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Spotify’s new licensing deal eases path to going public

Daniel Ek, chief executive officer and co-founder of Spotify AB.
Akio Kon | Bloomberg | Getty Images
Daniel Ek, chief executive officer and co-founder of Spotify AB.

After two years of on-and-off negotiations, Spotify and the world's biggest record company have finally agreed to a licensing deal that paves the way for Spotify to go public and gives the music industry more flexibility in how new albums are streamed.

Spotify's agreement with the record company, Universal Music Group — whose hundreds of artists include Drake, U2, the Weeknd and Lady Gaga — is a global, multiyear deal, the companies announced on Tuesday.

Spotify's licensing contracts with all three major record companies had long since expired, and Universal's deal, the first to be renewed, will put pressure on the other major labels, Sony and Warner, to follow suit.

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For Spotify, the deal removes a major obstacle to going public. The streaming music company, which has been valued by investors at more than $8 billion, has by far the largest service of its kind, with 50 million paying subscribers and at least another 50 million who listen to music on Spotify's free tier, which has advertising.

But without contracts in place guaranteeing the presence of the music on its service — Universal controls around a third of all music sales around the world — the company would have difficulty attracting investors on the public markets.

In 2015, its most recently disclosed period, Spotify had $2.2 billion in revenue but lost $194 million.

The Universal deal includes a concession that the music industry has long sought, and which Spotify has fought hard against: The service will now let Universal and its artists withhold new releases for two weeks from its free tier, which pays far lower royalties than the paid version.

Spotify's refusal to offer this flexibility was one of the reasons that Taylor Swift removed her music from the service in late 2014, an episode that exposed to the general public the tensions underlying the streaming revolution.

"Starting today, Universal artists can choose to release new albums on premium only for two weeks, offering subscribers an earlier chance to explore the complete creative work, while the singles are available across Spotify for all our listeners to enjoy," Daniel Ek, the chief executive and co-founder of Spotify, said in a statement.

In exchange, Spotify is getting a concession of its own: a reduction in royalty rates. The companies did not disclose the financial terms of the new contract, but according to three people briefed on its terms, the deal allows Spotify to cut the royalties it pays for Universal's recordings to about 52 percent, from about 55 percent.

This change is contingent on Spotify reaching certain subscriber goals over the term of the contract, said these people, who were not authorized to discuss confidential terms. The royalties that Spotify pays for recordings are separate from those that are paid to songwriters and music publishers, which amount to about 10 percent.

Lucian Grainge, the chief executive of Universal, noted in a statement that streaming now makes up a majority of the revenue for record labels.

"Our challenge," Mr. Grainge said, "is transforming that upturn into sustainable growth."