Music labels may not be too happy with Spotify's new licensing strategy.
Spotify Technology SA (SPOT) is reportedly offering some managers and independent artists direct deals to license their music to its streaming platform, bypassing major record labels like Universal Music Group, Sony Music Entertainment and Warner Music Group. Experts say this strategy could let artists make more money but might pose some risks for the streaming giant.
Atlantic Equities analyst James Cordwell said this strategy would allow artists to make more money without labels taking a chunk of their profits, and getting more money up front than is typical with streaming services like Spotify, Apple Inc.'s (AAPL) Apple Music and Alphabet Inc.'s (GOOGL) new YouTube Music.
"In so doing, Spotify is taking on a bit more risk .. but I'd argue that Spotify is better positioned to take on that risk because it can control how much [an artist's music] gets played," Cordwell said, referring to Spotify's curated playlists like Discover Weekly or RapCaviar. In exchange, the Luxembourg, Sweden-based company could possibly get better deals with these artists, like exclusives or special promotions, he said.
However, Spotify may remain at the mercy of record labels, Morningstar analyst Ali Mogharabi said in an email, as it will need access to popular content controlled by the "Big Three" record labels to continue attracting listeners and subscribers.
"Unlike Netflix (NFLX) on the video side, Spotify does not own the content that keeps attracting listeners," Mogharabi said. "Spotify may be aiming to become a label.... [but] such a strategy can also affect its current relationships with the major labels, possibly limiting access to content, and/or not helping it when it goes back to renew or renegotiate its agreements with the labels."
Spotify's performance has remained fairly stable for a new stock, contrary to many investor's expectations given its direct listing, Cordwell said. The stock has recovered since plummeting after the company missed earnings and revenue expectations on May 2, hitting a record high of $171.48 on June 8.
During its earnings announcement, Spotify also reported 170 million monthly active users, including 75 million premium subscribers and 99 million ad-supported monthly active users, compared with a consensus estimate of 98 million ad-supported monthly active users.
The music streaming giant went public on April 3 through a unique direct listing, meaning the company did not raise any additional money nor did it have to pay hefty fees to traditional underwriters. The stock opened at $165.90 before declining in the afternoon to close at $149.60, still above the New York Stock Exchange's "reference price" of $132.
Spotify shares closed up 0.52% to $172.37 on Monday, June 11, having increased more than 4% in the past five days.