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As Spotify AB gears up for a potential initial public offering next year, the music-streaming service is missing one key component in its pitch to investors: rights to play the music in years to come, according to people familiar with the matter.

Spotify is now operating on short-term extensions of its old contracts with all three major record companies, having been on a month-to-month basis with at least one of the labels for nearly a year. It is negotiating new deals that would make its finances more attractive to investors.

Spotify, which saw its net loss increase to roughly $200 million last year even as revenue doubled to more than $2 billion, wants to pay a smaller share than the nearly 55% of its revenue that it currently pays to record labels and artists, according to people familiar with the matter.

It pays roughly an additional 15% to music publishers and songwriters.

But some major label executives want Spotify to pay them as much as 58% of revenue from both its free and paid tiers. That is what Apple Inc. pays for Apple Music subscribers who aren't on free trials, people familiar with the matter said. Apple has more than 5 million users on free trials, they said.

Some executives think Spotify should pay more than it did when it was getting off the ground in the U.S. in 2011.

Other label executives said they may let Spotify pay lower rates, but only if the streaming service grants them other rights, such as the ability to make some music available only to the service's 30 million-plus paying subscribers and not to its more than 70 million free users.

Some also want Spotify to limit free usage, a move they hope would drive more paid subscription.

Spotify is under mounting pressure to go public thanks to the terms of its most recent round of financing: $1 billion in convertible debt issued by a group that includes private-equity firm TPG, hedge fund Dragoneer Investment Group and Goldman Sachs. The debt carries an interest rate that increases the longer Spotify delays an IPO, while the investors are also entitled to a 20% discount on shares if they convert their debt into equity—a discount that also balloons the longer Spotify takes to go public.

The licensing disagreement highlights the tricky relationship between Spotify and the major record labels, which all took minority stakes in the Swedish outfit as part of their initial licensing deals. As investors, the labels have a direct interest in seeing Spotify succeed, while they are also counting on subscription streaming in general to make up for a long decline in record sales. Paid services yield far more per user than ad-supported ones, and Spotify is the world's biggest subscription service, with double the 15 million paying subscribers that one-year-old Apple Music has.

But the labels and Spotify don't see eye to eye on some fundamental issues. In addition to what Spotify should pay for the music, record companies and their artists have also butted heads with Spotify over its practice of making its entire 40 million-song catalog available to both free and paid users at the same time. Pop star Taylor Swift, British singer Adele and rocker Gwen Stefani are among the artists that have withheld albums from Spotify because they didn't want to make them available on the free tier, where users can listen to entire albums, playlists or artist catalogs in a random order they can't control.

Spotify has privately explored allowing several acts to release music on the paid tier only for short windows of time, but hasn't given the green light on adoption of such a practice, worried that such a move would drive its free users to other sites such as Alphabet Inc.'s YouTube where they might find unsanctioned, user-uploaded versions of the new tunes free, people familiar with the matter said.

Some label executives would also like Spotify to limit the time that users can listen free, since most free listeners who convert to paid subscriptions do so within their first six months on the service, according to research by financial services firm Cowen & Co. At the end of last year, roughly 35% of Spotify's free users were converting to paid subscriptions, up from 25% two years ago, according to Cowen's research.

To improve its margins ahead of an IPO, Spotify also could raise subscription prices, which have been flat at $10 since it launched in the U.S. in 2011. But with a host of deeper-pocketed competitors including Apple Music, Alphabet's YouTube Red and Google Play offering similar services for $10 a month subscription, Spotify isn't keen on being the first to raise prices.

Write to Hannah Karp at hannah.karp@wsj.com

(END) Dow Jones Newswires

August 23, 2016 16:55 ET (20:55 GMT)

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