Startups

How Spotify is finally gaining leverage over record labels

Comment

The problem with Spotify going public has always been that the record labels own the music. They force Spotify to pay 70 percent or more of its revenue to them for royalties, and could jack up that price if Spotify got too profitable.

That’s why over the past few years, Spotify has been pushing five different paths to putting pressure on the labels to cut it a better royalties deal. They all hinge around the idea of making the labels need Spotify as much as it’s historically needed them.

When Spotify launched in 2008, it had no power in the relationship since it had so few listeners. It needed to raise over $180 million in its first few years and pay the labels a huge upfront advance on royalty payments to convince them to let it launch in the US. Spotify also had to sell the labels equity so even if it succeeded, they’d be financially protected.

But now that Spotify has grown to 50 million paid subscribers and a huge base of free ad-supported listeners, it’s emerging from the streaming pack including YouTube / Google Music, Pandora, Apple Music, and Amazon so rights owners can’t just favor them instead. Spotify has begun to gain some leverage over the labels so that it can make money without them and they need it to have a hit record.

Here are the five ways Spotify is weakening the the record companies’ iron grip on music:

Dictating The Top 40

Spotify’s Discover Weekly and Release Radar playlists aren’t just some of its most popular and differentiated features. They give Spotify newfound power to choose what artists and songs a large swath of its listeners hear. Instead of focusing on peer-to-peer sharing or direct channels between the artists and the fans, it’s prioritized music discovery methods that put it in control. Spotify wants to take the place of the thousands of radio stations that record labels typically kiss up to.

Spotify’s owned playlists like Discovery Weekly let it influence what gets popular
If Spotify can use its owned playlists to make or break different artists, it can use this influence to demand better deals from the labels. Record companies that offer it lower royalty rates, don’t do exclusives with its competitors like Apple Music, or get their artists to release special re-recorded Spotify Sessions of their hits could see their artists placed more prominently in Spotify’s playlists and their audiences grow. Labels that don’t play ball with Spotify might sublty notice they’re not getting the same playlist love. Spotify’s already been accused of this retaliatory behavior. Even though it denied the practice, the threat could be enough to coerce the labels.

Scale

Spotify needs all the major record labels to let it stream their content, otherwise its catalogue would be confusingly incomplete. Most listeners don’t know what artists are on which of the three major labels – Sony, Warner, and Universal. So the result of any one of them refusing to work with Spotify is that it would make almost a third of its music unavailable, and drive users to its competitors.

But that was when Spotify had so few listeners that the labels didn’t need it. Now Spotify contributes a big enough percentage of record labels’ total royalties that they have a lot more to lose from cutting it off. As we said above, their artists would suffer from the loss of distribution, but they’d also suffer a loss of revenue. Spotify’s size has made record labels pulling out into either a bad bet or a bluff.

Diversifying Beyond Music

Spotify has to pay out 70 percent of its revenue from major label music, but not from other content types like video and podcasts. That’s partly why Spotify is pouring investment into creating original content like 12 different video series, including Drawn & Recorded about music history. It’s also got a big original podcasts initiative.

Spotify’s original video series Drawn & Recorded tells tales from music history

The more Spotify gets people watching and listening to the content it creates or gets for cheap, the smaller the share of its total earnings it has to pay out to the labels. Meanwhile, it gets to offer exclusive content that doesn’t piss off fans who aren’t subscribed the way Apple Music’s early access to blockbuster albums does. When Spotify first announced it was getting into video, people though it was trying to challenge YouTube or Vevo or even Facebook. Really it just wants to run Netflix’s “Stranger Things” playbook.

Access Restrictions

The biggest driver of Spotify’s success has been its free ad-supported tier that serves as a subscriber acquisition funnel. But some labels don’t want their music available to listeners that earn them less per stream than paid subscribers, at least when it first comes out. Now the Financial Times reports Spotify is in negotiations with labels to allow them to withhold top new releases from the free tier in exchange for better royalty rates.

Essentially, Spotify has built its ad-supported audience to be so big that it can now restrict their access to content as a bargaining chip. Some artists like Taylor Swift have been arguing for this option for years, but now Spotify has the scale to demand a financial incentive in return.

Becoming A Label

If Spotify owns the rights to the music it streams, it’s who earns the royalty payouts. That’s why two sources tell TechCrunch that Spotify has discussed traditional record label-style deals with artists. Musicians who cut these deals could get a cash advance in exchange for Spotify owning a percentage of their recording revenues.

Spotify CEO Daniel Ek
These deals could potentially come with exclusivity clauses around when and where the artists could distribute their music elsewhere, but that’s not confirmed. Apple already offers up-front financial compensation in exchange for exclusivity, as Chance The Rapper just revealed he was paid $500,000 and given a commercial to make his album Coloring Book and Apple Music exclusive for the first two weeks. Spotify on the other hand is looking into more inclusive deals that align them with artists’ long-term success.

Power To The IPO

 

Employing all these strategies, Spotify is now using its leverage with labels to negotiate lower royalty rates. TechCrunch previously reported that Spotify is considering delaying its IPO until 2018 to allow these sources of leverage to grow so it can score a better deal before going public. Spotify declined to comment on this story.

While at first glance, Spotify paying less for per stream might seem worse for artists trying to make a living on music. But the success of Spotify and the path it could forge for streaming services is also in the interest of those artists. Not only could royalty rates start to climb closer to CD sale revenue if it grows big enough. Spotify is also incentivized to help artists use streaming to promote their merchandise and ticket sales where the bulk of their earnings comes from while it takes a cut. It’s becoming the portal to music.

Napster made music piracy mainstream and the record labels sued it to death without a replacement causing users to fragment across underground download apps they couldn’t fight. Now 15 years later, convenience has once again depowered record labels in favor of broad access to the pantheon of music. But this time, 50 million people are paying for it.

More TechCrunch

A Singapore High Court has effectively approved Pine Labs’ request to shift its operations to India.

Pine Labs gets Singapore court approval to shift base to India

Ahead of the AI safety summit kicking off in Seoul, South Korea later this week, its co-host the United Kingdom is expanding its own efforts in the field. The AI…

UK opens office in San Francisco to tackle AI risk

Companies are always looking for an edge, and searching for ways to encourage their employees to innovate. One way to do that is by running an internal hackathon around a…

Why companies are turning to internal hackathons

Featured Article

I’m rooting for Melinda French Gates to fix tech’s broken ‘brilliant jerk’ culture

Women in tech still face a shocking level of mistreatment at work. Melinda French Gates is one of the few working to change that.

15 hours ago
I’m rooting for Melinda French Gates to fix tech’s  broken ‘brilliant jerk’ culture

Blue Origin has successfully completed its NS-25 mission, resuming crewed flights for the first time in nearly two years. The mission brought six tourist crew members to the edge of…

Blue Origin successfully launches its first crewed mission since 2022

Creative Artists Agency (CAA), one of the top entertainment and sports talent agencies, is hoping to be at the forefront of AI protection services for celebrities in Hollywood. With many…

Hollywood agency CAA aims to help stars manage their own AI likenesses

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

3 days ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

3 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data