An attendee checks his mobile handset in front of Spotify House during the South By Southwest (SXSW) Interactive Festival in Austin, Texas, U.S (Photographer: David Paul Morris/Bloomberg)  

Spotify Is Said to Seek Reset in Negotiations With Record Labels

(Bloomberg) -- Spotify Ltd., under pressure to file for an initial public offering, is showing renewed urgency in a fresh round of meetings with record labels to nail down long-term licensing deals, according to people familiar with the discussions.

A key element of the talks is moving more Spotify users from its free service to a $10-per-month subscription. The two sides have discussed giving labels the ability to limit some new releases to Spotify’s paid tier, in exchange for letting Spotify pay a lower percentage of its subscription revenue to the labels, the people said. Spotify has also proposed reducing its royalty payments by providing additional data and promotion to artists, said the people, who asked not to be identified discussing private conversations.

Spotify declined to comment.

Executives from the world’s largest music-subscription service would like to have the deals completed by year-end, one person said. Lowering the percentage of sales Spotify pays to labels would help the company improve its chances of being profitable, a major concern for potential investors.

Spotify has some leverage of its own: It’s an increasingly important source of revenue to the music industry as streaming becomes a more mainstream way that people consume music. Streaming was the largest source of sales for recorded music in 2015, and Spotify has paid more than $5 billion to the music industry since October 2008.

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Spotify Chief Executive Officer Daniel Ek said this week that the London-based company has 40 million paying subscribers, up from 30 million in March.  Apple Music, the second-biggest service, has 17 million subscribers.

Spotify has been trying to hash out new deals with the three major record labels -- Warner Music Group Corp., Sony Corp.’s music division and Vivendi SA’s Universal Music Group -- for as long as a year in some cases.

Spotify paid out 84 percent of its sales to rights holders in 2015, and most of that went to record labels. That’s why Spotify’s losses grew even as it doubled sales last year to $2.2 billion. Without new deals, Spotify and the labels have been operating on month-to-month extensions that preserve the status quo.

Vested Interest

Record labels have a vested interest in keeping Spotify healthy, because they risk becoming overly dependent on Apple without a strong independent alternative -- a similar fate as during the iTunes download era. But the labels have been unwilling to reduce the licensing fees they receive from Spotify without getting something in return, the people said.

Apple Music can absorb losses because it’s a division of the world’s most valuable company, and has paid artists hefty advances to release new music exclusively on its service. Spotify has decried that practice as bad for the industry and consumers, and punished artists who do so, leaving them out of high-profile playlists.

Spotify offers a wider array of music and services for free than Apple Music and Pandora, and musicians have bemoaned royalties received from Spotify as sparse. Taylor Swift publicly feuded with the company over its refusal to withhold new albums from its free tier.

Ek has said Spotify needs an enticing free service to lure customers away from other free products, like YouTube. And Spotify converts a high percentage of its free users into subscribers, he says. The company, which took on $1 billion in debt earlier this year, also has been considering acquisitions to bolster its advertising technology and software to better track the publishing rights of songs to make it easier to compensate songwriters and labels.

The labels say Spotify isn’t doing enough, especially because advertising from the free service accounts for less than 20 percent of Spotify’s overall revenue. Two of the executives in charge of Spotify’s advertising business, Chief Revenue Officer Jeff Levick and Vice President of Sales Jonathan Forster, are leaving the company.

Record labels want artists to be able to control whether a new album appears on the free tier or not, the people said. Spotify has come close to giving individual artists that option, only to withdraw. Troy Carter, the former manager of Lady Gaga and John Legend, joined Spotify earlier this year to help the company improve its relationship with artists.