On Tues­day April 4, after two years of tough nego­ti­a­tions, Spo­ti­fy, the lead­ing glob­al music stream­ing ser­vice, and Viven­di’s sub­sidiary Uni­ver­sal Music Group (UMG), a world leader in music-based enter­tain­ment, entered into a new mul­ti-year glob­al license agree­ment where both sides got what they want­ed.

In mak­ing the announce­ment, Daniel Ek, Chair­man and CEO of Spo­ti­fy, said, “Start­ing today, Uni­ver­sal artists can choose to release new albums on pre­mi­um only for two weeks, offer­ing sub­scribers an ear­li­er chance to explore the com­plete cre­ative work, while the sin­gles are avail­able across Spo­ti­fy for all our lis­ten­ers to enjoy.”

At UMG, stream­ing ser­vices are now the largest rev­enue source. Sir Lucian Grainge, Chair­man and CEO of UMG, said, “Eight years ago, when stream­ing was a wel­come but small source of rev­enue, UMG embraced part­ners like Spo­ti­fy as a way to help return music to a vibrant future ben­e­fit­ting the entire ecosys­tem. Work­ing hand in hand with these dig­i­tal ser­vices brought us the industry’s first real growth in near­ly two decades. Today, stream­ing rep­re­sents the major­i­ty of the busi­ness. Our chal­lenge is trans­form­ing that upturn into sus­tain­able growth.”

Spo­ti­fy has agreed to let UMG and its artists restrict new albums only to Spotify’s 50 mil­lion pay­ing sub­scribers for two weeks, which pays far high­er roy­al­ties than the free ver­sion. Finan­cial fil­ings from 2016 showed that 70% of Spotify’s users were on the free tier. UMG will also get data from Spo­ti­fy on the lis­ten­ing pat­terns of users, help­ing the label improve its mar­ket­ing strat­e­gy.

Spo­ti­fy is grow­ing fast but remains unprof­itable large­ly because of the fees paid to labels. With this con­tract, Spo­ti­fy may cut the roy­al­ties it pays for UMG’s record­ings, which con­trol around a third of all music sales around the world.

The stream­ing mar­ket is increas­ing­ly get­ting more com­pet­i­tive. A deci­sion by UMG to give Spo­ti­fy a bet­ter roy­al­ty rate could have led to pres­sure to accept less from ser­vices like Apple Music (with 20 mil­lion sub­scribers) and Ama­zon Music Unlim­it­ed. Labels are reluc­tant to reduce their rates, but UMG may have solved that prob­lem by tying low­er­ing the men­tioned roy­al­ties to ambi­tious growth tar­gets for Spo­ti­fy.

Through this deal, Spo­ti­fy also removes a major obsta­cle for going pub­lic by ensur­ing the pres­ence of high­ly demand­ed music in its stream­ing ser­vices.

Spo­ti­fy is still nego­ti­at­ing with two oth­er major music labels — Sony Music and Warn­er Music Group — but it will use UMG’s deal as a tem­plate. Val­ued by investors at more than U.S. $8.5 bil­lion, Spo­ti­fy hasn’t said when it will go pub­lic. The com­pa­ny had planned to issue shares this year – via direct list­ing rather than a tra­di­tion­al IPO – but may delay until 2018.

New Deal Between Uni­ver­sal and Spo­ti­fy Lays Grounds for the Lat­ter to Go Pub­lic (PDF)

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Source: The Net­work

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