Spotify’s best chance of survival is by reshaping the record deal

As Spotify moves into its second decade of operations, there’s no doubting its strong position at the head of the increasingly-vital music streaming pack, but finding a way to shape such an outwardly successful model into a profitable one is proving harder than many would have expected.

With streaming numbers through the roof, new records being broken each month (although mostly by Drake and Ed Sheeran), and paid subscriptions having ticked past the 50 million mark, Spotify is nonetheless having to pay upwards of 70 percent of its revenue to record labels and publishers in order to keep the taps running hot.

With such monstrous overheads, the question that remains is how Spotify will manage to pivot from here to become a viable platform in the long-term.

Last year, it was suggested that negotiations with the labels to reduce their take had failed. What if, then, Spotify were able to take the likes of Warner, Universal and Sony out of the equation with their own label of sorts, and keep a tight fist on those profits?

It would certainly help to improve the tenuous chances of profitability that loom over its ongoing hopes of an IPO, and, according to new reports, Spotify is ready to stop working with the labels and instead start competing with them directly.

Rumours have been swirling for a while now that Spotify is approaching artists with deals that resemble something they’d find at a label, allowing the streaming platform a percentage of their revenue, and effectively recouping a slice of the hefty royalties they’re required to pay.

Just as a service like Netflix will co-opt an actor or director with a six-picture deal, so too could Spotify build a roster of artists whose success they could influence directly, and whose royalty payments would remain in the Spotify coffers.

But, putting aside the possibility of advances or even big upfront payments to secure exclusivity for the platform, why would artists make the leap and chalk out a deal with Spotify over an established label?

The answer lies firstly in Spotify’s dominant influence over listening habits, and, by extension, the charts. Streaming figures have now reached the point at which they’re capable of exerting a significant influence on the charts, with Spotify’s innumerable playlists having quickly become the new tastemakers in the eyes of many consumers.

With the immediacy and ease of use found in its push-button curation, it’s quickly taking a host of other platforms, from radio to the music media, out of the equation. By using its ability to position its own artists very favourably on its own service, Spotify could offer an influence that the labels can only dream of – or spend through the nose to attain – and that will be a tempting thought for many artists.

If Spotify can nurture and maintain this already-formidable hold it has over the listening habits of tens or even hundreds of millions, it stands to reason that it will be able to better negotiate its licensing deals with labels that may fear unfavourable placement of their artists (which Spotify has certainly been accused of – and denied), and who ultimately rely on the service for much of their revenue.

But the most potent move of all would almost certainly be to poach their artists from them outright, and with the landscape created by Spotify being so markedly different from the one that produced ‘the big three’, it could potentially offer artists a chance to negotiate deals in entirely different ways to what was possible with a traditional label or publishing deal.

Spotify is reportedly eyeing a delayed 2018 date for its planned IPO, as it continues to negotiate licensing deals with the labels, among other moves. But rather than attempting to wrest lighter rates from the labels, it may simply be hoping to lessen the labels’ strangle-hold on royalties by taking some of them for itself – and it could change the record deal for good in the process.

Perhaps, ultimately, it needs to.

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