Exclusive: Spotify, Warner hope to clinch royalty deal by September – sources

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LONDON (Reuters) – Music streaming company Spotify is close to agreeing a new licensing pact with Warner Music Inc, the last big music royalty deal it needs before pushing ahead with a U.S. stock market listing, four sources familiar with the situation said.

The parties are positive a deal could be signed by September as major issues such as granting loss-making Spotify a more favorable revenue split in return for making some new albums accessible only to its paying subscribers for a defined period have already been agreed, the sources said.

However, the precise revenue split and the size of a potential guaranteed upfront payment to the label, home to artists including Ed Sheeran and Muse, have yet to be agreed, said two of the sources.

“The negotiations are at a crossroads,” said one of the sources, asking not to be named because the talks are private, adding discussions were taking place daily. “There are still a number of key points that remain to be agreed. If we manage to come to terms on these points, then it could lead to a very quick transaction. If not, any deal would remain at bay.”

Others saw a deal being done by late summer.

“Given the way talks are progressing, I would be surprised if we don’t have a deal in September,” said another source on the other side of the table.

Spotify Takes Wing

Sweden’s Spotify has grown in less than a decade into the world’s most popular streaming music service, but its financial sustainability hinges on its ability to strike music licensing contracts at less onerous royalty rates..

Basic features of Spotify are free and supported by advertising while paying subscribers enjoy unlimited listening and other premium features.

It faces mounting competition from far bigger internet players such as Apple (AAPL.O) and Amazon (AMZN.O), which can afford to subsidize their push into music by drawing on money they make in other businesses.

The streaming firm, which was recently valued at $13 billion, is pushing for a 50-50 revenue split but Warner Music is demanding it retains at least 52 percent of the royalties, in line with the other labels, according to the sources.

Under the terms of their current agreement, Spotify pays 55 percent of royalties to Warner.

Warner is also pushing to receive a guaranteed upfront payment regardless of subscription growth, said one of the sources. The label, owned by billionaire investor Len Blavatnik’s Access Industries, is also asking for protection against the potential rise of unsigned artists who could over time reduce its revenue share.

FILE PHOTO: Ed Sheeran performs on the Pyramid Stage at Worthy Farm in Somerset during the Glastonbury Festival in Britain, June 25, 2017.Dylan Martinez /File Photo

This follows recent press reports that Spotify was filling its playlists with anonymous or little known artists to reduce the influence of the majors, said one of the sources. Warner would be ready to reduce its royalties rate from 55 percent to 52 percent provided these issues were resolved, said the same person. Spotify declined to comment.

Other Deals

Earlier this year, the Swedish company struck a licensing deal with Vivendi’s (VIV.PA) Universal Music Group (UMG) to pay the world’s largest label a lower royalty rate. This was recently followed by a similar agreement with Sony Music.

Spotify didn’t disclose the terms of the deals but it was widely reported that the streaming firm had managed to lower the royalty rate from about 57 percent to 52 percent, based on growing volumes of paying listeners.

In return, the streaming service agreed to restrict new albums to paying subscribers for a couple of weeks before offering access to free users.

As of June, Spotify had 53 million paying users or 40 percent of streaming music subscribers worldwide, according to MIDiA Research. It has more than 140 million active users, including free listeners.

By comparison, Apple had 19 percent, or 28.2 million music subscribers, in June, up from 20 million in December, while Amazon held 12 percent, or 16 million subscribers, MIDiA estimated.

Heading for the Market

One of the sources said Spotify, which hired Goldman Sachs and Morgan Stanley to advise it on a stock market listing, is still aiming to go public via a direct listing toward the end of this year or the beginning of the next.

Spotify recorded revenues of 2.9 billion euros for 2016, up 51 percent from 2015, according to company filings in Luxembourg in June.

Operating losses grew 48 percent to 349.4 million euros, but including financing costs, its losses before tax leapt 133 percent to 539 million euros.

Last year, Universal held a 28.9 percent share of global music label revenue, Sony Music generated 22.4 percent and Warner 17.4 percent. Independent labels made up the remaining 31.3 percent, according to MIDiA Research.

The company has faced boycotts from some top music artists who have complained its free services undercut the value of their work but the major label licensing deals have gone some way toward easing these tensions, according to analysts.

Additional reporting by Eric Auchard in Frankfurt and Jessica Toonkel in New York; Editing by Keith Weir