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Spotify is asking users to take another hike, raising premium subscription prices in the United States for a second consecutive year. Starting in July, Spotify’s premium individual plan in the U.S. will increase a dollar to $11.99 a month and the duo plan will jump a buck to $16.99 a month, while the family plan will leap-frog $3 to $19.99 a month. The student plan will remain $5.99 a month.
“On Spotify, users discover and enjoy music, podcasts, and audiobooks,” the company said in its announcement on Monday (June 3). “So that we can continue to invest in and innovate on our product features and bring users the best experience, we occasionally update our prices.”
In July 2023, the company enacted similar increases though the family plan was raised just a dollar from $15.99 to $16.99. Last year’s bump in its individual subscription price was a change of pace for Spotify after holding steady at $9.99 in the U.S. for a dozen years. For most of its existence, the company focused on rapid subscription growth over profits, though the mood has since shifted, with major labels and others welcoming price hikes as streaming’s importance to their bottom lines continues to increase.
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How important? In the U.S, subscriptions accounted for 59.3% of total recorded music revenues in 2023, up from 57.8% in 2022. Globally, subs accounted for 48.9% of recorded music revenue in 2023, according to the IFPI, up from 48.3% in 2022.
Label leaders are open about wanting higher subscription prices. In early May, Warner Music Group CEO Robert Kyncl called for “further increases” to subscription prices to “ensure that the value that music provides to these platforms is properly recognized,” and Sony Music Entertainment CEO Rob Stringer recently called on streaming services with ad-supported tiers — ie, Spotify — to start charging a “modest fee.”
In April, Bloomberg reported that Spotify would raise its prices in select markets, including the U.K. and Australia, and that the U.S. would soon follow. Spotify’s willingness to raise prices in consecutive years pleased investors, and shares jumped 17.6% that week. Today’s announcement that it would again raise fees in its largest market has Spotify’s stock up nearly 6% in pre-market trading.
The price increase comes at the end of a “period of relative peace” between Spotify and music publishers following the former’s decision to pay the latter — and songwriters — a discounted rate for streams on several tiers. Spotify reasoned that by adding audiobooks to premium offerings like individual, duo and family plans, these subscriptions are now “bundles,” a type of plan that qualifies for a discounted rate on U.S. mechanical royalties given that multiple products are offered under one price. According to Billboard estimates, that change will mean publishers and writers will earn about $150 million less in royalties over the course of its first bundled year.
In response, the NMPA sent the company a cease and desist for alleged unlicensed content and the Mechanical Licensing Collective (MLC) filed a lawsuit explicitly about the bundling. In addition, the Recording Academy, Association of Independent Music Publishers (AIMP), Nashville Songwriters’ Association International (NSAI) and more have made statements against the change.
You’ve most likely heard by now the news that Spotify, through a surprising bundling maneuver, has unilaterally decided to give songwriters a substantial pay cut. As part of our ongoing efforts to provide the songwriting community with data and details related to this incredibly important income stream — which at this point must feel like a continual moving target — we have reviewed and analyzed Spotify’s reporting for the first month where they instituted this change (March), and compared it with the month prior (February).
What Is Happening?: Spotify has decided to bundle audiobooks in its premium tier offerings (affecting 85% of total Spotify subscribers). By doing so, they are now claiming that nearly half of total subscriber revenue is attributed to audiobooks, reducing reported service revenue to music to 52%. This results in a substantial decrease in payments to songwriters, which we explain below.
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In March, total mechanical revenue paid by Spotify was reduced by 33.9% (from $36.7 million in February to $24.3 million). This is where the reported yearly $150 million reduction comes from — an estimate built on Spotify’s prior-year performance and payment reports to the Mechanical Licensing Collective. The twist here is that Spotify reported that performance royalties increased 18.75% from February to March (from $31.2 million to $37 million).
Spotify’s performance royalties always fluctuate from month to month (by as much as +/- 10%) but the magnitude of this change is unusual (and unexplained). Was March’s unexpected growth in Spotify’s performance royalties an anomaly, or a precursor to a new level of payments for that royalty? Due to the structure of the mechanical royalty payment formula, an increase in performance payments results in a decrease in mechanical payments.
For many songwriters who have agreements with music publishers, performance royalties are beneficial because half are paid directly to the songwriter and not through their publishing agreement, whereas mechanical royalties run through the publisher.
So, while mechanical payments in March were reduced by 33.9%, the total reduction in payments to songwriters was 9.75% ($67.9 million to $61.3 million), which on an annual basis comes out to $80 million.
Historical Performance vs. Mechanical Payments for CRB III: This harkens back to prior reporting (and confusion) a couple of months ago when the streaming services reported an increase in performance revenue over the prior five-year period (2018-2022). While we cannot explain exactly why performance revenue changed in this historic accounting period, we can presume that it had something to do with deals that were being negotiated during that time and were finalized and took retroactive effect by the time the final remanded reporting was provided and required by the final determination of the appeal.
