JAMBOX Entertainment Studios: Here's how Spotify's deal with Universal Music will impact the streaming music industry

April 15, 2017

Here's how Spotify's deal with Universal Music will impact the streaming music industry

Reprinted by JAMBOX Entertainmen t Studios

Spotify has signed a deal Universal Music Group that lets artists release new albums exclusively on the streaming service’s premium tier for two weeks, Reuters reports.
Only Spotify’s paid subscribers will have full access to albums during this time, though album singles will still be available for all listeners.
Further details about the deal, such as its fee structure or duration have not been disclosed. It’s likely that Spotify is getting a more favorable percentage on the music licensing fees charged by Universal. This would benefit Spotify’s path to profitability and an IPO. Spotify is still negotiating with the remaining two of the "big three" music labels, Sony Music and Warner Music Group. It may use this deal with Universal as a blueprint.
Despite the dearth of details around this deal, there are points of context to provide color:

Streaming is music’s biggest moneymaker. For the first time in 2016, streaming services such as Spotify, Pandora, and Apple Music made up the majority (51%) of music industry revenue in the US, the Recording Industry Association of America (RIAA) reported recently. Streaming revenue reached $3.9 billion last year, growing an astounding 68% year-over-year (YoY).
Universal is pushing for Spotify paywalls. One condition for this deal is that Spotify only give its paid users immediate and unrestricted access to new albums. This is a sensible strategy because subscriptions are lucrative — they more than doubled in 2016 to $2.5 billion, and now make up a third of total music revenue and two-thirds of revenue from streaming.
The deal makes a Spotify IPO more likely. Spotify’s costly licensing agreements with major labels are an obstacle to its IPO. The company pays out 55% of its revenue to record labels, with the biggest checks going to Universal, Sony, and Warner Music. It reportedly wanted to get this down to 50%. Last summer, Spotify accounted for 10% of these labels’ revenue.
Spotify wants an IPO as soon as possible. The company is under pressure to IPO sooner rather than later since its $1 billion debt financing round last March. These debts are tied to the timing of the IPO. They determined that investors can convert their stakes into shares at a 20% discount to the list price. However, this discount increases by 2.5% every six months.