Morning Report: Spotify Bends to Exclusives Ahead of IPO Ambitions

Yesterday, Spotify renewed its licensing agreement with Universal Music Group (UMG). According to the agreement, premium-tiered Spotify users will get exclusive access to select albums two weeks prior to free-tiered users. In exchange, The Verge reports that Spotify’s royalty payments will be modestly reduced.

The new license deal with Universal Music Group validates Spotify’s ambitions to IPO in 2018 under more favorable terms with labels, with the streaming service using its growth and mindshare as leverage. And at first blush, this new licensing deal opens that gate.

As reported by Mattermark in August of 2016, Spotify’s royalty payout “was a full 85 percent of its top line.” And there is no real incentive for the major labels, which make up the bulk of Spotify’s library, to reduce its payout in correlation with Spotify’s growth. And as The Verge discovered in its analysis of Spotify’s contract with Sony, the devil is in the details, making licensing agreements with labels much more complicated than calculating the cost of revenue per stream. So while the UMG deal may serve as an important signal that Spotify can get a handle on its royalty payments (and neither UMG or Spotify has confirmed that royalty payments have, indeed, been reduced), it does not make Spotify’s path to IPO obviously clear.

The new deal with UMG is also admittance from the company that exclusives are becoming a bigger part of the music streaming experience. “We know that not every album by every artist should be released the same way, and we’ve worked hard with UMG to develop a new, flexible release policy,” said Spotify’s CEO Daniel Ek in a statement about the deal. The march towards exclusivity has also been reinforced by Apple Music and its exclusives from artists Frank Ocean, Chance the Rapper, and Drake.

For Spotify, which actively touts that its free-tier has access to its full music library, the agreement with UMG to go exclusive is a dent in its armor. Without other labels reporting new licensing deals, the impact this UMG deal will have on Spotify’s music library, overall royalty payments, and growth is hazy. And as competition in the streaming space heats up, reduced royalty payments in favor of exclusivity are not guaranteed.

For now, the renewed Spotify deal shows that Spotify has some leverage. And if it can hold onto its reduced royalty payments for modest limitations on its free tier, the path forward to a 2018 IPO appears attainable.

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