Spotify Seeks to Fine-Tune Music Rights as It Gears Up for IPO
Streaming service is in talks with record labels to negotiate new contracts
As Spotify AB gears up for a potential initial public offering next year, the music-streaming service is missing one key component in its pitch to investors: rights to play the music in years to come, according to people familiar with the matter.
Spotify is now operating on short-term extensions of its old contracts with all three major record companies, having been on a month-to-month basis with at least one of the labels for nearly a year. It is negotiating new deals that would make its finances more attractive to investors.
Spotify, which saw its net loss increase to roughly $200 million last year even as revenue doubled to more than $2 billion, wants to pay a smaller share than the nearly 55% of its revenue that it currently pays to record labels and artists, according to people familiar with the matter.
It pays roughly an additional 15% to music publishers and songwriters.
But some major label executives want Spotify to pay them as much as 58% of revenue from both its free and paid tiers. That is what Apple Inc. pays for Apple Music subscribers who aren’t on free trials, people familiar with the matter said. Apple has more than 5 million users on free trials, they said.
Some executives think Spotify should pay more than it did when it was getting off the ground in the U.S. in 2011.
Other label executives said they may let Spotify pay lower rates, but only if the streaming service grants them other rights, such as the ability to make some music available only to the service’s 30 million-plus paying subscribers and not to its more than 70 million free users.
Some also want Spotify to limit free usage, a move they hope would drive more paid subscription.
Spotify is under mounting pressure to go public thanks to the terms of its most recent round of financing: $1 billion in convertible debt issued by a group that includes private-equity firm TPG, hedge fund Dragoneer Investment Group and Goldman Sachs. The debt carries an interest rate that increases the longer Spotify delays an IPO, while the investors are also entitled to a 20% discount on shares if they convert their debt into equity—a discount that also balloons the longer Spotify takes to go public.
The licensing disagreement highlights the tricky relationship between Spotify and the major record labels, which all took minority stakes in the Swedish outfit as part of their initial licensing deals. As investors, the labels have a direct interest in seeing Spotify succeed, while they are also counting on subscription streaming in general to make up for a long decline in record sales. Paid services yield far more per user than ad-supported ones, and Spotify is the world’s biggest subscription service, with double the 15 million paying subscribers that one-year-old Apple Music has.