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I.D. BAD GOES INSIDE THE DEAL

What caused UMG to pivot in its drawn-out talks with Spotify, forging a new agreement last week? It was indeed a bold move on the part of Sir Lucian Grainge, but the safeguards that were built in at UMG’s insistence made this experiment in testing out new strategies one worth undertaking. What isn’t generally understood is that the deal is short-term, and adjustments will be made if called for. While Universal agreed to a reduced rate—believed to be 2-to-3%—the deal stipulates that it will kick in only once agreed-upon subscriber-growth benchmarks are met. This stipulation is combined with Spotify hitting a certain churn rate on any discount programs—meaning the new rate will only apply to those trial users who stay on as paid subscribers. The underlying concept is that subscriber growth will lead to a slice of an ever-bigger pie for Universal.

UMG’s rationale for making the deal—which does not include UMPG—is to help grow Spotify’s business, because the two companies are essentially in partnership as content provider and the streaming equivalent of a major retailer/distributor. As the biggest player in the game, Spotify is unquestionably becoming Universal’s most important partner, responsible for the bulk of the 1.48 billion euros in total streaming revenue the music group took in last year. If UMG experiences another year-over-year 55% increase in streaming revenue, that figure will be nearly 2.5b euros. UMG calls the deal a pure play, because Spotify’s only business is music, unlike Apple, Amazon and Google. But what happens post-IPO is even more important, because Spotify must continue to grow within sustainable parameters if it’s going to become a viable business.

Behind the scenes, one U.S. attorney who represents Spotify but was not directly involved in the negotiations, is said to have played a lobbying role on behalf of his client. Spotify General Counsel Horacio Gutierrez ran point in the dealmaking. 

The deal clears the way for Spotify’s IPO, but according to a 4/6 WSJ story, the company is considering a direct listing, meaning it would simply register its shares on a public exchange and let them trade freely. In a typical IPO, new investors buy shares from the company, its early investors or both, the night before they start trading. In a direct listing, investors purchase shares in the open market after they’re listed, while the price is set organically. Spotify was last valued at $8.5b in June 2015, and is said to be targeting a valuation of $10b+. If it lists directly, the WSJ notes, the company will likely need to renegotiate the terms of its debt. Does this scenario have any material impact on the deals being made with the rights holders?

The Spotify narrative has brightened considerably since the fall of 2014, when the Daniel Ek-led service took on the immensely popular Taylor Swift and was subsequently viewed as the devil by some artists, managers and label execs. Since that PR gut punch, the company has become far more savvy at marketing its brand to the industry, with the arrival of the artist-friendly Troy Carter in June 2016 furthering a change in perception that was already underway. Most managers and labels believe that Spotify is doing a better marketing job than Apple, while Spotify’s playlists have become increasingly popular as discovery tools.

Now, it seems, Apple has an industry PR problem of its own. Initially, Apple Music was seen by the industry as the hoped-for answer to monetizing the streaming model, but the anticipated explosion has yet to occur, and there’s been a surprising lack of PR coming out of Cupertino in recent months regarding subscriber growth—the last figure announced was “over 20m” sometime last year, and whisperers say that the total is now close to 30m. Some observe that Apple looks like it doesn’t want to compete; Apple’s now-familiar spin is, how do you compete with free? The company’s attitude appears to be that they are Apple, after all, and the brand speaks for itself. Apple clearly is not accustomed to being #2.

The chill that was created between Apple and the labels when it began sidestepping them and going directly to artists, and which blew up around the Frank Ocean fracas and the Chance the Rapper deal, is still being felt. This aggressive behavior has caused the majors to view Apple as a potential direct competitor—some say artist advances + distribution = label. The resentment toward top Apple Music executives, who have spearheaded these aggressive tactics, appears to have helped turn the labels toward Spotify, as the service continues to grow its business.

THE SILENT TREATMENT: Now that the first domino has fallen, sources close to Spotify expect WMG and the indies to fall next. But Sony Music is one key domino that may not fall so easily, as Spotify’s recent actions—which are comparable to Apple’s intrusion into the artist-label relationship—have added another layer of intrigue. According to those in the know, Spotify’s dealmakers and strategists decided to pull a power play, shutting down all communication with Sony. They supposedly refused to take calls or reply to emails from Sony execs, while canceling meetings with label execs and managers, and going straight to certain superstars. Sony Music was not happy about the stealth tactic, which moved an already tense situation to DEFCON 3 level. Sony let Spotify know that this tactic was going to get them nowhere, and normal testy relations have returned during the negotiations.

The primary sticking point for Sony, according to those close to the talks, has been that, by agreeing to the 2-3% reduction, the company believes it would be giving up tens of millions in annual profits that now go straight to the bottom line. Unlike UMG, Sony appears to be firmly entrenched in its position of no reduction of the current rate unless it is guaranteed not only the windowing option but also a rate increase once Spotify hits greater scale. Nonetheless, most expect Sony to agree to a deal similar to UMG’s in the not-too-distant future.

There’s growing solidarity between Spotify and the rights holders, because the values of UMG, Sony Music and WMG will continue to increase along with that of Spotify. But will Spotify’s value outstrip that of the music groups?

RULE, BRITANNIA: The British invasion of the U.S. music business hit a milestone last week, when Rob Stringer started his new job as CEO of Sony Music, while WMG confirmed speculation that, on 10/1, the start of WMG’s next fiscal year, Max Lousada will become its CEO of Recorded Music. That means Lousada’s job will be similar to that of fellow Brit Stringer. Now, all eyes are on them to see who they’ll choose to replace themselves as heads of Columbia and Warner Music U.K., respectively. It isn’t addressed in the WMG press release, but informed sources say that Atlantic co-heads Julie Greenwald and Craig Kallman and WBR topper Cameron Strang will report directly to Lousada. Atlantic is having a great run on the charts due in part to U.K. artists Coldplay and Ed Sheeran, while the streaming phenomenon has helped fuel its double-digit marketshare, and WBR’s 2016 marketshare was way up.

Stringer’s appointment had been long-planned, but the Lousada appointment was a rather recent initiative by Warners senior management, as two major competitors were both rumored to be interested in Lousada. People familiar with the Lousada appointment say that all top label personnel in the U.S. supported and signed off on it. Ironically, Lousada will have the same title held by Lyor Cohen from 2004 to 2012, but most believe the similarities will end there.

NAMES IN THE RUMOR MILL: Ben Cook, Miles Leonard, Stefan Blom, Michael Nash, Boyd Muir, Kevin Kelleher, Dennis Kooker and Eddy Cue.

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