Spotify finally proves its worth to record labels
In the early days of Spotify (NYSE: SPOT), his negotiations with record companies were often stormy because he demanded more and more concessions and better conditions with each renewal. But his last deal with Vivendi‘s (OTC: VIVHY) Universal Music Group (UMG) suggests that the two sides are more cooperative than ever.
As part of the deal, UMG is committed to adopting future Spotify products connecting artists to fans and providing feedback for improvement. This is a major step towards Spotify’s vision of developing a two-sided market, which will provide an additional source of revenue for its subscription and consumer advertising activities.
Get the biggest label on board
Universal’s adherence to the use of its two-sided marketplace products is a big win for Spotify. This would have been a key point of contention in Spotify’s latest round of negotiations.
Spotify wants to exempt promoted listening from the revenue pool it shares with labels. Currently, he offers products like Marquee (which can be used to notify fans when an artist they’re following releases a new album) and promotes songs in playlists. While the labels pay for this promotion, they get some of that revenue back in the form of a royalty payment. And although these products now represent a small part of the revenue, Spotify hopes that they will become a significant part of the business.
UMG controls approximately 40% of the recorded music market share in the United States. With the biggest label on board with Spotify’s double-sided Marketplace products, Spotify’s job is negotiating deals with the other labels – Sony, Warner Music Group, and Merlin (which represents a consortium of independent labels) – just got a lot easier. One label cannot afford for another to have access to promotional tools that it does not have.
Building on your competitive advantage
Spotify’s biggest competitive advantage is its massive amount of auditor data and its ability to leverage that data for increased engagement. Spotify’s first efforts to use listener data to increase engagement were with its algorithm-generated playlists, which account for around 17% of listeners on its platform.
Using the same underlying data and Technology can provide unique information to record companies and artists about who is listening to what and help them reach more listeners. Competitors in the space won’t always have the same access to quality data, especially given the popularity of playlists (a mine of data) on Spotify.
Its other competitive advantage is its size. Spotify has more listeners and subscribers than any other streaming platform. And as streaming gains in importance in the music industry, it puts Spotify in a privileged position to both demand more from labels and deliver more in return. It now has the power to push a song or album to # 1 on the Billboard charts.
The labels can however be found in a Catch-22. If labels promote listening on Spotify, that means they are probably spending less to promote listening through other channels like physical stores or radio stations. From then on, Spotify consolidates its power over labels, and by deliberately keeping the durations of its agreements short (typically two to three years), it will be able to come back to the table and ask for more.
But with music industry revenues returning to early 2000s levels, thanks in large part to streaming, Spotify should be able to squeeze a relatively larger share of that revenue without major negative consequences for record companies.
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