Spotify seeks cut in royalty fees to allow for free mobile service

Screenshots from Spotify's iOS app

Streaming music app Spotify might soon offer a free tier of service to its users who access the service via a mobile app. Those familiar with the situation say that the company has started meeting with the major recording labels. The goal is to reduce the royalty rates that Spotify pays them, and at the same time, get the rights to offer a free tier of music for mobile devices similar to what Spotify offers on the desktop.

Spotify, based in the U.K., is said to have already started negotiations with Warner Music and has plans to meet with Sony and Universal in the weeks ahead. The highly competitive field could have another big player soon if speculation that Apple will launch its own streaming music service later this quarter is true. Spotify has 20 million users globally, but only 5 million are paid subscribers. Currently, 70% of Spotify's revenues go toward paying royalties while 20% pays for customer acquisition costs. The remaining 10% covers other costs including Spotify's technology, which has been praised by listeners. This business model leaves no room for profits which is why the new negotiations are so important, especially if a free tier of service for mobile users is being planned.

Will Spotify be successful in cutting licensing fees? The company already pays among the lowest royalties to artists, so there might not be that much more room to maneuver.