In our latest post, we thought we'd cast an eye over the profitability issues facing Spotify, in particular with respect to its recent music licensing contractual renegotiations.
At present, Spotify (advertisement above) is the world’s leading music streaming company with over 100 million users, 40 million of which are paid users. These numbers put it well ahead of Apple’s much younger ‘Apple Music’ service, which, however, still boasts a healthy and growing 17 million paid user base.
Streaming music is big business with high margins, and has been linked with a turn around in the fortunes of the the US music industry in recent years.
Whilst physical sales and digital downloads wane in popularity, streaming has bucked the trend. Of late, even Wall Street has become bullish on the future of the music industry, with Goldman Sachs boldly predicting revenues will double in the next 15 years.
For streaming providers, content is king. Spotify is rumoured to pay content owners 70% of its annual revenue. Competitor Apple Music pays even more to content owners but offers a three month no-cost trial period.
Despite impressive revenue performance (over USD 2 billion last year) Spotify is yet to turn a profit. In this, Spotify is not alone in the US. Apple Music is rumoured to be in the same boat and Jay Z’s music streaming service Tidal has posted significant losses to date.
Streaming services like Spotify typically arrange multi-year licensing arrangements to acquire their content.
In light of the above, the commercial terms of these arrangements are naturally of critical importance and negotiations can be difficult and complex.
On one hand, content providers such as music labels want to ensure they adequately compensated for the music they provide. In 2014, Taylor Swift famously pulled her music from Spotify due to feeling short-changed. Some music executives have argued that they don’t want the music industry to end up in a similar position to that of film and television, where they feel too much power has been given to streaming companies like Netflix. On the other hand, streaming services like Spotify would argue licensing terms can not be overly onerous as they need to eventually make a profit to stay in business, and they would point to other ad-based services such as YouTube paying notably less back to the music industry.
At present, Spotify is said to be out of contract with three major music labels: Universal, Sony and Warner - in one case by nearly 1.5 years. As a result, Spotify has been in the less than ideal situation of licensing music content on a month to month basis. This uncertainty is something Spotify is keen to put an end to. With the company looking to go to IPO in the near future, investors will be looking for the security of long term contracts. In light of this, the company has been rumoured to be delaying its IPO until 2018.
Outside of the US, one company which has seen more success, at least in the profitability stakes, is QQ Music in China, the world’s third largest streaming service. In part this has been attributed to the negotiating power of QQ Music’s owners - internet giant Tencent, and is based on QQ Music’s potential future user base of over 800 million users. The Chinese market is currently the 10th largest in the world for recorded music but is expected to climb to the number one position over time.
Spotify’s prolonged contractual struggles are a good example of the fact that when it comes to contracts, legal terms and commercial leverage are often intertwined. As music streaming continues to grow in the future it will be interesting to follow how the situation unfolds as both sides seek to find the final contractual point of balance.
This information is intended for guidance purposes only and does not constitute legal advice. If you do need legal advice, however, get in touch with us!