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According to several "music industry sources", Spotify is negotiating with major music labels to both renew their contracts and, most interestingly, lower their license fees by a "substantial" amount. The report claims that Spotify hopes to offer streaming to mobiles for free, partly supported by ads, revealing the impetus for the company's cost-cutting request. Currently, Spotify on mobile is limited to paying subscribers only. Spotify has not yet confirmed the report.
Although it may be aiming to launch free-to-stream music for mobile devices, The Verge's sources claim Spotify doesn't have much financial wiggle room when it comes to absorbing costs. About 70 percent of the company's revenue is spent on licensing, 20 percent is spent toward advertising and hooking new subscribers which leaves roughly 10 percent for the company to spend on its remaining overhead.
Despite claims that Spotify is strapped for cash, we noted last summer that Spotify was the second largest revenue source for record labels, not to mention the recipient of numerous multi-million dollar investments. Some believe that Spotify has difficult times ahead though, in becoming a sustainable, profitable company.
While Spotify remains a wildly popular service, it may soon find itself in an increasingly competitive landscape. Last year, the Wall Street Journal reported that inside sources claimed Apple was negotiating license deals in an effort to create a Pandora-like music radio service. A couple months later, Bloomberg confirmed those rumors. With its new focus on music, the born-again social networking site Myspace may also be hoping to sneak a slice of Spotify's market dominance.
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