If Spotify Cut Revenue in Half, Why Aren’t We Seeing a 50% Reduction? The payment structure has various protections so that Spotify and other similar digital service providers cannot unilaterally adjust their prices to the detriment of songwriters, as Spotify has done here. One of those protections is an obligation to pay songwriters a portion of what they pay record labels, to the extent that that amount is greater than the service revenue percentage. This is called the “TCC Prong,” or “Total Content Cost Prong.” Because Spotify’s deals with the record labels apparently do not give them the flexibility to choose what they can bundle into offerings and make price reductions, what they pay the labels has not changed. In fact, in March, that percentage increased by 5.86%, or $13.1 million.
So is the Total Yearly Reduction 150M or 80M? This will most likely land somewhere in the middle, as it depends on what Spotify reports paying on performance (i.e., if March’s performance royalty growth was an anomaly) and what it pays to the labels. Over the course of the next several months, if Spotify does not change its position, we will be monitoring and reporting trends in percentage and actual results as part of our ongoing effort to provide the songwriting community with actual and up-to-date information related to their royalties. You can also check the current going rate of publishing revenue yourself at any time with our royalty calculator, updated monthly.
Spotify spent five years litigating against publishers and songwriters to establish rates for 2018-2022. The result was a positive increase but a major delay in payment. In total, the mechanical increase from all digital service providers came out to about $250 million over that period. Of that, Spotify contributed $98.6 million more, and that’s just from its restated 2021-2022 period. Songwriters did not receive the eventual rate increase until earlier this year.
When Spotify, the NMPA and NSAI reached an agreement for 2023-2027, we thought the fight was over. We were wrong.
At the end of March, Spotify reported yearly revenue of $15 billion. This audiobook bundling maneuver, which affects 100% of all musical content on its service, reflects less than a 1% cost savings for the tech behemoth. And for a limited time, at that, since the settlement referenced above ends in 2027. This begs the question to Spotify analysts and shareholders alike as to whether it is worth it — and leads to the obvious answer: “It is not.” Spotify should reverse course immediately and find 1% savings somewhere else that doesn’t work to decimate the revenue of millions of American songwriters, the lifeblood of our treasured American music industry.
Jordan Bromley leads Manatt Entertainment, a legal and consulting firm providing services to the entertainment industry for over 45 years. He sits on the Board of Directors for the Music Artists Coalition, an artist first advocacy coalition established in 2019.
Trent Smith is a financial analyst at Manatt Entertainment with extensive experience in the streaming economy.
Spotify is facing a class action lawsuit over its recent decision to kill its short-lived “Car Thing” device, filed by angry consumers who say the streaming company’s move left them “with nothing more than a paperweight that cost between $50 and $100.”
The case came just days after Spotify announced that the Car Thing – a device launched in 2021 for playing music in a car but discontinued just a year later – would be rendered fully non-usable in December. Spotify has offered no refunds or trade-in options.
In a complaint filed Tuesday in Manhattan federal court, attorneys for the jilted customers accused Spotify violating state and federal laws by essentially of duping their clients into buying a “useless product.”
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“Had plaintiffs and other members of the class known that Spotify manufactured the Car Thing with the ability to brick the product at any point after its introduction to the marketplace and in Spotify’s total discretion, they would not have bought a Car Thing, or would have paid substantially less for them,” the lawsuit reads.
The lawsuit was filed by three Car Thing buyers — Hamza Mazumder, Anthony Bracarello and Luke Martin – but aims to represent thousands of other consumers who experienced “the forced obsolescence of their purchase.”
Spotify announced the Car Thing in April 2021, saying it would provide users with a “seamless and personalized in-car listening experience.” The product – a touch screen with a physical dial that still requires access to a smartphone — rolled out February 2022 at a price point of $89.99. But just months later, Spotify said it would cease production, telling investors that they “frankly haven’t seen the volume at the higher prices that would make the current product financially viable.”
Last week, Spotify alerted users last week that it would stop supporting the devices. Then this week, the company confirmed that the move, set to take effect Dec. 9, would render the devices fully inoperable. The company told users it was “not offering any trade-in options” and urged them to consider “safely disposing of your device following local electronic waste guidelines.”
“The goal of our Car Thing exploration in the U.S. was to learn more about how people listen in the car,” Spotify said in a statement. “In July 2022, we announced we’d stop further production and now it’s time to say goodbye to the devices entirely. Users will have until December 9, 2024 until all Car Thing devices will be deactivated.”
In the new lawsuit, Spotify’s customers say they couldn’t have expected that the company would shut down the devices just a few years after they were purchased. The decision to do so “unilaterally and without recourse” has left buyers nothing more than a paperweight that cost between $50 and $100.”
“Plaintiffs and class members would not have purchased a Car Thing if they knew that Spotify would stop supporting the product within just a few months or years of purchase,” attorneys for the users write.
In technical terms, the lawsuit includes allegations that Spotify violated state consumer protection and false advertising laws in New York, Florida and Pennsylvania, as well as the federal Computer Fraud and Abuse Act and various other forms of civil wrongdoing.
A spokeswoman for Spotify did not immediately return a request for comment on the lawsuit’s allegations.
Read the entire complaint here:
Car Thing, likened by at least one admirer as the Zune of the 2020s, will cease to exist later this year following an announcement by Spotify late last week that the little device that couldn’t will stop working on Dec. 9. It’s not a suspension of technical support or software updates, but rather the simply designed in-car audio player will be remotely deactivated and that users should be prepared to discard it.
