Spotify and Universal Music Group deal changes streaming dynamic

Universal Music Group

Earlier this month, Spotify signed a new, multi-year agreement with Universal Music Group–a deal that, as Bas Grasmeyer points out in his article, “Projecting Trends,” allows the world’s largest record label to “withhold albums from Spotify’s free ad-supported tier for two weeks.”

This deal is extraordinary. Spotify appears to be willing to give more flexibility to labels by allowing UMG to withhold albums for extended periods of time from Spotify’s largest base of listeners. It signifies a drastic change in the dynamic between labels and streaming services; and, as Grasmeyer points out, will likely lead to other labels “negotiat[ing] for similar terms.”

Adverse effects

Of course, Spotify’s efforts to encourage users to sign up for paid subscriptions, by windowing new album releases, opens the door to several, potentially detrimental, listening alternatives. Perhaps the most pressing issue, as Grasmeyer points out, is piracy. Preventing access to certain albums – especially albums released by UMG, which is home to artists like Lady Gaga, Drake, and Taylor Swift, among other big-name acts – could certainly cause an uptick in piracy.

However, Grasmeyer quotes Mark Mulligan of Music Industry Blog, who is less concerned about an increase in piracy in response to the windowing of albums, saying, “While there is a risk that windowing may give piracy a little boost, those consumers that choose to torrent rather than upgrade or simply wait 2 weeks were never realistic targets for the 9.99 tier anyway.”

Universal Music Group and Spotify are taking a chance

As Spotify gears up their bid to go public, they are faced with the need to create newer, more efficient revenue streams, and encourage users to become paid subscribers. The deal with UMG shows Spotify is serious about cracking down on privileges of free subscribers – and it shows signs of maturity in the world of streaming. As streaming continues to grow ever more popular, there is no greater time than now for Spotify to flex its muscles; and the UMG deal is the evidence investors needed to know Spotify is dedicated to becoming seriously profitable and investment-worthy.

Industry-wide effect

As previously mentioned, a ripple effect may occur in response to this deal. The other two record labels of the “Big Three,” Sony Music and Warner Music Group, may soon follow suit with their own similar deals. There is also potential, if this deal sits with consumers comfortably, that Spotify’s free tier may go to the wayside. If the number of paid subscribers rises in the face of windowed album releases, it may be in the best interests of labels, Spotify, and artists to kill the free tier – and open Spotify to much greater revenue.