Everybody’s talking about Universal Music Group’s new deal with Spotify. The deal, a multi-year global license agreement, lets UMG withhold albums from Spotify’s free ad-supported tier for two weeks. While singles will still be available to all types of users, some releases by Universal’s artists will only be available to paid subscribers in the first two weeks of being released.
It’s an influential deal that’s likely to impact the dynamics of music streaming, since other labels are likely to negotiate for similar terms.
Spotify needs to get to a more healthy financial spot in anticipation of the company going public. Mark Mulligan points out that Spotify has been paying out 80% of its revenues to rights holders: not exactly appealing for investors. To fix that, Spotify can do two things: 1) own more of its own copyrights, like Netflix, and compete with labels for talent, and 2) reduce rates to rights holders. While it is facing pressure from publishers to increase their payouts, it has managed to reduce UMG’s revenue share in exchange for ambitious subscriber growth targets. If Spotify doesn’t meet these targets, then the reduction will be postponed or reversed. The other aspect, albums being windowed into premium-only for two week periods, underscores the negotiation’s emphasis on growing streaming subscriber numbers and the average revenue per user (ARPU) of the service.
This deal obviously doesn’t work if albums are available in free tiers of other services, so it’s likely that UMG will maintain a take-it-or-leave-it position in dealing with them: either you window the album, or all your users will have to wait two weeks longer.
The deal’s timing is logical, with streaming now making more money in the US than downloads ever did. In 2016 streaming accounted for 43% of Universal’s total sales/streams revenues, with ad-supported streams and subscriptions turning over $1.6 billion for them. And while the total recorded music market grew by $1 billion, streaming grew by $2 billion, easily off-setting the decline of legacy formats.
As many analysts have pointed out: these are the signs of a maturing market, but some are worried.
Have we forgotten about piracy?
In a post on Techdirt, Ross Pruden warns that the deal could “encourage users to regress from free (and legal) methods to their familiar free (and illegal) methods.” He argues that in those two week windows, some users will go over to Google, type “Taylor Swift new album torrent” and discover how easy pirating music still is. However Mark Mulligan is less worried:
“While there is a risk that windowing may give piracy a little boost, those consumers that choose to Torrent rather than upgrade or simply wait 2 weeks were never realistic targets for the 9.99 tier anyway. What we may well see is a spike in uptake of free trials and the ‘$1 for 3 months’ super trials.”
– Mark Mulligan
These super trials have been one of the key factors of Spotify’s subscriber growth in 2016, and leads some to argue that the price of streaming subscriptions needs to be rethought. Some even speculate as to whether we’re witnessing the end of free streaming.
While the market has certainly matured, it still remains fragile and piracy is still a constant risk. The two week premium windows for certain releases seem like a good vehicle to test the maturity of the market and the shift in consumer behaviour and expectations. Downloads are inconvenient after all – even piracy is moving to streaming. Hypebot’s Bruce Houghton argues that casual music fans, the ones not willing to pay $9.99, will simply wait out the two weeks. The time period is not that long, and the album’s singles will already be available on Spotify and YouTube.
Yet Spotify and the labels are intent on seeing if they can tap a potentially large amount of revenue. While 70% of Spotify’s users were on the free tier, the revenue those users generated amounts to less than 10% of total revenues.
Peter Paterno, a lawyer who represents artists like Dr. Dre, Metallica, Skrillex, and Pharell, commented on Billboard that “the labels hate the free tier, [because it pays so much less than subscription revenue.] They’re trying to drive fans to subscribe.” Music business journalist for Quartz, Amy X. Wang, shares the opinion: “the service’s sudden turnaround today indicates that its free-music strategy was not sitting well with the music industry at large.”
The general consensus however, is that it’s a win-win for Spotify and UMG. Whether windowed releases will lead to significant growth of subscriber numbers, or piracy, is a question that will be answered before 2017 is over.
Don’t forget to subscribe to our Synchtank Weekly newsletter to receive all of our blog posts via email, plus key industry news, and details of our podcast episodes and free webinars.