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“The goal of our Car Thing exploration in the U.S. was to learn more about how people listen in the car,” said a Spotify spokesperson when asked about Car Thing’s death sentence. “In July 2022, we announced we’d stop further production and now it’s time to say goodbye to the devices entirely. Users will have until December 9, 2024 until all Car Thing devices will be deactivated.”
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Spotify broke the news to Car Thingheads in an email on May 23, writing that the company was “switching gears” and that “while this chapter is closing, we’re working new, innovative ways to enhance your drives in the future.” A day later, the company sent a followup email explaining that “this was not a decision we made lightly and we want to ensure that you have the right place to reach out if you have any questions.”
Slowcore in a slowcar.
The soon-to-be-obsolete devices have a 4-inch touch screen, a large rubbery spin dial and several buttons. In terms of size, Car Thing is 5-inches wide, 3-inches high and less than an inch thin. It is light (three ounces) and mounts to a dashboard, air vent or a CD player, and stays put in said mounts using magnets. Adding to the confusion surrounding its very existence, the Thing still needs to be connected to your car stereo using bluetooth or wires, and requires a dedicated power source and your smartphone (via WiFi) in order to access Spotify’s millions of tracks and podcasts. Users of the gadget control what’s playing via the touch screen, the dial or Spotify’s increasingly smart “Hey Spotify” voice control mode, which has become particularly popular among buckled-up kids wanting to take over the playlist.
The audio streaming giant began tinkering with a voice-controlled hardware device in 2019 as a way to test in-car listening habits and also to fill a need for Spotify devotees with older cars — or slightly less-smart or attractive interfaces — to enjoy their favorite music and podcasts while driving. Car Things began rolling out to select U.S. premium subscribers in April 2021 before going wide in February 2022 at a price point of $89.99. But a few months later, Spotify slammed the breaks on Car Thing production, saying in an earnings call that they “frankly haven’t seen the volume at the higher prices that would make the current product financially viable.”
Unsurprisingly, the company has not disclosed sales figures.
On its support website, Spotify said its decision to discontinue Car Thing was “part of our ongoing efforts to streamline our product offerings” and that “we understand it may be disappointing, but this decision allows us to focus on developing new features and enhancements that will ultimately provide a better experience to all Spotify users.” The company suggests resetting your Car Thing to factory settings before disposing of it at your nearest electronic waste recycling center. Spotify added that it has no plans to develop a new car device and won’t be offering a trade-in benefit.
“War!” a singer once shouted. “What is it good for?” Well, that depends. In the music business, what can seem like grand ideological conflicts are usually just messy public negotiations over money. That doesn’t mean they’re not brutal, though. And sometimes the amounts at stake turn out to be very much worth fighting over.
The latest industry imbroglio is the National Music Publishers Association’s conflict with Spotify — call it the Battle of the Bundle — which could be worth about $150 million next year. On March 1, Spotify added access to audiobooks to its standard subscription to create a product that it says qualifies as a bundle under the terms of its 2022 legal settlement of the Phonorecords IV rate-setting procedure with the NMPA. Then, as the settlement says it can do, it allocates part of the subscription cost to the audiobook piece of the bundle in order to qualify for a lower payment to publishers.
Whether or not Spotify has a legitimate bundle, it sure has chutzpah — converting all of its U.S. subscribers to bundle customers is a bold move. Now it also has a war on its hands. Already, the NMPA has sent the company a cease and desist for alleged unlicensed content and the allied Mechanical Licensing Collective (MLC) filed a lawsuit about the bundling.
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This is only the response to the attack, though. By trying to cut payments to publishers, Spotify essentially attacked the NMPA, with which the streaming services settled, as well as its president and CEO David Israelite, who actually seems to enjoy this kind of combat. Just to be clear, I don’t think that Israelite literally loves fighting, but I do think he gets a certain satisfaction out of being good at it — he was a champion college debater and he’s a talented amateur poker player. He’s the kind of opponent who thinks strategically, sees several moves ahead and fights on a number of fronts at once.
The obvious fight will be the lawsuit filed by the MLC, which is likely to be long and expensive — think of it as a long slog of a ground war. The expense of that will be borne by the streaming services, though, since they fund the MLC’s operations under the provisions of the Music Modernization Act. But Israelite will attack on other fronts as well. The cease-and-desist letter marks the beginning of probing attacks, each one small. Spotify now licenses the works it uses but are there a few hundred uses of some works that might have slipped through the cracks? At a maximum of $150,000 per work in statutory damages for willful infringement, those oversights add up fast. Just as important, a slowdown in licensing for other uses, including video, could keep Spotify from moving forward with some of its plans to compete with Apple and Amazon.
Israelite will also move forward with what one might call sanctions, by trying to organize different parts of the music business against Spotify, much as Universal Music Group did with TikTok. Most years, the June NMPA Annual Meeting includes the music business version of Two Minutes Hate for an online company that’s not paying or underpaying rightsholders. That’s in less than a month. It’s hard to know how successful this will be, but it seems reasonable to assume that Spotify is going to have a much harder time booking acts to play its party during next year’s Grammy Week.
