The compromise: Spotify & UMG’s long-term streaming deal

After two years of operating on a month-to-month basis and intense negotiations, the biggest music company in the world and the globe’s #1 music streaming service have reached a multi-year licensing agreement.

Daniel Ek should be grinning from ear-to-ear as Spotify won a lower-revenue take by Universal Music Group – but, of course, there’s a catch. Universal has reportedly set Spotify paid-subscriber growth targets in return; but if the streaming giant doesn’t reach them, UMG has the option to either postpone its reduced revenue share or give it up entirely.

In return for the larger piece of the revenue pie, Spotify will undertake a major backtrack in its release policy. Universal-signed acts will now have more say in which of their new releases are kept off Spotify’s free tier.

Crucially though, the deal is critical for Spotify’s planned IPO in 2018. The service, currently valued at US$8.5 billion with 50 million global paid subscribers, needed to convince labels to take a smaller share of revenue in order to increase its profitability.

Speaking to TIO, Dean Ormston, Head of Member Services at APRA AMCOS said:

“The best way to increase the return to artists from music streaming services is to grow the number of people paying for subscription-based access. Windowing potentially puts more control in the hands of artists in relation to their new releases, which could be a motivator for Spotify’s customers to move from a free to premium subscription.”

While it’s not been reported just how much UMG will be taking of the revenue share if Spotify reaches its growth targets, current deals see record music companies take 55% of Spotify revenue and publishers take around 10-12%.

On average, record companies get paid a rate of 5 cents per 100 plays on Spotify. That’s fine for an artist like Ed Sheeran, who clocks up 50.7 million streams in a week, but for a local industry where streaming represents more than 30% of the business, deals like this are crucial for the new music economy.

Sir Lucian Grainge, Chairman and CEO of Universal Music Group, said: “In a market this dynamic, one evolving more rapidly than ever before, success requires creative and continual re-evaluation of how best to bring artists’ music to fans. At UMG, we’ve not only reimagined distribution models and technologies, but entire business models.”

Daniel Ek, Chairman and CEO of Spotify, said: “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. 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.”

This article originally appeared on The Industry Observer, which is now part of The Music Network.