Spotify — the streaming music company with 50 million paying users — has been working on renegotiating licensing deals with labels over the last several months — a critical move to improve its revenues and margins en route to going public — and today one of the big pieces of that process has fallen into place.
The streaming music platform now has a new deal with Merlin, the biggest digital rights agency representing independent music labels — a fragmented but ultimately large group that accounts for 12 percent of the recorded music market with 20,000 labels (and covering hundreds of thousands of artists as diverse as Dizzee Rascal, Nick Cave and the Bad Seeds, and Prince), and distributors in 51 countries.
We’ve reached out both to Merlin and Spotify to see if they can provide specifics of what the new deal will entail and will update this post as we learn more, although Merlin has already said that it would not be commenting on the commercial terms. From what we’ve heard from a source close to the negotiations, Merlin has been able to get terms that are “competitive” with those of the largest labels.
As a couple of points of reference further to that:
— Earlier this month, Spotify inked a new deal with Universal Music, which saw the label accept a lower royalty payment per-play from Spotify (meaning more kept by the streaming company), but also gained some ground in windowing, where songs will not be available in Spotify’s free tier, and only its paid tier, in the first two weeks of the release. Spotify says that today it has over 100 million active users, so with 50 million paying this means that around 50 million listeners are listening for free.
— Spotify itself notes that “The agreement is structured to reflect and promote the value of Merlin’s collective offering of its members’ repertoire, while offering improved marketing and advertising opportunities and enhanced access to data. Merlin member labels can also participate in Spotify’s recently announced flexible release policy.” (Which was the basis of the Universal deal.)
— Merlin’s CEO Charles Caldas has been outspoken for a while now about how he wants Merlin to have equal footing with larger labels when it comes to licensing negotiations, not just to improve Merlin’s returns but to drive home the point to members that collective bargaining is better in the long run for them.
Ergo, it sounds like Merlin’s deal with Spotify has roughly landed in the same place as Universal’s.
“This new agreement lays the path to future sustainable growth for us both, and we look forward to remaining an integral part in the service’s continued success,” Caldas noted in a statement.
“I’m delighted that Merlin has reached this new agreement with Spotify,” added Martin Mills, Merlin chairman. “We’ve been great partners for each other, and this updated arrangement allows independents in the Merlin community the comfort of knowing they have a highly competitive deal and parity of access to the service, whilst creating a commercial environment in which Spotify can grow to the benefit of all of us.”
Many of Spotify’s earliest adopters were consumers who sought out independent music on the platform, and as such Merlin’s association with the company goes back a long way: Merlin was a launch partner of Spotify’s in 2008 and today covers deals with labels like Armada Music, Beggars Group, Domino, Entertainment One, Epitaph/Anti, Hopeless Records, Kobalt Music Recordings, Mad Decent, Naxos, [PIAS], Secretly Group, Sub Pop and Warp.
Today, Spotify has 50 million paying users, a big emphasis on playlists, and is aiming a much bigger, mainstream market. Partly because of this, Merlin today is the fourth-largest label partner on Spotify — although this is still significant in that there are many smaller and independent groups that are still negotiating with Spotify below it. Warner, Sony and Universal account for the majority of the 30 million tracks available on the service.
Spotify was last valued back in 2015 at $8.53 billion, but while revenues have been on a steady upward climb since then, so have its payments to labels. In 2015, the last year for which there are public accounts for Spotify, the company posted a net loss of €173 million ($186 million), revenues of €1.95 billion ($2.1 billion), but with royalty and distribution fees of €1.63 billion ($1.75 billion) (via FT).
This is what led the company to renegotiating its deals with labels, at a time when Spotify has realised that it has significantly more leverage now because of its size as the world’s biggest streaming music company.
While Pandora is now moving ahead with its own Premium tiers and (finally) some more international growth, and Apple is pushing hard on its own music product, Spotify has not been standing still. Just this week the company expanded its half-price student tier to 33 countries, and it relaunched its artists’ portal to improve services that creatives and their managers can use to market their music, interact with fans, view analytics about how their tracks are being consumed and more.
Prior to the renegotiations, Spotify was working on a rough 70-72 percent payout as has been reported before and outlined a few years ago by Spotify itself (a past link to Spotify’s own explanation is now dead). Essentially, about 55 percent is paid to record labels and artists; and 15 percent or more goes to music publishers and songwriters.
The company says it has paid out over $5 billion to rights holders since launching.
Merlin, meanwhile, also licenses to SoundCloud, YouTube Red, Spotify, Pandora, Google Play, Deezer, Vevo and KKBOX in Asia.