Israelite has also said he plans to take the fight to Capitol Hill with a legislative proposal to give publishers and songwriters more negotiating power. (If war is just the continuation of policy by other means, as Carl von Clausewitz has it, can’t the reverse also be true?) The odds of passing this legislation soon don’t seem all that high — right now the odds of passing any legislation soon don’t seem all that high — and if publishers and songwriters had the power to make it happen, they would have been trying already. But it starts a conversation that the NMPA wants to start, and it opens a front where the NMPA can fight at an advantage, partly because Israelite, a former Hill staffer, would fight on his home turf. Could the NMPA could get a hearing on the topic of songwriter pay that would embarrass Spotify? The company could argue that it needs margin relief, and it does, but how would that look on TV?
If this sounds like an incredibly elaborate and expensive way to figure out the definition of a bundle, you’re missing the point. Because it is, but also because no one cares. The point, for the NMPA, is to force Spotify to concede, through some combination of litigation, legislation and PR. Strong spotlights create a harsh glare. From Spotify’s perspective, looking for copyright infringement that fell through the cracks might seem like an aggressively-literal reading of the law. But isn’t an automatic bundle aggravatingly literal in its own right?
There’s also a theory that Israelite needs to get music publishers out of a situation he got them into, since he backed the 2022 settlement that allowed for bundles, but this is unfair. Under the decision in the rate-setting case before this, Phonorecords III, bundles were allowed and could be accounted for by subtracting the value of one from the total price, then using the remainder to calculate royalties. Under the Phonorecords IV settlement, bundles must be accounted for proportionally, which is far from ideal but a bit better. Obviously, Israelite and the NMPA thought they could get a better deal by settling the case than fighting it out in court, at great expense, and the NMPA board approved it. Arguably, they’d have ended up fighting either way.
That brings up another question: Phonorecords IV only covers the period through the end of 2027. Before that, both sides will go back to rate court, each more inclined to fight and less apt to settle. Whatever happens, the publishers will lose predictability and Spotify will look bad, especially compared to its rival streaming services. There could be a long, grinding Cold War that really will be good for nothing.
Recently, Spotify has reclassified its premium individual, duo and family subscription services as “bundled subscription services” in an ill-informed attempt to deprive songwriters and music publishers of their rightfully earned U.S. mechanical royalties. As a result, the agreed-upon revenue share rate for Spotify premium, currently 15.2%, may effectively be reduced to less than 12%, depending upon a number of factors. Losses to songwriters and publishers, estimated by Billboard to be $150 million on an annualized basis, will undoubtedly increase over time as subscription revenue and users grow.
Let me say straight away that this column is not intended to embarrass or disparage Spotify in any way. Quite the opposite: This is a respectful appeal to the company, specifically its senior leadership team, to do the right thing by songwriters, regardless of what strategies they appear to believe are legally permissible.
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Spotify has an unfortunate and documented history of punching down at songwriters and music publishers. In just the last few years, this includes appealing the Phonorecords III decision, which reasonably raised the mechanical royalty rate from 10.5% to 15.1% of revenue over a five-year period (while also providing discounted terms for family and student accounts that are beneficial to Spotify and other music services). Almost immediately after serving notice of its intention to appeal Phonorecords III, Spotify moved to retroactively implement the Copyright Royalty Board’s final pre-appeal decision and clawed back a multi-million-dollar credit from songwriters and music publishers throughout 2019. The appeal and remand process lasted for many years, ultimately delaying the payment of a large amount of mechanical royalties, including those earned during the hardship of the COVID-19 pandemic, until February 2024. And finally, in late 2021, Spotify proposed statutory rates for 2023-2027 that the NMPA referred to as the “lowest royalty rates in history.”
While the settlement of Phonorecords IV in 2022 was celebrated by both streaming services and music publishers, Spotify and other DSPs had especially good reason to rejoice. The settlement provides that revenue share rates minimally increase from the prior rate of 15.1% to 15.35% over a five-year period while also providing for discounts related to not only family and student accounts but also Spotify duo —subscription tiers that are meaningful to Spotify given the strong growth of family and duo plans, as the company has noted in earnings reports. The settlement also provides specific terms for DSPs that choose to bundle a qualifying music subscription service with other products and services.
It’s difficult to imagine why Spotify could have any degree of buyer’s remorse concerning the Phonorecords IV settlement or deliberately attempt to manipulate its terms given how clearly reasonable and fair it is. Spotify presumably entered into the settlement with the full knowledge and acceptance that it was agreeing to pay the revenue share rates of 15.1% to 15.35% upon a properly undiluted revenue base, as it had been doing until March 2024.
But Spotify has again devalued the contributions of songwriters to its platform, a move that has been described by rights and advocacy organizations as “cynical,” “potentially unlawful,” “greedy” and “offensive.”
I’ve been asked a lot in recent weeks why Spotify is doing this. The answer, other than perhaps “because they believe they can,” is simple. I believe that Spotify is unjustly attempting to reduce the amounts it pays to songwriters and music publishers in order to (1) effectively use the displaced royalties to offset the costs of running its audiobook business and (2) improve its margins.
Spotify’s reframing of the vast majority of its subscription services as bundled subscription services is a work of fiction. It has done so, in part, by launching a standalone audiobooks access tier that does not appear commercially attractive to users and was launched, at least to an extent, to support its “bundling” strategy. As noted in the Mechanical Licensing Collective’s (the MLC) legal complaint against Spotify, the audiobooks access tier is largely hidden from view on Spotify’s website on a page where the primary purpose is to steer subscribers to premium, not audiobooks access.
