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How Spotify is finally gaining leverage over record labels


The problem with Spotify going public has always been that the record labels own the music. They force Spotify to pay 70 percent or more of its revenue to them for royalties, and could jack up that price if Spotify got too profitable.

That’s why over the past few years, Spotify has been pushing five different paths to putting pressure on the labels to cut it a better royalties deal. They all hinge around the idea of making the labels need Spotify as much as it’s historically needed them.

When Spotify launched in 2008, it had no power in the relationship since it had so few listeners. It needed to raise over $180 million in its first few years and pay the labels a huge upfront advance on royalty payments to convince them to let it launch in the US. Spotify also had to sell the labels equity so even if it succeeded, they’d be financially protected.

But now that Spotify has grown to 50 million paid subscribers and a huge base of free ad-supported listeners, it’s emerging from the streaming pack including YouTube / Google Music, Pandora, Apple Music, and Amazon so rights owners can’t just favor them instead. Spotify has begun to gain some leverage over the labels so that it can make money without them and they need it to have a hit record.

Here are the five ways Spotify is weakening the the record companies’ iron grip on music:

Dictating The Top 40

Spotify’s Discover Weekly and Release Radar playlists aren’t just some of its most popular and differentiated features. They give Spotify newfound power to choose what artists and songs a large swath of its listeners hear. Instead of focusing on peer-to-peer sharing or direct channels between the artists and the fans, it’s prioritized music discovery methods that put it in control. Spotify wants to take the place of the thousands of radio stations that record labels typically kiss up to.

Spotify’s owned playlists like Discovery Weekly let it influence what gets popular

If Spotify can use its owned playlists to make or break different artists, it can use this influence to demand better deals from the labels. Record companies that offer it lower royalty rates, don’t do exclusives with its competitors like Apple Music, or get their artists to release special re-recorded Spotify Sessions of their hits could see their artists placed more prominently in Spotify’s playlists and their audiences grow. Labels that don’t play ball with Spotify might sublty notice they’re not getting the same playlist love. Spotify’s already been accused of this retaliatory behavior. Even though it denied the practice, the threat could be enough to coerce the labels.

Scale

Spotify needs all the major record labels to let it stream their content, otherwise its catalogue would be confusingly incomplete. Most listeners don’t know what artists are on which of the three major labels – Sony, Warner, and Universal. So the result of any one of them refusing to work with Spotify is that it would make almost a third of its music unavailable, and drive users to its competitors.

But that was when Spotify had so few listeners that the labels didn’t need it. Now Spotify contributes a big enough percentage of record labels’ total royalties that they have a lot more to lose from cutting it off. As we said above, their artists would suffer from the loss of distribution, but they’d also suffer a loss of revenue. Spotify’s size has made record labels pulling out into either a bad bet or a bluff.

Diversifying Beyond Music

Spotify has to pay out 70 percent of its revenue from major label music, but not from other content types like video and podcasts. That’s partly why Spotify is pouring investment into creating original content like 12 different video series, including Drawn & Recorded about music history. It’s also got a big original podcasts initiative.