Spotify can handle artists rebelling against its business model. Radiohead's Thom Yorke has been a longtime critic, and late last year, Taylor Swift pulled all her albums from the site, neither of which seemed to bother Spotify too much.
However, Spotify needs the record labels that control the music it streams, and those labels are now putting pressure on the Swedish company to drop its freemium model. Universal Music Group, the world's largest record label, is using contract negotiations to force Spotify to change its free service, saying it's too similar to the paid subscription service.
Spotify works by agreeing to contracts with the big record labels, which allows the company to stream the label's entire back catalogue. Universal holds the key to the music of the world's top artists, from ABBA and U2 to Sam Smith and Kanye West, so Spotify needs them on its side. Universal is using current negotiations to move Spotify away from ad-supported free accounts to subscriptions.
It's easy to see why as ad-supported free streaming generated $295 million in the U.S. for music labels in 2014, whereas paid subscriptions generated nearly $800 million in revenues.
Spotify has 60 million users worldwide, but only 15 million of those pay for subscription services. According to the Financial Times, Universal claims free streaming services are hurting digital downloads from online venues like Apple's App Store.
"It's clear that the key to success for artists, consumers and Spotify alike is developing an offering that drives more free users to the paid tier," said the FT source.
Spotify rejects this premise though, saying it is monetizing people who have never been monetized before. Head of the the Nordic region for Spotify, Jonathan Forster, says the company wants to keep the freemium model. "We think this model works, without free, pay has never succeeded," he said.
Rather than scrapping the service altogether, Universal wants Spotify to limit the free accounts, maybe by giving users only a limited play time, to try and attract more people to subscription accounts. Universal Music, like other labels, holds a five percent stake in Spotify, but it has the power to pull its back catalog, a far more powerful bargaining chip than the equity stake. Universal has made no official comment on contract negotiations.
No other labels appear to be applying similar pressure, but Sony CEO Doug Morris has been critical of streaming services in the past, saying he equates "free" with the decline of the music business.
Still, it seems unlikely that Spotify would abandon its free service. Although Spotify is often cited as such, YouTube is actually the world's most popular music streaming service. If Spotify were to pull or limit its free offering, it would risk losing users to YouTube or others in what is becoming a more competitive market. Already facing the likes of Pandora and Deezer, Apple is expected to enter the market this year with a streaming service following its acquisition of Beats Electronics last year.