The audiobooks access tier is also only available in the United States, the only country to which the Phonorecords IV settlement and accompanying statutory framework applies, and is notably not available in any other country where audiobooks are available in premium. Spotify’s intent is rather obvious on its face, but to think that the availability of the audiobooks access tier as implemented is something of a silver bullet that qualifies it to reclassify its premium individual, family, and duo tiers as a bundled subscription service is a true mark of acting in bad faith. To do so when Spotify is reportedly on the cusp of rightfully raising prices in the United States is all the more insulting.
In the wake of the ire directed at Spotify from songwriters and the music publishing community in recent weeks, the company has issued statements to Billboard and other media.
First, Spotify has stated that it is simply doing what other services have done with bundled products. In my opinion, this is misleading. The Spotify competitors that have availed themselves of bundle reporting methods have done so for products that are bona fide bundles consisting of individually available services and products that hold a clear commercial value, and to which users actively elect to subscribe. Spotify has even done this itself for bundled products on a more limited basis, in the manner actually intended by the Phonorecords IV settlement and its predecessors. But as the MLC’s legal filing against Spotify notes, anyone who subscribed to Spotify premium prior to November 8, 2023, did not elect to receive audiobooks content or functionality. Many premium users have not utilized audiobooks even once; and, as of this writing, a non-student Spotify subscription without audiobooks does not even exist.
Spotify has also been quick to point out that music publishers “agreed to and celebrated” the Phonorecords IV settlement. I can assure readers there is no world in which the music publishing community truly believed that it was agreeing to bundling provisions in the manner in which they are being abused by Spotify to drastically reduce its payments to songwriters and music publishers. At minimum, Spotify’s actions clearly violate the spirit of the agreement, and to say otherwise is blatantly dishonest. To the extent Spotify may believe it has outsmarted songwriters and music publishers, there should be no pride in ownership.
Finally, Spotify has stated that it “paid a record amount to publishers and societies in 2023 and is on track to pay out an even larger amount in 2024,” which presumably refers to Spotify’s global rather than U.S. domestic spend on music publishing royalties. This may be true given Spotify’s growth trajectory, which as of its most recent reporting was up 20% year-over-year in revenue and up 14% in premium subscribers. However, it is wholly irrelevant and a deflection from the issue. Simply paying more from one year to the next does not atone for the grave offense at hand. The amount of royalties paid is not the only pertinent metric.
Spotify has repeatedly stated its desire to become a more efficient and profitable company. I applaud that. Spotify operating profitably is good for the music business — including songwriters and music publishers. And Spotify is welcome to spread its wings and invest in new areas of business such as podcasts and audiobooks. But let’s be clear: The royalties that Spotify pays to songwriters and music publishers (and other music rightsholders including record labels) are not preventing it from becoming or remaining profitable.
Spotify has said on multiple occasions, including during its 2022 investor day presentation, that it has chosen to prioritize growth over profitability and has done so deliberately and willingly. Its music gross margin has operated at strong numbers and improved over time, in part thanks to its marketplace initiatives, but overall gross margin has been dragged down by investments the company has made in the podcast space. Not all of those investments, including content deals and acquisitions of other companies, have produced positive results, as is well documented in various media, and Spotify has since pivoted to operate more efficiently and better ensure that its costs do not grow quicker than its revenue.
The royalties Spotify pays to songwriters and music publishers are not the problem, nor are the royalties it pays to others. Spotify receives tremendous value in exchange for the mechanical and other royalties that it pays for musical works, and songwriters should not be treated by Spotify as a drag on its margins. To pay slightly north of 15% of revenue for songwriters’ creative output is a gift, and there is absolutely no reason for Spotify to sneak around corners to dilute songwriters’ income. It is beyond the pale, even relative to actions that Spotify has taken against songwriters and publishers in recent years.
I love Spotify and have been a user since the very beginning. But I value the songs upon which it has built its entire business even more. Spotify is a house built by songwriters. In the modern listening environment, which heavily depends upon personalization, recommendations and playlists, songs and songwriters are an even more crucial part of the infrastructure and the value conveyed to consumers who pay Spotify subscription fees.
I’ve often said that compensating songwriters in accordance with the value that they bring to music streaming platforms is not only good business but also good for business. Spotify’s relationship with songwriters and publishers, whether it realizes it or not, is mission-critical and not just about maintaining positive sentiment. Given the global stature of Spotify and the company’s interest in various content types including podcasts, music videos and lyrics, returning its relationship with songwriters and publishers to a respectful position is important to its future. Unfortunately, Spotify’s relationship with the songwriter and music publishing communities that it has built its business upon is now more fraught and damaged than ever. Trust has been almost entirely eroded. That cannot merely be chalked up to, as Spotify stated during its most recent earnings call, “natural tensions between suppliers and distributors.” But it may not be too late to fix things.
