Young little Spotify and the big old record companies

One of the smaller points in the Spotify fund-raising piece in the FT that flashed around the globe Tuesday was mention of a “strategic partner” in the wings. This was widely interpreted to mean a record company.  Some might have raised an eyebrow and wondered why a single record company would wish to take a piece of Spotify when it’s widely acknowledged that only when a service can offer all the content from all the labels can it be said to be in a position to offer a meaningful consumer offering (niche and genre-specific takes aside). These days however, Universal appears to be flying in the face of that truism by going alone in its recently announced services with both Virgin and Orange. Perhaps having such a high share of the UK market gives them that confidence. Music Week reported earlier this month Universal has currently 44.5% of the UK album market and 46.5% of the singles. As the FT argues, having a record label on board might allow the company to negotiate lower royalty rates. Artists signed to such a label might begin to query the value of such a deal to them however.


universal logoSo might this “strategic partner” in the wings be Universal? Well earlier in the year, around the time of Spotify’s launch, rumours swirled around the industry about the cost and terms of Spotify’s licenses with the major record labels. Estimates from between £4m and £7m have been bandied about as the amount they had to pay in upfronts to the majors to achieve their slam-dunk comprehensive license pack. Hence perhaps the need to raise substantial sums again so early on. If that weren’t crippling enough, a new and sophisticated deal option was rumoured too. In the early naughties, taking some equity in start-up music companies as well as charging upfront royalty fees was common practice. I like to think I helped pioneer such deals during my time in Los Angeles with EMI.  It was therefore widely assumed that the majors had repeated this practice in the case of Spotify. But, it was  also alleged that the majors had created a ‘put option’ in their deals that would allow them to  cash in their shares in the event that the company’s valuation reached a certain threshold. Such an option would be attractive to both sides since it would motivate the labels to collaborate with Spotify to increase its valuation and help Spotify by incentivising the labels to help Spotify and not some of its competitors.

spotifyIf the magic number was $200m then it might just be that this new round of investment is accompanied by a more significant re-jigging of the ownership of Spotify with several labels seeking to cash in and help their suffering bottom lines, while one or two others choose to enhance their holding position. One of the great advantages of cashing out in such a manner to the labels would be that no artists would need to be paid since the revenue came from the labels’ aggregated position not through individual performances.  Of course, until the day when Spotify goes public (something of a distant prospect in this market) we may never know. How any of this plays into Apple’s thinking about Spotify’s iPhone app is hard to fathom – if indeed Apple are aware of this dimension at all.

And from the perspective of a large record label, what real value would building up a single player like this bring in the long term? It is often argued that if one record company were to take some ownership in a big market-dominant player,  then the other competitor labels would never play ball and would support a competing player. But that was an argument made in the days when one major label didn’t control almost 50% of the market.  So this begs the larger question, as the architecture of the music industry continually evolves and reshapes, what path should a record company take in the digital arena and how does it achieve its mutation from a recording and marketing business to a digital relationship management company? How fast can one company alone, get ahead of the rest of the industry before the others catch up?  As the speed of change increases so, it would seem, does the opacity of the game. As Mr Grainge, Chairman of Universal Music, said to me recently with a twinkle in his eye: “Oh, I’m very, very opaque”.


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One response to “Young little Spotify and the big old record companies

  1. Pingback: File Sharing « Andrew Weaver's Blog

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