Spotify Looks At Unveiling A Long-Term Strategy The Music Industry Won’t Like

Spotify direct license strategy on the Music 3.0 blogA new report suggests that Spotify is embarking on a new strategy that may ultimately alienate the very partners it needs to stay in business. A recent Billboard article outlined Spotify’s currently unannounced program of offering advances to a select number of indie artists for a direct licensing deal with the service.

If you’re an artist or manager, there’s a lot to like from this type of deal. A possible six-figure advance is nice but not as high as a major label might offer, but the prospective increased royalty rate on revenue from streaming is an eye-opener. The real question is, why would Spotify even propose this in the first place?

Reportedly Spotify is offering its direct licensees 50% of the revenue derived from streaming, which is less than the approximately 54% that it pays to a label. Spotify needs to decrease its costs, and this is one way to do it. The problem is that the company is prohibited from offering a direct license deal to artists that are already signed to a label so it would make sense that this is why indie artists are being approached. The reality is that there’s not much cost savings to be had there since it’s the big artists with the major labels that generate the majority of streams these days, not indie artists. So why even bother?

Before I throw out a theory, let’s look at what’s in it for the artist.

One of the problems with streaming for an artist is that regardless of what Spotify and other streaming services are paying out, the artist is only seeing 20 to 50% of that revenue due to the terms of their agreement with their record label. That means that for every $1 brought in by the label from Spotify, the artist sees anywhere from 20 to 50 cents. A direct deal means that the artist now collects the entire $1, which of course is very attractive. Spotify’s deal is also said to be non-exclusive, allowing the artist to go make similar deals with other streaming services as well, if available.

But there are risks involved for the artist too. A major label still has the marketing and promotion infrastructure to boost an artist to superstardom that can’t be easily or inexpensively duplicated, so if the artist even thinks he or she will need this type of heavy lifting in the future, a direct deal might jeopardize that. A label has much less incentive to sign an artist if it knows that Spotify might not be an available income stream to them.

Yet Spotify won’t save all that much money signing even relatively big indie artists to direct deals, so why even broach something that might upset their label partners. If you think about it, Spotify appears to be looking long-term with this strategy, which is enter into a direct deal with who you believe to be the superstars of tomorrow today. If enough have done this and made a good amount of money along the way, it will be hard for them to give up at least half the proceeds to a label down the road. The more artists that are in that position, the more Spotify is also in a position of strength the next time licensing negotiations with the labels come around.

It should be noted that a direct license doesn’t mean that Spotify is becoming a label itself and therefore a direct competitor with its label partners. It won’t own any of the directly licensed copyrights, since it’s basically leasing them, the same as they do now.

Direct license deals could also be a blow to music aggregators like TuneCore and CD Baby, companies that indie artists use to distribute their works to the digital services in exchange for a percentage of the income and/or fees. A direct deal bypasses the need for such services.

A Spotify direct license deal is a subtle strategy looking years forward for the payoff, but it’s all about ultimately helping the company’s bottom line, and therefore its stock price. It will probably upset some or all of its label partners, but you can’t blame the company for trying a new angle at cutting costs.

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