Here is my genuine and respectful appeal to Spotify, and it’s not a big ask: Please voluntarily honor the Phonorecords IV settlement on the intended terms that you know fully well were agreed to and promptly reverse course on your misguided attempts to reduce U.S. mechanical royalties in this manner. Songwriters and the broader music publishing community will thank you. If this is too much to ask, I believe the songwriting community will never want to hear another word from Spotify about, to use the company’s own words, “giving a million creative artists the opportunity to live off their art.”
Adam Parness was the global head of music publishing at Spotify from 2017 to 2019. He currently operates Adam Parness Music Consulting and serves as a highly trusted and sought after strategic advisor to numerous music rightsholders, notably in the music publishing space, as well as popular global brands, technology-based creative services companies and firms investing in music and technology.
This is The Legal Beat, a weekly newsletter about music law from Billboard Pro, offering you a one-stop cheat sheet of big new cases, important rulings and all the fun stuff in between.
This week: Spotify faces a lawsuit over allegations that it “unlawfully” chose to reduce royalty payments to publishers and songwriters; Earth, Wind & Fire reaches a settlement over how much it’s owed in damages by an unauthorized tribute band; Elvis Presley’s granddaughter sues to protect Graceland from a “fraudulent” foreclosure; and much more.
THE BIG STORY: Spotify Taken To Court Over Royalties
Weeks after Billboard estimated that Spotify would pay roughly $150 million less to songwriters and publishers over the next year, the streaming giant is facing a legal battle over the move.In a lawsuit filed last week, the Mechanical Licensing Collective (MLC) claimed Spotify had “unilaterally and unlawfully” chosen to cut its royalty payments nearly in half by “erroneously recharacterizing” the nature of its streaming services to secure a lower rate.“The financial consequences of Spotify’s failure to meet its statutory obligations are enormous for songwriters and music publishers,” the MLC wrote. “If unchecked, the impact on songwriters and music publishers of Spotify’s unlawful underreporting could run into the hundreds of millions of dollars.”At issue in the lawsuit is Spotify’s recent addition of audiobooks to its premium subscription service. The streamer believes that because of the new offering, it’s now entitled to pay a discounted “bundled” royalty rate under federal law. But the MLC says Spotify’s interpretation is legally incorrect and represents a “clear breach” of its requirements under the law.This is the second lawsuit of the past six months for the MLC — an entity created by Congress in 2018 to collect royalties under the Music Modernization Act. After the MLC filed a similar case against Pandora in February, that streamer argued that the group was supposed to operate as a “neutral intermediary” and was “not authorized to play judge and jury” or pursue “legal frolics.”For the full breakdown of the new case against Spotify — including industry reactions and access to the full complaint filed in court — go read Kristin Robinson’s entire story here.
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The National Music Publishers’ Association (NMPA) has sent a letter to Judiciary Committee leadership in both the U.S. House of Representatives and Senate, asking for the overhaul of the statutory license in section 115 of the Copyright Act, which “prevents private negotiations in a free market” for mechanical royalty rates for songwriters and music publishers in the U.S.
On May 20, David Israelite, the organization’s president and CEO, teased this announcement in a guest column for Billboard, saying: “soon we will unveil a legislative proposal to permanently fix the power imbalance songwriters face by being subject to a compulsory license for their songs.”
In his new letter, NMPA’s Israelite writes that doing away with the 100-year-old system of government-regulated price setting for songwriter and publisher royalties (specifically, mechanical royalties) and allowing rate negotiations to occur in a free market would prevent songwriters and publishers from being taken advantage of by “Big Tech:” “Those who do operate in a free market, such as record labels, have negotiated protections against bad faith tactics. However, music publishers and songwriters have no such leverage under the [Copyright Royalty Board] to do so.”
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For years, music publishers and songwriters have lamented that they do not get to negotiate for their U.S. mechanical royalty rate privately because of wording in section 115 of the Copyright Act, which places “non dramatic musical works,” like songs, under a compulsory license, dating back to 1909. The rate for that license is determined by a set of Copyright Royalty Board judges, who weigh the interests of the music business against that of tech companies like Spotify, Apple Music, Amazon Music and more to determine what they feel is a fair price for music.
Record labels, which work with “sound recording” copyrights, not “musical works,” are able to freely negotiate their rates, as are music publishers and songwriters outside the U.S. Because of the discrepancy between how U.S. music publishers and songwriters are treated compared to others, publishers feel that they are held back from getting the best rates possible.
The letter arrives just a week after music publishers, the NMPA, and the Mechanical Licensing Collective (The MLC) — which collects and distributes mechanical royalties for U.S. publishers and songwriters — waged a war against Spotify for paying a lower U.S. mechanical royalty rate for premium, duo and family plans, starting in March 2024. Spotify believes that the addition of audiobooks to premium, duo and family plans qualifies these tiers as bundles, a type of subscription that pays a lower royalty rate.
For days after this information was first reported, various music organizations made statements against Spotify, often calling its reclassification “cynical” and a “loophole” to pay songwriters less and takes advantage of the settlement made between music publishers, songwriters and streamers to agree on a rate structure for 2023-2027 (known as “Phonorecords IV”), which was approved by the Copyright Royalty Board judges.
