Daniel Ek

Four months into the streaming service’s life as a public company, Wall Street is cheering its possibilities, while the music industry watches its next moves warily.

On July 26, Spotify revealed its second-­quarter earnings, reporting its first full quarter as a public company since its April 3 debut on the New York Stock Exchange. The results — 83 million global subscribers, up 40 percent year over year, and 180 million monthly active users — sent its stock price soaring to a record high, ending the day at $196.28, as investors rewarded the company for growing its subscribers by 8 million.

In its short tenure as a public company, Spotify has done remarkably well on Wall Street, as its ­valuation ballooned to as high as $34 billion. Its relationships in the music industry, on the other hand, have soured. Missteps ­surrounding the company’s hateful-conduct initiative in May raised concerns about ­censorship from artists and ­executives, for example, resulting in the policy being rescinded three weeks later. And while Wall Street was encouraged by its earnings, the company’s losses doubled year over year to $461 million, causing Spotify to seek ways to reduce its content costs.

In June, Billboard reported that Spotify had quietly been ­negotiating licensing deals directly with ­managers and independent ­artists, which had record company executives ­privately discussing how they could fight back. Those deals, according to one ­manager who has reviewed several offers, are similar for both rising and established acts, and ask for a multiyear ­licensing ­agreement — which auto-renews unless the artist opts out — and a lower royalty payout from which, by ­sidestepping the labels, an artist would see a larger percentage. In exchange, Spotify offers ­dedicated marketing and ­promotional ­assistance, but no ­financial or editorial commitments, though offers for some superstar acts vary.

“It’s more about having an actual voice at the company, because a lot of things that are done there are automated,” says the manager. “There’s no playlisting guarantee, but you get the key to the castle.”

There is little that labels can do ­immediately to stop Spotify from licensing music directly from acts they haven’t signed themselves. One option floated was blocking Spotify’s expansion into new international markets, since the service needs new music licenses in each territory. But while each label could potentially deny Spotify permission to launch in a market like India, the labels can’t collude with one another to do so.

Even if Spotify were now to volunteer to halt its direct ­licensing deals with independent acts and their managers, some music ­executives tell Billboard that it would be too little, too late: They no longer trust Spotify to act in the music ­industry’s ­interests, especially with ­shareholders now onboard. That rift could make Spotify’s next round of licensing negotiations with the majors more adversarial, and its deal with Universal Music expires in under a year, sources say. Though it’s unlikely that labels could strengthen the language in their current ­licensing agreements that prevents Spotify competing with them in a meaningful way in their core ­businesses, the labels could simply demand higher returns.

Spotify CEO Daniel Ek addressed the direct deals in an earnings call on July 26. “Licensing content doesn’t make us a label, nor do we have any interest in becoming a label,” he told investors. “We don’t own any rights to any music, and we’re not acting like a record label … The key ­objective that we’re ­pursuing is ­taking the data and insights that we’re generating on our ­platform, and creating tools that allow ­artists and labels to better market ­themselves in the marketplace. I think this is a huge opportunity for all labels to become more effective.”

On June 12, Ek failed to appear at the UJA-Federation luncheon ­honoring both him and Spotify global head of creator services Troy Carter as music ­visionaries of the year, with only Carter on hand to accept the award. Several music executives told Billboard they were disappointed by Ek’s absence, and noted that YouTube global music head Lyor Cohen showed up, displaying a desire to connect despite the tense relationship between the industry and the world’s biggest free video site. “Even Lyor is trying to build bridges,” said one top major-label executive at the time.

That Carter ended up as Spotify’s sole envoy became more ­significant on July 31, when the company confirmed he would be leaving his post in September. His exit was the latest, and most high-profile, in a line of a half-dozen executives who have streamed out of the company in recent months, including from the artist, label and industry relations departments. Spotify has said several of those departures were part of an internal reorganization; Carter’s department will be combined under that of head of shows and editorial Nick Holmsten, who will take over Carter’s former role.

One music attorney says the ­exodus may also just be because those ­positions are no longer needed, now that Carter and his team have “softened the sharp elbows and the view of Spotify in the creative community.”

“Spotify is big enough now that artists, managers and labels will have to suck up to whoever is holding the key,” says a former major-label executive. “Troy did a great job of ­getting artists to see what’s doable on the platform, and ­convincing Spotify to invest in marketing artists instead of the platform. But if it mattered who is at the streaming platforms, wouldn’t everyone go to Tidal so they could bug JAY-Z? And even if it did matter, what other choice would they have?”

Or, as BTIG Research analyst Rich Greenfield put it while ­recommending the stock in July: “The Spotify platform is simply too ­powerful to wait any longer to embrace.”

 

Source: Billboard