Spotify (SPOT US) is the world’s biggest streaming company. The company IPO’d earlier this year and the share prices have rallied more than 26% since the IPO in early April 2018.
Source: Bloomberg
Spotify (SPOT US) have recently started to feature music videos as part of many of their playlists. Record Music companies such as Universal, Sony (SNY US), Vivendi (VIV FP) and Warner are not happy about this development as Spotify (SPOT US) are not paying for this. Bloomberg notes that Universal executive is frustrated by this behavior.
“We want to allow our digital partners to experiment and at the same time make sure our songwriters are paid properly,’’ Cimino said in his first interview discussing the dispute. “Audio is different than video.’’
Bloomberg also writes:
“It also fits a pattern. Spotify routinely introduces or tests new features without much warning or agreement on compensation, industry executives say. In response, they’ve hindered Spotify’s expansion into new territories and moved to bolster ties with its biggest rivals.
For example Spotify’s (SPOT US) launch in India, one of the world’s biggest markets have been delayed due to issues with the record labels. Mysmartprice writes;
In order to get back at the company, these labels have apparently refused to give the license for their music for the streaming services launch in India and new territories that the company may want to launch in. Music licenses are sold region-wise, which means that Spotify is pretty much in a spot if it wants to launch in India.
India was supposed to be Spotify’s (SPOT US) first step in expanding in new markets such as South Korea, and Russia, whilst increasing its presence in Middle East and Africa. For example in Russia the big label companies already have deals with Vkontakte, in addition, and Apple (APPL US) is already present there.
All of this has its precipice with that Spotify has recently started signing-up artists directly, basically circumventing the record companies. As New York Times points out;
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 (SPOT US) is walking a tightrope. Currently, the company is paying the record labels 52% royalty fees from any stream it plays. This means that for Spotify (SPOT US), under the current deal structures, the economics of scale that exist for other platform companies with often a set fix cost, increasing margins as revenue increase does not exist.
Furthermore, Spotify (SPOT US) is in a delicate situation as it is negotiating upcoming royalty deals with the label companies for 2019. When the current deal was signed several years ago, the record labels wanted to encourage people to pay for music. Hence, they cut what could potentially be seen as a favorable deal for Spotify (SPOT US). This coming deal will most likely not be as favorable to Spotify (SPOT US).
In addition, two label companies, have recently further showed their displeasure with what Spotify (SPOT US) is doing by signing more favorable promotional deals with the likes of Apple (APPL US) and Pandora (P US).
As an investor and trader, it will be important to monitor these potential negotiations in detail. Spotify has a market cap of over $30bn, which one could argue partially is based on its ability to continue to expand and to sign-up new users worldwide. If the record labels will hinder their geographical expansion, and their main competitors step up, first sign of declining user growth could be devastating for the company’s share price.
Stay tuned as we will monitor these developments closely.
