How Spotify’s bypassing of labels will change the industry

As things stand in the world of music streaming, Spotify gets almost all of its music by cutting deals with the music labels, which have cut their own deals with musicians. But now, Spotify is starting to cut out the middle man. The music streaming giant has started licensing some songs directly from artists and their managers, paying advances of “several hundred thousand dollars” for a collection of tracks. The upside for Spotify is that after cutting an initial check, it then pays the artists a slightly lower royalty rate than it pays the labels. The upside for the artists and their managers: They get to keep all of the royalties instead of watching the majority of that money go to a music label.

Despite what they say on the matter, Spotify is competing with the labels, by offering artists a chance to make more money by selling their music to Spotify instead of a traditional label. This is also what Spotify said it would do in advance of this year’s public offering. Spotify didn’t say that out loud, for obvious reasons — it still needs to work with music labels, and if Spotify takes them on directly, the labels will go apoplectic.

Bypassing labels

Spotify does imagine, however, that over time, a growing tier of music acts, or small independent labels, won’t use the big labels for distribution. Instead, they’ll work directly with the streaming service. If that happens, the thinking goes, Spotify will be able to command better terms from the small acts and labels than it gets from Universal Music and the other giant labels. But the small acts and labels will end up keeping more money than they would have in the earlier arrangements because they won’t have to pay the big guys to bring their stuff to Spotify and other outlets. When Spotify talks about becoming a “platform” — a term it used dozens of times in its public offering documents and then again during its investor pitch day last month — it is talking about a bunch of different things. But the main one is that Spotify wants to connect music acts directly with music listeners and take a cut of the transaction.

The facts:

• Spotify isn’t becoming a label itself: It isn’t going to own the music it is licensing.
• Spotify isn’t demanding exclusive distribution rights. Artists who do direct deals with them can also sell their music to Apple and Google and anyone else.
• Spotify isn’t going after giant stars who already have label deals, which would trigger all-out war with the labels. It is talking to mid-tail acts, who may not be in demand with the labels, anyway.

Then again: It’s 2018, and Spotify is just starting to flex its muscle as one of the world’s dominant music distributors. And Netflix has laid out a very compelling model for digital media distributors who want to move from licensing content to owning their own content. And Spotify’s CFO used to be Netflix’s CFO.

Financial gain

Spotify is offering a 50 percent cut of per-stream royalty rates. That’s less than the percentage major labels earn, but artists end up with a significantly smaller portion of those label royalties, so Spotify’s proposal could be enticing. Indie musicians often license their music to Spotify, Apple Music, and other services by using third-party distribution companies like TuneCore as the middle man. Spotify’s strategy also seeks to cut those distribution services out of the picture by allowing artists to license the same music that Spotify is getting to other platforms while “retaining full revenue” from those deals. There’s no exclusivity involved. Additionally, artists maintain ownership of their master recordings, which is rarely the case under label contracts.

It’s likely that Spotify is limiting these attractive licensing terms to popular indie acts for now, as negotiating with a large roster of artists would quickly get very complicated. And in an obvious sign that it’s seeking to avoid angering record label partners, Billboard notes that Spotify is discouraging artists from saying things like they’ve “signed” with the streaming music company. Many of Spotify’s agreements with record labels forbid the company from directly challenging them, according to the report. Thus, Spotify is pursuing independent musicians instead of trying to poach label talent.

The long-term impact

Simon Owens is a freelance tech journalist in Washington D.C. He says there would be many advantages to Spotify signing its own music artists, but the main one is that it would cut down on Spotify’s costs.

“The problem for Spotify is that unlike other services like Netflix, it has high marginal costs,” he says. “Every single time a song is streamed, [Spotify] has to pay a royalty to one of the major music labels, and it’s basically paying 75 cents on every dollar that it’s making in these royalty fees.” But there’s a problem. If Spotify were to start producing music, it would be directly competing with the owners of the content it’s now distributing. Owens says record companies would likely accept that — because Sony BMG, Universal Music, Warner Music and EMI are all part owners of Spotify. “A little-known fact is that early on, in order to make nice with the labels — because when Spotify launched it was an untested business model, so obviously these major record labels were sceptical — it sold equity to them. These record labels are tied to Spotify, so they actually have a monetary interest in seeing it succeed.”

Record companies may have more than a monetary interest in preserving Spotify. In an industry ruled by music streaming, their survival may depend on it. As an artist, your path can go either way at this crossroads. Many aspiring producers and DJs may wish to seek the independence that partnering with Spotify brings, though it is worth remembering that for many, labels still offer a great means of exposure for your music.