As I’ve written in other posts, Spotify wants to do a public offering this year but won’t be able to do that until it signs new licensing agreements with each of the major labels. It looks like the first of those agreements has come to pass with the reported signing of Universal Music.
The fact is that Spotify was not in a particular position of power here, so had to make some concessions that under other circumstances (like not having an impending IPO to think about) it would probably not agree to. One of the biggest is that it has agreed to make new album releases available only on its paid tier, something that the company has stated it would never acquiesce to in the past. This “windowing” is for two weeks and begins today. New singles will still be available across both the free and paid tiers.
One of the more interesting reported terms is that Spotify is said to have set subscriber growth targets in return for a reduced royalty payment. No one is saying exactly what those subscriber milestones are, but the company must feel very comfortable with them in order to place it in the agreement. It’s presumed that the payments will increase if Spotify doesn’t meet those goals, but there could also be a penalty involved or maybe even an increased staked in the company.
This is only the first of the agreements that Spotify has to have in place prior to its IPO. There’s still Sony and Warners as well as Merlin for indie content. That said, one would think that the other agreements would be similar to the one with Universal Music, as most labels require a “favored nations” clause that requires everyone to get the same terms.
If Spotify can’t get these agreements in order, it could shoot down its IPO, as there would be too much future financial uncertainty for investors or underwriters to sign on. This is a good first step.