Analysis

Spotify UMG deal returns focus to potential IPO… and artist concerns


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If you saw our story yesterday afternoon, you’ll know that Spotify has signed the first of its new licensing deals with major labels, Universal Music Group.

The immediate talking point was Spotify’s confirmation that it will allow UMG artists to window albums on its premium tier for two weeks before their release for free listeners. Overnight, though, attention has also turned to the implications for Spotify’s IPO.

“Spotify would have an easier time going public if it had a deal with at least one of the other majors, but it could probably have a successful offering without locking in every deal first,” wrote Billboard’s Robert Levine in his analysis.

“Spotify needs to create a strong narrative for Wall Street if it is going to IPO successfully. Within that narrative it needs to demonstrate that it is embarking on a journey of change even if the destination is some way off yet,” added Midia Research’s Mark Mulligan in his own blog post.

Spotify’s near future is going to be dominated by the delicate balance between the expectations of Wall Street on one hand, and music rightsholders on the other.

While there was speculation earlier this year that Spotify’s IPO may slip to 2018, going public this year remains a real possibility for the company, which has been watching the market reception for Snapchat’s IPO among other indicators.

The ‘narrative’ required to fire up investors isn’t just that Spotify is reducing its royalties burden and inching toward profitability; it’s one of confidence that it can survive and prosper in the long-term, against competition from the deepest-pocketed tech giants.

“The labels need Spotify to start building a sustainable business. It is not enough for Spotify to simply clear the IPO hurdle, it needs to land on its feet and maintain speed,” suggested Mulligan. “While it’s great to see that UMG and Spotify have hit upon a framework for delivering better rates in return for better growth, Spotify must be careful to ensure that it grows sustainably and not pursue growth at any cost.”

As we’ve written before, the desired outcome for rightsholders is to have Spotify – and ideally other pureplay services, obviously – providing healthy competition for Apple, Google and Amazon.

One more point to be aware of. The financial terms of the UMG deal are unsurprisingly private, but most reports are running with the assumption that Spotify has secured some kind of discount on its rates.

That in turn is already sparking concerns for some artists, especially given their knowledge that the major labels will enjoy equity-based windfalls from Spotify’s IPO that may make lower rates a short-term hit worth taking.

Spotify will need to think very carefully about how it presents these licensing deals to the artist community, as well as redoubling its efforts to create tools to help them grow their streams, audiences and revenues on the platform.

Stuart Dredge

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