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Spotify to let labels pay for sponsored recommendations; what it could mean

In a potentially significant move, Spotify will start allowing music labels add sponsored listings to personalised music recommendations, the company announced on Monday. “Artists and labels can identify music that’s a priority for them, and our system will add that signal to the algorithm that determines personalized listening sessions,” the company said, adding that only users who are using features on Spotify to discover new music will hear such sponsored music.

This announcement could have significant repercussions for artists’ “discoverability”, as most popular music is released by three large labels, Universal, Warner and Sony, who may be able to outspend independent artists and independent labels. In India, there is the added concern that the music industry is dominated by film soundtracks, which is also concentrated in the hands of a small number of labels. We have reached out to Spotify for comment on whether this experiment — for now, that’s what this is — will be rolled out for listeners in India.

Want both artists and labels to reach listeners: Spotify

However potentially tectonic this change could be, Spotify is careful about how it frames these sponsored songs. “To ensure the tool is accessible to artists at any stage of their careers, it won’t require any upfront budget. Instead, labels or rights holders agree to be paid a promotional recording royalty rate for streams in personalized listening sessions where we provided this service,” the company said. The company added that these tracks will be targeted, and if they don’t resonate with listeners, they will be pulled.

Even with a gradual approach like this, the fact remains that this might be something that boosts Spotify’s per-user revenue margin. In the streaming music industry, services like Spotify are either ad-supported or based on paid subscriptions. In the latter case, Spotify still has to pay out royalties to labels depending on how many times individual user listens to a particular artists’ music. By letting artists and labels reduce the royalty payouts they receive to get a boost in reach — an unguaranteed one, at that — Spotify potentially stands to gain by getting the same revenue from customers, while needing to pay labels less.

Depending on how successful this proves for Spotify and artists, this may fundamentally change what it means to distribute music on a streaming service. Especially in price-sensitive markets like India, where margins are slim and paid subscriptions are at a nascent stage, adding another monetisation model — on top of ads between songs — may have a significant impact for listeners as well as artists. Whether this will be a net positive impact or not depends on how Spotify’s experiment goes, and whether this will spread to other streaming services.

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In any case, smaller labels already have issues with streaming services not featuring them. Large labels are often able to buy real estate like banner ads on streaming services, something independent artists may struggle to do. Tips Music’s Managing Director Kumar Taurani, for instance, complained about this in May. “If you’re listening to Gaana on your phone, the screen size is small, so it is up to them to decide whose music to promote,” he said.

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I cover the digital content ecosystem and telecom for MediaNama.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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