• Thursday, March 28, 2024
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Spotify enters high-stakes licensing talks with music industry

Spotify

For the first time since going public, Spotify is entering high-stakes licensing talks with music rights owners that will impact its profit margins for several years.

The New York-listed streaming service must cut deals with Vivendi-owned Universal Music, Sony Music and Warner Music, which combined control two-thirds of Spotify’s catalogue.

The talks, which typically go on for several months or even longer, are in “very early stages”, according to people familiar with the situation. Rather than strike new deals, the two sides could also extend their current arrangements for another year.

But the talks come at a tricky time for Spotify, which has faced fresh criticism from the music industry in recent weeks.

Spotify is appealing a US court decision that would give songwriters a big pay rise from music streaming on its platform — a move that Justin Tranter, the writer behind hits by Justin Bieber and Ariana Grande, called “shameful”.

At the same time, Warner Music sued Spotify after the two groups could not agree on licensing rights in India. Spotify’s official company statement called its third-biggest supplier “abusive” — comments that Warner’s own press office described as “appalling”.

When asked whether recent drama has damaged the relationship with his biggest suppliers, Daniel Ek, Spotify’s chief executive, pointed to the $10bn that Spotify has paid out to the music business.

“Are there issues from time to time about compensation, as there are between every supplier and retailer? Of course,” he told the Financial Times in a recent interview. “The music industry went through a phase where it was almost in a decade-long decline . . . if you look at the relationship now from when we started . . . the relationship is a lot better.”

Mr Ek has a point. After being decimated by piracy, US music revenues have grown in the double digits for three consecutive years. Universal Music made $7.1bn in sales in 2018, which chief Lucian Grainge described at a February Grammy Awards party as “the best year for any music company ever”. The growth is largely due to subscription streaming — the business model that Spotify pioneered.

Yet even as business has roared back, the companies that control the music industry have clashed with Spotify over how to split the riches. Every few years, the two sides convene to renegotiate royalty payments; Spotify pays out most of its revenues back to the suppliers who own its 35m song catalogue.

The last time Spotify had to negotiate the rates, it was gearing up for a public listing that industry insiders expected to have an impact on the entire sector. The music labels agreed to reduce Spotify’s payouts to them, helping Spotify make its case with investors when it hit the NYSE last April. From 2016 to 2017, Spotify’s annual gross margin jumped from 16 per cent to 22 per cent. In its most recent quarter, gross margins hit 26.7 per cent.

But this time around, Spotify’s positioning may have changed.

“Years ago Spotify was stuck in this narrative that it was Spotify against the artists. They managed to move the dialogue away from that, partly because of effective PR and partly because artists were getting bigger cheques,” said Mark Mulligan, an analyst at Midia Research. “This all has turned back the clock”.

While labels negotiate directly with streaming companies to agree on royalty payments for music recordings, songwriters in the US are beholden to the Copyright Royalty Board, an arcane government body that sets rates every five years according to a 1909 law that was designed to protect against a monopoly on player-piano rolls.

In January, the CRB decided to raise the songwriters’ share of revenues from streaming to 15.1 per cent from 10.5 per cent. Spotify and Amazon have appealed against the decision, while Apple did not.

Spotify is also awaiting decisions from a judge in India over its legal battle with Warner, and the EU antitrust commissioner Margrethe Vestager, who vowed to “start looking at” the complaint against Apple.

Mr Ek says Spotify’s wars across three continents are a “coincidence”.

“This isn’t a case that we decided 48 hours ago that we wanted to do,” he said. “I wish it went that fast.”