In the NMPA’s letter — addressed to Sen. Richard Durbin (D-Ill.), Sen. Lindsey Graham (R-SC), Rep. Jim Jordan (R-OH), and Rep. Jerrold Nadler (D-NY) — Israelite calls Spotify’s move a “manipulat[ion] [of] the compulsory licensing rules” and the latest in what he feels is the “continued abuse of the statutory system by digital services… [which] has made it clear that additional action by Congress is needed.”
On May 15, the NMPA sent a cease and desist letter to the streamer for hosting lyrics, music videos, and podcast content that contain their copyrighted musical works without a proper license. The next day, on May 16, The MLC joined in, filing a lawsuit against Spotify for “improperly” reclassifying its premium, duo and family plans and trying to get a discount, which would result in what Billboard estimates is a $150 million annualized reduction in U.S. mechanical royalties, compared to what they would have paid if these tiers never changed over.
In his new letter, NMPA’s Israelite proposes a solution for abolishing the current system, saying: “Congress should allow rightsholders the choice to license through the MLC using the statutorily set royalty rates or to withdraw from the MLC and operate in a free market if they meet certain conditions.”
He continues, “if copyright owners chose to withdraw their copyrights from the blanket license, currently administered by the MLC, they would be required to do the following:
Require all rightsholders who exercise this option to provide 6 months’ notice to the Register of Copyrights and the MLC;
Require that the withdrawing rightsholders ensure their musical work copyrights and ownership interests are registered in the MLC’s public database;
Require the MLC to flag those rightsholders and their catalogues as withdrawn from the MLC blanket license and subject to voluntary license negotiations; and
Require copyright holders to maintain with the MLC database current, up-to-date contact information, which would be used to contact for licensing.”
Read the full letter below:
Dear Chair Durbin, Ranking Member Graham, Chairman Jordan, and Ranking Member Nadler:
The Music Modernization Act (MMA) has offered not only songwriters and music publishers, but also digital service providers, unprecedented benefits. However, the bill has amplified the need for corrections to the century-old compulsory license governing their work.
Large, foreign-owned companies, like Spotify, should not enjoy unfair advantages over American songwriters because of outdated federal policy. By making one simple change, Congress can undo a more than 100-year-old mistake in the compulsory license and ensure songwriters and music creators continue to benefit from their creative efforts.
How did we get here? Almost six years ago, members of the House and Senate Judiciary Committees came together to pass the MMA, a landmark piece of copyright legislation for the age of digital music streaming. The MMA took important steps forward in improving the compulsory license imposed on songwriters and music publishers by creating the Mechanical Licensing Collective (MLC) to administer a blanket license under Section 115 of the Copyright Act, which is taken by digital music services.
The MLC increased transparency through a public database, furthered licensing efficiency through a central administrator, and improved the process for distributing musical work royalties. However, the benefits did not extend to, or remedy, the ongoing issues faced by rightsholders subject to the government rate-setting process.
The continued abuse of the statutory system by digital services, most recently Spotify, has made clear that additional action by Congress is needed. The royalty rates paid to musical work copyright owners for uses of those works under the Section 115 blanket license are set in a proceeding before the Copyright Royalty Board (CRB), within the Library of Congress, once every five years. In these proceedings, music publishers and songwriters must face off against some of the biggest tech companies in the world: Spotify, Apple, Amazon, Google, among others to establish rates for the use of musical works.
Because the law prevents private negotiations in a free market, publishers and songwriters have seen ongoing abuse of the statutory system and CRB rate-setting process with little ability for recourse. Most recently, Spotify has found a new way to game the statutory rate system to underpay rightsholders by hundreds of millions in royalties.
In March, Spotify began manipulating the compulsory licensing rules and reclassified its premium subscription music service, along with almost 50 million subscribers, into what it is calling a “bundle.” The benefit to taking this action is, under the compulsory royalty rates, bundles attribute less revenue – and therefore pay less in royalties – to the music than a premium subscription music service. Spotify has taken a part of its music service that was previously offered to consumers for free, audiobooks, and it is now calling audiobooks a bundle with its music service to substantially reduce the musical work royalties owed.
Those who do operate in a free market, such as record labels, have negotiated protections against these bad faith tactics. However, music publishers and songwriters have no such leverage under the CRB to do so.
Fortunately, there are solutions Congress can enact that would preserve the benefits of the MMA and the MLC while providing songwriters and publishers a better chance to compete on a level playing field with Big Tech firms like Spotify. Rather than picking who wins and who loses, Congress should allow rightsholders the choice to license through the MLC using the statutorily set royalty rates or to withdraw from the MLC and operate in a free market if they meet certain conditions.
If copyright owners chose to withdraw their copyrights from the blanket license, currently administered by the MLC, they would be required to do the following:
Require all rightsholders who exercise this option to provide 6 months’ notice to the Register of Copyrights and the MLC;
Require that the withdrawing rightsholders ensure their musical work copyrights and ownership interests are registered in the MLC’s public database;
Require the MLC to flag those rightsholders and their catalogues as withdrawn from the MLC blanket license and subject to voluntary license negotiations; and
Require copyright holders to maintain with the MLC database current, up-to-date contact information, which would be used to contact for licensing.
