Spotify is starting to compete with the music labels by signing direct deals with music acts Just like it said it would.

Spotify CEO Daniel Ek
Asa Mathat

Spotify gets almost all of its music by cutting deals with the music labels, which have cut their own deals with musicians. Now it is starting to cut out the middle man.

Per Billboard, Spotify has started licensing some songs directly from artists and their managers, paying advances of “several hundred thousand dollars” for a collection of tracks. I asked a Spotify rep to comment on the report; he declined.

The upside for Spotify: After cutting an initial check, it then pays the artists a slightly lower royalty rate than it pays the labels. The upside for the artists and their managers: They get to keep all of the royalties instead of watching the majority of that money go to a music label.

Spotify won’t say it is competing with the music labels. At last week’s Code Conference, when I asked Spotify CEO Daniel Ek about the role of labels in a streaming-music world, he went on at length about the value labels provide.

But make no mistake. Spotify is competing with the labels, by offering artists a chance to make more money by selling their music to Spotify instead of a traditional label.

This is also what Spotify said it would do in advance of this year’s public offering. Spotify didn’t say that out loud, for obvious reasons — it still needs to work with music labels, and if Spotify takes them on directly, the labels will go apoplectic.

But Spotify has been clearly signaling that it intends do exactly that. Which is why I was able to write this two months ago:

“Spotify does imagine, however, that over time, a growing tier of music acts, or small independent labels, won’t use the big labels for distribution. Instead they’ll work directly with the streaming service.

If that happens, the thinking goes, Spotify will be able to command better terms from the small acts and labels than it gets from Universal Music and the other giant labels. But the small acts and labels will end up keeping more money than they would have in the earlier arrangements because they won’t have to pay the big guys to bring their stuff to Spotify and other outlets.

So when Spotify talks about becoming a “platform” — a term it used dozens of times in its public offering documents and then again during its investor pitch day last month — it is talking about a bunch of different things. But the main one is that Spotify wants to connect music acts directly with music listeners and take a cut of the transaction.

“It’s a kind of code,” says a person who has worked with the company since its early days. “You have to imagine what they’re talking about.”

Important caveats:

  • Spotify isn’t becoming a label itself: It isn’t going to own the music it is licensing.
  • Spotify isn’t demanding exclusive distribution rights. Artists who do direct deals with them can also sell their music to Apple and Google and anyone else.
  • Spotify isn’t going after giant stars who already have label deals, which would trigger all-out war with the labels. It is talking to mid-tail acts, who may not be in demand with the labels, anyway.

Then again: It’s 2018, and Spotify is just starting to flex its muscle as one of the world’s dominant music distributors. And Netflix has laid out a very compelling model for digital media distributors who want to move from licensing content to owning their own content. And Spotify’s CFO used to be Netflix’s CFO.

Feel free to speculate about what happens next.