Universal Music Publishing Group HQ in Santa Monica, CA
Spotify needs major labels and publishers, and major labels and publishers need Spotify. But that doesn’t mean they have to like each other.
Several months ago, Spotify unveiled an interesting plan.
The company would offer select independent/unsigned artists and management groups direct licensing deals. Popular indie artists and groups would receive substantially larger cuts for their works on the platform, plus ownership of their masters. They would also receive 5-to-6-figure cash advances.
Major labels weren’t happy about the move. And neither were indies.
This wasn’t just some errant musing.
So far, we’ve learned that Spotify has already made several direct deals involving substantial advances. But the extent of the deals remains unclear, as well as how far the company will expand this strategy.
Seeing the move as a threat to their business model, top executives at Universal, Sony, and Warner have rattled the cage, though we’re also not clear how this will play out in upcoming renegotiations.
Clearly taken aback, CEO Daniel Ek has spent months now convincing the music industry Spotify won’t compete against labels.
During the company’s Q2 2018 earnings call in July, Ek clarified,
“Licensing content doesn’t make us a label, nor do we have any interest in being a label… We want to grow the number of labels and creators on the platform, as well as the number of creators using our tools and services. In some cases, we license from labels, and in others, from artists if they own the rights to their own music.”
But, a new dispute has broken out between Spotify and the music industry, specifically with music publishers. This time, over music video royalty payments.
The war over music videos.
Promoting major artists to its 180 million+ users, Spotify features many music videos atop its most popular playlists. The company reportedly earns a substantial amount from the videos. And when it comes to curation, videos offer a critical differentiation in playlists like Rap Caviar.
There’s just one problem. The company hasn’t paid its fair share to publishers — at least according to frustrated publishers.
Speaking with Bloomberg’s Lucas Shaw, Marc Cimino, a top Universal Music Publishing Group executive, blasted the company.
“We want to allow our digital partners to experiment and at the same time make sure our songwriters are paid properly. Audio is different than video.”
Cimino oversees a large song catalog, collecting royalties for artists including Nicki Minaj and Adele.
The dispute has reportedly built up for months between Spotify and major publishers, including BMG. And, top executives may have had enough.
Per Shaw, the company frequently rolls out and tests new features without first telling music executives. Spotify also does so without agreeing to a fair compensation.
The world’s top streaming music service – in terms of total subscribers – will soon enter into contract negotiation talks with publishers. If favorable to Spotify, the contracts may help the company finally post a profit after 10 years on the market.
Playing the blame game.
Ahead of key talks, the problem is that both sides – music industry executives and Spotify – have pinned the blame on each other.
Executives, for example, reportedly call Spotify a bad partner – “arrogant, unreliable, and dismissive of their work.” The company, per Shaw, reportedly calls publishers and labels “backward-looking” who restrain the service’s “attempt to innovate.”
Both sides, it seems, have a point.
Spotify’s direct licensing deals with popular indie artists cut off an important revenue stream for major labels and publishers. With the deals, Spotify would serve as the intermediary for stardom. After all, the service commands a huge global audience.
Major labels and publishers, on the other hand, have now posted billions of dollars in revenue. Sony and Universal now earn over $500,000 each hour in streaming royalties alone, according to back-of-the-envelope estimates. So, of course, top executives don’t want to lose out on a healthy, growing revenue stream. After all, thanks to streaming companies like Spotify and Apple Music, the music industry posted $43 billion in sales last year.
And, both sides can’t afford to infuriate the other.
As the company has now gone public, Spotify can’t cut major labels and publishers out of the loop without hurting its bottom line.
The service has yet to find a missing ingredient another smaller rival has – profitability. So, with its planned global expansion, Spotify needs to appease major labels and publishers to obtain music licenses.
Labels and publishers, on the other hand, can’t afford to dismiss Spotify. Its global reach has now become too gigantic.
Amy Yong, a Macquarie analyst, expressed this contradictory relationship between Spotify and the music industry.
“It’s a strange relationship because the record labels want Spotify to succeed, but not too much. It gives them too much leverage.”
Unfortunately, the conflict between both sides has and will continue claiming one key victim – artists.
According to Citibank, while music industry sales continue to grow substantially thanks to streaming, artists only receive a tiny percentage of that amount – around $5 billion.
In upcoming negotiations, Spotify will look for a royalty payment deal that will help it become profitable. Or at least losing less money. Of course, major labels and publishers will look to keep a bigger slice of royalties for their works.
In the end, despite whoever succeeds in obtaining a favorable deal in negotiation talks, musicians and songwriters will continue receiving breadcrumbs. But, that’s another article for another day.
Featured image by Hans Splinter (CC by 2.0).