It's no secret that the digital age hasn't been kind to the music industry. Streaming services like Spotify, Rdio, and Pandora have buoyed a long-declining market with the support of eager music labels, but it seems those very same labels are starting to get nervous about their revenue streams.
Universal Music Group, the largest of all labels, is beginning to question the "freemium" model that helped bring in over a billion dollars in revenue from US streaming last year. According to the Financial Times, Universal is leveraging current contract negotiations with Spotify to pressure the streaming service to put harsher limits on its free service. The label hopes that such a move would convert more free users into paid subscriptions, which cost $10 per month. CEO Lucian Grainge publicly stated his concerns with the freemium model last month, when he said, "Ad-funded on-demand is not going to sustain the entire ecosystem of the creators as well as the investors."
Universal hopes to use contract negotiations to limit free streaming
Other labels are coming to the conclusion that ad-supported free streaming services need to be adjusted, according to reports. Unnamed sources tell Rolling Stone that "most" labels are pushing for more limits on free music streaming. In addition to Universal, both the Sony Music and Warner Music CEOs have recently expressed doubts about free streaming — one said paid and free subscriptions need to be more "clearly differentiated." It's not known if either of those two labels are seeking to pressure Spotify or other services through contract negotiations.
Spotify says free is necessary to boost growth
The labels may seek to limit the amount of music users can listen to without paying up. Or they might hope to limit all free streaming to Pandora-like radio stations instead of on-demand music. Spotify and Rdio both allow for unlimited free on-demand streaming on computers, but limit mobile streaming to shuffled, radio-like services. Paid subscribers get full mobile streaming, offline access, higher quality, and no ads.
In the past, the labels were very supportive of free streaming — they saw it as a way to bring new customers (and money) into a declining industry. But as streaming grows and money continues to shift away from digital downloads and physical media, it seems the labels are becoming less comfortable. Spotify says that a substantial free service is the only proven way to get new paid subscribers, and it argues that the data shows that streaming isn't destroying proven revenue streams like iTunes. A spokesperson tells the Financial Times that "Spotify is monetizing people who have never been monetized before." Despite those arguments, it may come down to backroom negotiation tactics to see if free streaming survives in its current state.