Streaming services aren't the future of music - they're the new normal

Spotify to offer new releases to Premium users ahead of free tier                   By Ida Torres
Spotify to offer new releases to Premium users ahead of free tier By Ida Torres
Author

07 April, 2017

Earlier this week, the company announced a new deal with the Universal Music Group, paving the way for similar agreements with Sony Music and the Warner Music Group.

Spotify, a rival to Apple Music, has yet to report a profit as it expands, but is under pressure from some artists who have boycotted the usually free service and needs to show investors it can generate cash as it considers a USA listing. But he became more willing to compromise - sources have hinted that Spotify general counsel Horacio Gutierrez played a key role - and the deal couldn't wait much longer.

It would save Spotify from paying underwriting fees to launch an IPO, and would avoid diluting the value of existing stakes in the company.

Spotify may be getting impatient, and that's good news for investors.

In 2015, Spotify was valued at $8.5 billion.

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For Spotify, the deal removes a major obstacle to going public. Traditional IPOs tend to be a more involved process for companies and prices are set after deliberations and meetings with investors. And UMG, which accounted for 35.7 percent of the US recorded-music market in the first quarter of 2017, according to Nielsen Music, often sets the pattern for the structure of digital deals. "I don't think it's going to be used for many releases other than the biggest artists", says Elliot Groffman, a partner at Carroll Guido & Groffman.

The new deal between the music giants allows some UMG artists to place their albums exclusively on Spotify's premium tier for 2 weeks before everyone else hears it.

The royalties Spotify pays for recordings are separate from those that are paid to songwriters and music publishers, which amount to about 10 per cent.

With varying degrees of enthusiasm, the rest of the industry will probably follow - even if some labels hold out for a while. Whether Spotify or music labels can make sustainable profits off streaming is another question, but it's clearer than ever that this is the bed that's been made for them.


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