Report: UMG Takes On Spotify's 'Freemium' Model

Under The Gun

The relationship between SPOTIFY and the major record labels -- specifically UNIVERSAL MUSIC GROUP -- has hit a rough patch. THE FINANCIAL TIMES reports, "the 'freemium' model used by SPOTIFY to amass 60 million users and 15 million paying subscribers around the world is facing a new challenge just months after the pop star TAYLOR SWIFT yanked her albums from the music streaming service. The Shake It Off singer mounted a high-profile publicity campaign against SPOTIFY at the end of 2014 (NET NEWS 11/3/14), claiming the service was undervaluing her music by allowing people to listen to it free of charge.

Now, UNIVERSAL MUSIC GROUP, the world’s largest music company and home to acts ranging from SAM SMITH to KATY PERRY, is using license negotiations with SPOTIFY to push for changes to the company’s free service, privately arguing that it is not sufficiently distinct from the its paid-subscription tier."

SWIFT famously pulled her “1989” album from the streaming service when it was first released. BIG MACHINE Pres./CEO SCOTT BORCHETTA has long been a vocal critic of streaming services such as SPOTIFY, saying on more than one occasion, to different publications, the streaming business model is, “A race to the bottom.” SWIFT also penned a JULY op-ed piece in the WALL STREET JOURNAL in which she stated, “Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for. It’s my opinion that music should not be free.”

The FT article notes, "The SPOTIFY business model relies on attracting users to a free service that offers a selection of music but with limited functionality, with the aim of converting those users to paying subscribers. SPOTIFY generates some revenue around the free service but makes more via paid subscriptions. A person close to UNIVERSAL says there was clear evidence the availability of free music on SPOTIFY was hurting digital downloads from stores such as APPLE’s iTUNES. 'The market data really speaks for itself,' the person said. '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'.”

SPOTIFY does not want to lose their free offering, claiming that doing so would slow the conversion of free users to paying subscribers and could send those users to other sites such as YOUTUBE. “Without free, pay has never succeeded,” JONATHAN FORSTER, who heads the Nordics region for SPOTIFY, told THE FINANCIAL TIMES. “We’re one of the greenest shoots of growth in the industry. We don’t want to destabilize that. We think that this model works.”

The report notes UMG isn't asking SPOTIFY to totally stop offering the free tier. Instead, it is asking the webcaster to modify the free service, perhaps by capping the amount of time it can be used, to accelerate the conversion to higher margin, paid subscription.

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