What Happens Next If Spotify Goes Public?

Record labels’ equity in Spotify has allowed the music subscription service to start and to flourish. But, if the company decides to file for IPO, their ownership could also be an added source of tension between labels and artists who already feel underpaid by the company.

paidContent understands the four majors and indie umbrella Merlin own 18 percent of Spotify (at least, they did prior to its last funding) – bought not by cash but by writing off the equivalent value of royalty payments.

Spotify’s future now looks increasingly that of a large-scale, global service that’s self-operated rather than sold out. It is aiming for 100 million users, and could get there by opening its API, ongoing conversion innovation and bundled deals. As it reaches that goal, and profitability, it will naturally prompt the question – should Spotify stay private, or raise money on the market?

The latter would give its institutional investors DST, Kleiner Perkins and Accel the return they will expect from their $100 million investment and would allow Spotify to fund its future label deals and infrastructure from stock trades as well as subscriber revenue.

The labels are not seeking such a direct financial return like the VCs are – they are using Spotify just to find a sustainable digital future for music consumption. But they would nevertheless stand to gain a windfall from any IPO – split between the majors, on four percent each, and Merlin on two percent, paidContent understands.

But, just as contracts many artists signed with labels years ago don’t account for significant streaming or even download royalties, there is likely no contractual provision for labels returning to artists proceeds from any investment gains.

Payment to artists is not exactly going to be high on their priority list. Investors are going to want to claw back their money,” Pink Floyd and Jools Holland manager Paul Loasby told an industry seminar thrown by MusicTank in London last week.

“The labels have equity in a lot of these services. They have a vested interest. It’s weighted against the artist. Look at the current valuation placed on Spotify of $1 billion on 15 million songs. You’re looking at each song worth $66, which I think is a bit sad, it’s nothing.”

Beggars Group label strategy director Simon Wheeler added…

If that goes to the company’s bottom line, that’s a problem.” But Wheeler is more realistic than Oasby. “That would be a really nice problem for us to face. We’re yet to be in a position to realise any of that money.”

In fairness to labels, they have braved considerable disruption and have finally opened up their licenses to budding new online access services, often getting burned in the process by failures like Spiralfrog and Beyond Oblivion, losing millions due in potential royalty payments.

“If we take equity stakes, it’s never at the expense of the underlying commercial terms that the deals are structured around,” EMI digital business SVP Cosmo Lush told Loasby during MusicTank’s seminar.

“If you have a stake in a partner’s business, your objectives are much better aligned with that business.”

Some labels have also been singed by investments in failed services that pre-date Spotify. In 2009, Warner Music Group wrote off $33 million from its investments in Lala and Imeem, thereby doubling its quarterly losses.

Spotify is no Lala; it is a far more beneficial force for labels and artists – and it is likely the last time labels like Warner will make such investments in the services which they nevertheless hope will lead their business in to the digital future.

Labels must work hard to allay growing criticism from some of their artists about the extent of fees they receive from plays through streaming services.

If Spotify goes public, artists may not receive direct material benefit – but the one-off windfalls to labels will mean they can continue to support artists through A&R, marketing and more.

“If you assume a label acts in their artists’ best interest, that equity stake is very positive for the artist,” EMI’s Lush said.