Could Spotify and the record industry being headed for a standoff?

Over the course of the year, Spotify has discreetly started an interesting experiment: it’s struck direct licensing deals with some independent artists, bypassing the record companies. These license agreements with artists who do not operate through a record company are not exclusive and also allow them to distribute their music through other platforms such as Amazon or Apple Music, to receive a much larger amount of rights generated by the reproductions, and in addition to maintain all property rights over their music.

These agreements are specified as advances on reproduction rights that could be between tens and hundreds of thousands of dollars and the signs are that they are beginning to make record companies get nervous. Spotify is not trying to set itself up as a record company, given that it would have no rights over the music it streams, but it could be a key player in getting a certain number of artists to reach their audience directly through its platform. Estimates suggest the three major recording conglomerates, Sony, Universal and Warner, control around 80% of the business.

In a standard agreement, Spotify pays the record companies 52% of the billing generated by each song, and the record company pays the artist a percentage that usually ranges between 15% and, in some exceptional cases, up to 50% of that amount . According to a recent and exhaustive report by Citibank, the average outcome is that only 12% of revenue generated by streaming music goes to musicians, a situation that is becoming more and more unequal over time in favor of the record companies.

Artists who sign directly with Spotify instead of doing so through a record company would receive the full amount of income that the company currently pays to those labels. At the moment, this is attracting the attention of relatively unknown artists in the process of building their image, but the idea of ​​maintaining ownership of their music could eventually be attractive to other more established performers: Taylor Swift, after years of success with her record company, is willing to become a free agent as soon as her current contract expires and could well accept distribution agreements of this type that would allow her to exploit the rights of her music through streaming channels.

It is difficult to know how the record companies, which are minor shareholders in Spotify, might react if they are no longer able to attract new talent as well as losing their more consolidated artists as they demand to renegotiate their contracts.

The prospect of disintermediation makes sense: the added value that a record company currently generates has fundamentally to do with distribution, and streaming platforms are becoming the way more and more people access music. Spotify currently reaches 183 million people around the world, of which some one hundred million people listen to it for free, with advertising, and the company expects to reach 96 million subscribers at the end of this year, leading a market in which companies like Pandora, with about 75 million active users by the end of 2017, of which 5.48 pay; Apple Music, which reaches 49.5 million active users with about 38 million paying customers; or Amazon Music, which does not provide official data, but seems to be experiencing very strong growth. These companies also have a power through the personalization and recommendation algorithms that they possess, which could potentially create the kind of payola situations that characterized the industry in the past.

Such a market, where everything indicates that the record companies’ role is shrinking, giving way to a disintermediation that would clash with the enormous leverage these companies have over the music industry as it stands. Currently, no streaming platform could survive without access to the record companies’ back catalog, which makes the situation for many artists who negotiated deals in the past difficult to change. But Spotify’s experiment offers some artists an alternative that allows them to hold onto ownership of their work, that could make technology an artist’s best friend, and hopefully takes us a step closer to a more equitable music industry.

(En español, aquí)