A New Spotify Initiative Makes the Big Record Labels Nervous

By Ben Sisario | September 7, 2018

For decades, the path to stardom in the music industry has usually gone through a major record company.

Almost every artist today who reaches the top of the charts — whether Kanye or Adele, Beyoncé or Drake — has gotten there with help from one of the three conglomerates that control around 80 percent of the business: Universal, Sony and Warner.

Now Spotify is experimenting with another approach, one that is making those labels nervous.

Over the last year, the 12-year-old company has quietly struck direct licensing deals with a small number of independent artists. The deals give those artists a way onto the streaming platform and a closer relationship to the company — an advantage when pitching music for its influential playlists — while bypassing the major labels altogether.

Although the deals are modest — with advance payments of tens or hundreds of thousands of dollars, according to several people involved — the big record companies see the Spotify initiative as a potential threat: a small step that, down the line, could reshape the music business as it has existed since the days of the Victrola.

Spotify, a Stockholm company that went public in April, has offered few details about its entry into the talent marketplace. It has not revealed which artists it has made deals with, and declined to comment for this article.

According to six people in the music industry who have been briefed on the recent deals, but were not authorized to discuss them publicly, Spotify has paid advances to management firms and other companies that represent artists who are not signed to a record label. For now, that means up-and-coming acts and older artists who have gained control over their vintage hits.

Spotify is offering artists two advantages: a bigger financial cut and ownership of their recordings. The deals, furthermore, are not exclusive, leaving the artists free to license their songs to other streaming companies, like Apple Music and Amazon.

Spotify typically pays a record label around 52 percent of the revenue generated by each stream, or play, of a given song. The label, in turn, pays the artist a royalty of anywhere from 15 percent to, in some cases, 50 percent of its cut. By agreeing to a direct licensing deal with Spotify, artists and their representatives are able to keep the whole payout.

The closest the company has come to making its ambitions public was during an earnings call in July, when Daniel Ek, the company’s chief executive, confirmed reports in Billboard and elsewhere that Spotify was pursuing direct deals with independent artists.

He was careful to add that such deals did not mean Spotify was turning into a record company — something that Spotify’s contracts with the big labels forbid, according to people briefed on the terms of those contracts.

“Licensing content does not make us a label, nor do we have any interest in becoming a label,” Ek said on the call. “We don’t own any rights to any music, and we’re not acting like a record label.”

The next Ed Sheeran or Ariana Grande may be attracted by the very thing Ek cited in arguing that Spotify is not becoming a label. With its 83 million subscribers — and nearly 100 million more who listen free — the service can offer significant exposure to artists without asking them to give up something that traditional record companies demand as part of any deal: ownership of their recordings.

Taylor Swift is one artist who is intent on keeping her work. She will become a free agent this year after the expiration of her deal with Big Machine, an independent label in Nashville that is distributed by Universal, and she is said to be seeking a deal that would give her ownership of her recordings.

Spotify’s decision to forge closer relationships with artists comes with a big risk, however. In the end, it may not be worth antagonizing the labels that the company depends on, said Amy Yong, a media analyst at Macquarie.

“They are treading carefully,” Yong said. “They do not want the Big Three to shut then out from their library of content for the sake of signing deals with up-and-coming artists at a higher margin. That’s not an economic trade-off that you want to do.”

The major labels have signaled their disapproval of Spotify’s under-the-radar initiative in various ways. Through anonymous comments in news articles, music executives have indicated that they could punish Spotify by withholding the licenses the company needs to expand to India. The labels have also suggested they will be unwilling to compromise with Spotify as its contracts with the labels expire over the next year.

Representatives for the three major labels declined to comment for this article.

In what may be another sign of the tensions between the entrenched music industry and the streaming service, the three conglomerates have lately favored Spotify’s rivals with promotional goodies. Universal, for example, created an exclusive playlist with Apple Music.

“It’s almost a warning shot by the labels to remind Spotify that, as these stories play out, it’s not just Spotify that controls the narrative,” said Bill Werde, the director of Syracuse University’s Bandier Program on the music industry and a former editor of Billboard magazine.

One company that has made a deal with Spotify is Human Re Sources, a small distributor founded by J. Erving, an artist manager who has worked with Troy Carter, Spotify’s departing head of creative services.

In an interview, Erving said Spotify had paid a modest advance that helped him establish his company. Human Re Sources, he said, is able to pitch songs directly to Spotify’s internal teams — a rare advantage in the industry’s vast do-it-yourself landscape.

Spotify has not given favorable rates to artists affiliated with Human Re Sources, Erving said, and it has not guaranteed them placement on its playlists. But the company’s artists have had success penetrating Spotify’s most influential playlists, like New Music Fridays and Rap Caviar. Some of them, like Jussie Smollett — an actor in the hit television show “Empire,” who makes slithery R&B — have also made it onto a Spotify billboard in Times Square.

“Spotify has been very supportive of the stuff that we have released to date,” Erving said. “But Apple and Pandora have been very supportive as well.”

In preparation for its public stock listing, Spotify hinted that it had big plans to change the “old model” of the music business, which it said relied on “gatekeepers” like record companies and radio. In their place, Spotify said, it wanted to usher in a new era that would help new artists break through more easily.

That stance has put Spotify in an awkward position between investors, who are rooting for disruptions that could lead to profits, and music business executives, who would like the streaming service to stay in its lane.

According to public filings, Spotify had about $4.9 billion in revenue last year but almost $1.5 billion in net losses. Its stock price has risen steadily since April, and the company is valued at roughly $34 billion.

Below the level of the giant conglomerates, the attitude toward Spotify’s moves has been anything but hostile. Its entry into the talent marketplace may give artists more leverage, said Zack Gershen, an executive at Mtheory, a company that consults with artist managers.

“From our perspective, options are good,” Gershen said. “Options create competition. They create innovation. They help everybody discover what the future of this business is.”

© New York Times 2018