This would give rightsholders the option to stay within the current compulsory system or to operate within a free market. It would also restore basic principles of fairness to the market by requiring streaming platforms to deal with music makers as partners. Finally, it would provide a needed point of leverage for songwriters and music publishers to negotiate with streamers, like Spotify, who can otherwise use their power to bend government regulations to their advantage. All of this could be accomplished by building on the successful infrastructure created by the MMA and the MLC.”
Spotify has once again shocked the songwriting community by attempting to use a legal loophole to find a new way to pay them less.
Music creators had enjoyed a relative period of peace with Spotify since songwriters and music publishers struck a deal with digital services in 2022 to raise royalty rates over the next five years. Unfortunately, the streaming giant is now perverting that agreement by using audiobooks to redefine and reduce how much they pay songwriters – the tune of hundreds of millions of dollars. By unilaterally adding audiobooks to their premium music standalone service, they are now classifying that music service as a ‘bundle’ which means they can attempt to pay royalties under a different definition. In a single year this could cost songwriters an estimated $150 million.
Whether or not they can get away with this is still in question.
Record labels, who are in a free market, have immediate recourse against such underhanded tactics. They are not under a compulsory license like songwriters, and they have the freedom to negotiate directly with streaming services like Spotify. Crucially, this means if they don’t like the way their royalties are affected by Spotify’s bundling strategy, they can say no.
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Unfortunately, songwriters and music publishers cannot. They must go to court every five years and are at the mercy of three judges to interpret Spotify’s routing of the rules.
Spotify first aggressively came for songwriters in 2018. We had achieved a 44% raise in the headline rate for mechanical streaming royalties at the Copyright Royalty Board (CRB) – raising rates from 10.5% to 15.1% of revenue. In an unprecedented move, Spotify launched an appeal of that decision, sending us into a half-decade legal odyssey which ultimately resulted in the upholding of our headline rate increase as well as a few new changes.
Fast forward to 2022. Having lost their appeal in regard to the headline rate, the streaming services came to the table to negotiate the next five-year period.
To avoid repeating another era of uncertainty, and to ensure rates and terms improved, we agreed to a deal with Spotify, Amazon, Apple, Google, and Pandora to cover 2023-2027 which included a phased-in headline rate increase. Critically, it also included strengthening bundle definitions by ensuring that services were no longer able to attribute all parts of revenue to other non-music offerings in the bundle. However, the court prevented us from doing away with bundle definitions altogether because when a service pays under the bundle definition, they pay at a discount since music is only part of the offering.
Only recently, when reporting of royalties by Spotify sharply decreased in the middle of a CRB rate period, were we alerted to the fact that Spotify was reinterpreting the new bundle rules to manipulate their payments. However, calling Spotify’s premium service a bundle is dishonest.
After raising prices last year, there was great hope that Spotify would better align pricing with market value and songwriters would see the benefits resulting from the deal we agreed to in 2022 which ensures that when prices go up, so do their royalties.
Only in Spotify’s world would a price hike for users mean a lower royalty rate for songwriters.
As we look to the next CRB trial, where we will again face the largest tech companies in the world, we had hoped to approach it as business partners, bolstered by several years of collaboration. This development has shattered that potential as Spotify has returned to attacking the very songwriters who make its business possible – and worse, they’re doing it through a dishonest work-around.
Bundles were conceived to apply when two standalone products were combined to incentivize new users and grow the paying consumer base. What Spotify has done is act as if audiobooks are a new, separate service, when they are in fact the exact same premium streaming option to which millions of users are already subscribed.
In fact, in a bombshell last week, it was found that if you can even find where to sign up for the audiobook-only option, the first question Spotify asks you is who your favorite performing artists are – exactly like onboarding a music-only subscriber. It then offers you all of the music on its platform on-demand.
We will not stand for their misinterpretation of bundles as precisely defined in our settlement. If allowed to abuse the statutory formula in this way, it will pave the way for other services to do the same.
That’s why several serious actions are in process. Last week, the Mechanical Licensing Collective (MLC) sued Spotify for improperly reporting its usage – a.k.a. underpaying songwriters by labeling their services as a bundle.
As the MLC states in its complaint, “Spotify informs potential Audiobook Access subscribers that, unlike Premium subscribers, they will not have access to unlimited, ad-free, on-demand music. But in rolling out its Audiobooks Access plan, Spotify neglected to create a different product.”
Separately, NMPA also sent a demand letter to the streaming giant for its unlicensed use of musical works in its lyrics, videos, and podcasts. We also specifically warned Spotify about its rumored “remix” feature which would allow subscribers to “speed up, mash up, and otherwise edit” songs to create derivative works.
In addition to these legal challenges, soon we will unveil a legislative proposal to permanently fix the power imbalance songwriters face by being subject to a compulsory license for their songs.
Spotify’s cynical, and potentially unlawful, move should make all songwriters and artists question their relationship with the service. The strategy to rebrand music as a “bundle” further devalues their art and amounts to a complete betrayal.
David Israelite is the president and CEO of the National Music Publishers’ Association (NMPA). Founded in 1917, NMPA is the trade association representing all American music publishers and their songwriting partners.
In March, Spotify began paying music publishers and songwriters a discounted royalty rate for streams on its premium tiers — and the music business isn’t accepting the change without a fight. Spotify says that by adding audiobooks to its premium offerings, these subscriptions have been reclassified as “bundles,” a type of plan that qualifies for […]