Spotify In Negotiations

The digital streaming platform aims to find a profitable business model, but is the news bad for labels and artists?

The Verge reports that the music streaming service Spotify is in the process of renegotiating licensing agreements with the major record labels who provide its content. The news arrives in the same week that the Financial Times reports Google is to launch its own rival to Spotify. At present it’s unclear exactly what Google’s service will offer, or indeed whether Apple’s long-rumoured streaming service will arrive any time soon.

The case of Spotify is hugely relevant to musicians at this stage, since the service is already firmly established and widely criticised for its impact on artists’ income from recordings. The elephant in the room for the Swedish company is that despite a valuation of $3bn and despite boasting 20m users (a quarter of them paying subscribers), the service still isn’t profitable. Like so many online businesses before it, the Stockholm-based company is currently financed by venture capital. Finding a business model which allows the company to turn a profit is imperative.

The Verge cites anonymous ‘insiders’ who report that Spotify will use the renegotiations to try and persuade the major labels to lower their licensing fees, reducing the percentage of revenue which the company pays out for the permission to offer its musical content. At present, Spotify spends 70% of its revenue on licensing.

The news that licensing fees could be reduced will come as yet another blow for artists who already see negligible returns from streaming of their tracks via the service. Reports of artists receiving pitiful royalties from Spotify have proliferated since at least April 2010, when it was claimed that 1m plays of ‘Poker Face’ had earned Lady Gaga just $167 (a claim later refuted by Spotify, but which seems to be symptomatic of a bigger problem under the surface). It’s also been argued that labels are equally at fault, pocketing the lion’s share of Spotify revenue for themselves and only passing on a fraction to the artists themselves.

Whether the root cause is Spotify paying insufficient licensing fees or the labels’ greed, the fact that streaming still represents such a bad deal for artists in comparison to physical sales or digital downloads is ominous as consumers increasingly turn to services like Spotify, Pandora, Deezer and Rdio. If, as many industry analysts predict, streaming overtakes downloads as the main way consumers access music, the impact on artists could be hugely significant.