent it from competing in a substantial or meaningful way with the labels' core businesses. Spotify isn't supposed to buy catalog or musical recordings, for example, under the terms of its major-label deals.
But Spotify has some wiggle room, since the contractual language preventing it from competing with the labels head-on is likely a bit "fuzzy" so as not to ring alarm bells with antitrust authorities, says a source. And Spotify isn't seeking ownership of artists' masters like the majors do, nor is it asking for exclusive content, sources tell Billboard. Managers and artists that sign direct licensing deals with Spotify can then do separate deals with other services.
Major labels still offer a suite of benefits that Spotify doesn't, of course, including radio promotion, physical distribution and often much richer advances. But an independent-label executive says that Spotify's offers to acts and managers are "especially unfriendly" to indies, which "don't have the monetary power" to compete at the same level. "We're competing with Kobalt, with [Kobalt's label services division] AWAL, with [Capitol Music Group's indie distribution arm] Caroline -- it's not great to have another hat thrown in," says the executive, adding that indie companies have little leverage to prevent such deals because Spotify is "such a big part of our business, we're not in a position where we can't work with them."
A digital-music executive, meanwhile, says streaming companies' direct deals with artists will also "hurt the distributors and the marketing firms being set up to offer label services to artists who own their own masters." Those include Ghazi Shami's EMPIRE and Steve Stoute's UnitedMasters, which raised $70 million in 2017 from investors including Alphabet, Andreessen Horowitz and 20th Century Fox.
Even major-label executives have been discussing in recent days how best to respond to Spotify's direct dealmaking, sources tell Billboard. While the big record companies can't afford not to license their music to the world's biggest paid streaming service, they have other levers they can pull to influence Spotify's behavior: the streaming company still needs the major labels' permission in order to launch in new markets, for instance.
Some acts say they are tempted to sign direct deals with Spotify not just for the advance fee and the higher potential payouts per stream, but for the prospect of better placement on top playlists -- key real estate that some managers say has become increasingly difficult to score. Though not all acts who've made direct deals with Spotify are shooting to stardom -- one such band has received less playlist promotion than it had hoped, a source close to the act tells Billboard -- Spotify's support of some indie acts in recent years, such as Major Lazer, has been crucial to their success.
Spotify hasn't signed direct licensing agreements with every artist it promotes: Its RISE program, for example, features a mix of major-label and indie acts, from Karol G to Jorja Smith. It also hasn't disclosed which artists it has done individual deals with, cautioning those acts not to say they are "signed" to Spotify.
But it can save money by giving tracks it has directly licensed more spins or better playlist placement, since, at least in some of those cases, it is paying the act only 50 percent of the revenue per stream, say sources, slightly less than the 54 percent it pays on average to major labels in the United States, according to Billboard's calculations. Those terms could set precedent for future deals, and the savings could add up quickly.
In a statement last year, following controversy over the placement of tracks by little-known, pseudonymous producers on its mood-based playlists, a Spotify representative said, "We do not favor any tracks on our playlists due to costs."
But MIDiA Research managing director Mark Mulligan says Spotify's general tune has changed since the company was listed on the New York Stock Exchange in April and must now aim to become profitable. "As the bellwether of streaming, Spotify has been dictating the narrative for years, but always with the focus of being a partner for rights holders. Now that it is public, Spotify has found that tough talking trumps sweet talking," wrote Mulligan in a June 12 blog post. "Speaking from the experience of months of deep conversations with large institutional investors, Wall Street has pumped money into Spotify stock not because of how it will help labels' businesses, but because they expect it to replace labels, or, at the very least, compete with them at scale."
Additional reporting by Ed Christman, Melinda Newman and Dan Rys.
A version of this article originally appeared in the June 15 issue of Billboard.