Spotify’s new deal with Universal has massive implications for its upcoming IPO

Spotify caved.

If you’re a free user, then soon you won’t be able to access the same music on Spotify as a paying user.

The streaming company signed a deal this week with the biggest music label globally, Universal, to allow “windowing”. That means Universal artists can make their latest music available to paying, premium Spotify users for two weeks before the free users get to listen.

That’s a victory for Universal musicians, some of whom have kicked up a big fuss in the last two years about streaming. The label has Taylor Swift, Coldplay, and Adele on its books, all of whom have previously held off releasing new albums on Spotify off the bat.

This is a big deal, because Spotify has always hated the idea of windowing. It’s also made Spotify one of the most awesome streaming services for people who don’t want to pay £9.99 a month.

But the good times are over. The market has changed, and Spotify reportedly wants to IPO this year.

Let’s look at that first point. Spotify’s tagline is “Music for everyone”, but the evolution of the streaming market means that’s no longer really true. Look at Beyoncé’s “Lemonade”, for example, which was initially released only on Tidal, and still isn’t available on Spotify. People are getting used to the idea that no one streaming service can be a Google for music.

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And on that second point, here’s why negotiating new deals with the major labels – Universal, Sony, and Warner – is crucial if Spotify is to IPO:

Mark Mulligan, veteran music analyst at Midia Research, said people often compare Spotify to Netflix, which has grown hugely and is profitable. But Spotify has much bigger challenges.

He said: “Netflix has much more control of its own destiny because the TV rights landscape is so fragmented. No one wields the power that the music labels do, they’re like a UN Security Council veto.”

In short, music streaming services are hugely reliant on third parties, whereas Netflix owns the rights to lots of successful programmes by itself. Spotify isn’t a music label, whereas Netflix qualifies as a broadcaster. For investors, that’s a worry, because Spotify is vulnerable to the demands of outside parties.

“Investors think about the worst case scenario,” said Mulligan. “What if Spotify loses its licenses? It’s an empty app.”

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What Spotify has to do before its IPO is change the nature of those relationships and gain more independence. In the case of Universal, it has caved on windowing but, importantly, has reportedly persuaded Universal to accept a lower share of streaming revenues.

That, said Mulligan, will send the “right message” to investors who will want to see Spotify take greater financial control. It’s likely that Spotify has only negotiated a fractional reduction in revenue share, but that’s still enough.

“This allows Spotify to [tell investors]: ‘As the market grows, we’ll be able to persuade labels to reduce their share of revenue from us, because we will deliver so much more overall’,” said Mulligan.

Labels win either way, by making Spotify commit to growth targets. If Spotify grows quickly, they’ll get more revenue anyway. If it doesn’t, the labels can penalise it for failing to meet expectations.

With Universal on board, said Mulligan, it’s probable Sony and Warner will sign similar deals. And that puts Spotify in a stronger position for IPO.

What does this backroom deal-making mean for users, though?

Firstly, Spotify’s about to get much more aggressive in its marketing. If you don’t pay for the service, Spotify will probably try and lure you in with cheaper subscription plans or bundle deals where you get a premium subscription through your mobile provider.

Otherwise, if you’re a free user, Mulligan thinks you won’t actually feel that much impact. As it stands, Universal artists can choose to window their releases, but that doesn’t mean they will. And the type of people who need the free tier are younger.

“They are more playlist-oriented and, Ed Sheeran excepted, don’t really listen to albums,” said Mulligan. “I don’t think that many people will feel the pain, and those that do are the ones that should be paying.”