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Spotify’s new label deals to include windowing, say sources

By | Published on Friday 17 March 2017

Spotify

Windowing could finally be coming to Spotify as the major labels continue to play hardball over new multi-year licensing deals ahead of the streaming service’s much touted initial public offering.

Spotify has been busy trying to negotiate new deals with the majors for some time now, and it’s thought delays on getting those in place have in turn delayed the streaming service’s march towards IPO, which is costly for the company because of the way it structured some mega-loans last year.

As the record industry becomes ever more reliant on the streaming services for ever higher portions of its income – and as inevitable market consolidation reduces the number of streaming platforms overall – the negotiating hand of major streaming firms like Spotify will likely strengthen.

That, in many ways, is part of the plan for those launching high risk digital music businesses that are always saddled with incredibly expensive licences from the music industry at the outset.

Howver, Spotify can’t go to Wall Street without solid deals in place with the three music majors, which possibly makes this set of licensing negotiations the last where the labels can really push for more.

Though, at the same time, it’s not in the record industry’s interest to push so hard that the Spotify IPO fails – partly because of the equity the labels hold in the company, but also because of how much they already rely on the royalties it hands over each month.

Either way, it’s fair to say that the latest licensing negotiations have been heavy going. Not least because Spotify has been trying to negotiate the revenue share arrangements that sit at the heart of all the music industry’s streaming deals down a little. Partly because the big music publishers have done a decent job of negotiating their revenue share splits up in recent years, and the streaming firm needs to demonstrate to potential investors at the IPO that it will definitely be able to hold on to at least 30% of its revenues long-term.

According to the Financial Times, sources are now saying that talks have progressed considerably in the last few months, to the extent that deals could be signed within a few weeks. Though nothing is set in stone just yet.

It’s thought that the majors will accept a slight cut in overall royalty rates, though royalty arrangements are complicated by minimum guarantees and variations according to subscription type and territory. All of which means the actual value of any royalty deals agreed can depend on where the next round of growth in Spotify’s business takes place.

The big compromise Spotify will have to make in order to get those better rates, say the FT’s sources, is to allow the windowing of major releases off freemium. Which would mean big albums only being made available to Spotify’s paying users on release, subsequently arriving on the freemium level down the line.

There is widespread support for that kind of windowing among labels and artists, who hope that it would make more freemium users upgrade to premium, and some of which resent giving away their newest most prestigious content from the off. Indeed many in the industry have talked about such windowing as an inevitability, it being the streaming sector version of the record industry eventually persuading Apple to allow variable pricing – rather than one price fits all – on the iTunes store back when it was first gaining momentum.

Spotify has generally resisted efforts to cut back the catalogue of its free service. Freemium is Spotify’s main marketing platform, and as the likes of Apple and Amazon enter the streaming market, with their massive existing customer bases to sell subscriptions to, Spotify relies on its freebie userbase all the more. The fear is that if windowing of releases becomes the norm, Spotify will lose freebie users to piracy and YouTube.

Though, if the windowing of big releases did, in fact, result in more free users going premium, Spotify would benefit as much as anyone from the big concession it is seemingly about to make in its label deals. Which could therefore make it some clever deal making in hindsight. Meanwhile, we await official confirmation on all of this.


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