Spotify has struck its first licensing agreement with one of the four largest record companies and is closing in on a second deal, but what is it costing the European music service to open up shop in the United States?
The answer is plenty. The impasse that has prevented Spotify from acquiring U.S. music rights for more than a year has forced the streaming service to make significant concessions to the record labels, multiple music industry sources told CNET on Monday.
Not only has Spotify sweetened its financial offer to the top labels, but the streaming-music service has agreed to place certain limits on the amount of free music it offers here, according to sources familiar with the deals. The sources said that if Spotify finally launches a U.S.-based service, it will not be a carbon copy of the service that has attracted 10 million users in Europe.
A Spotify spokesman declined to comment on ongoing negotiations.
Spotify has inked an agreement with Sony Music Entertainment and The New York Times reported on Friday that EMI and the music service are making progress in their talks. No word yet on where Spotify is in the negotiations with Warner Music Group or Universal Music Group.
In negotiations, Spotify hasn't much of a choice but to give in to the labels on certain issues. The record companies haven't yielded much on their demands and appeared satisfied to keep Spotify out of the states indefinitely (I included some of this information in yesterday's story here, but decided it's worth breaking out).
There is no shortage of label executives who are skeptical of Spotify's business model. Using free music to lure users and later trying to convince them to buy subscription packages hasn't worked well for music services. For the labels, the model hasn't worked well enough at Spotify.
Even with all the numbers being thrown around about how much Spotify pays the labels, Spotify still only converts a single-digit percentage of total users to its paid version, industry insiders said. Then there's the possibility that Spotify, with its offer of free music, could cut into sales at Apple, Amazon, and other retailers. Free-song services also don't have a good survival record. Imeem, Ruckus, and SpiralFrog are three of the casualties.
What music sources say is that record-company execs want big upfront sums to help mitigate the risks they believe Spotify USA poses, as well as to hedge their bets.