On the latest Music Business Worldwide podcast, MBW founder Tim Ingham is joined by David Israelite, the President and CEO of the National Music Publishers’ Association.
We probably don’t need to ask you to guess which particular controversial topic they discuss.
Earlier this month, Spotify announced that it was changing the way it calculates mechanical royalty payments for songwriters and publishers in the US.
Spotify has re-categorized its Premium subscription tiers in the States as ‘bundles,’ enabling it to pay out a lesser mechanical royalty rate to songwriters than it would if said Premium tiers were classified as pure music services.
Spotify believes it is entitled to re-categorize these tiers as ‘bundles’ due to the fact that SPOT now offers access to music plus audiobooks.
The idea that ‘bundled’ services should be entitled to a lower mechanical royalty rate (vs. standard music subscription services) was enshrined in the so-called ‘CRB IV’ agreement/settlement between publishers and Spotify in the States, signed in 2022, and covering the years 2023-2027.
As David Israelite explains on this podcast, the NMPA is currently considering legal action against Spotify that would seek to undo the newly-lowered ‘bundle’ mechanical royalty rate on the service.
This isn’t the first time that Spotify and songwriters have butted heads, of course: In 2019, the US Copyright Royalty Board (CRB) decreed that Spotify and other streaming services needed to increase the headline mechanical royalty rates they paid publishers and songwriters in the US for the period covering 2018-2022.
That decision from the CRB (in the so-called ‘CRB III’ process) followed a campaign of lobbying and general legal cajoling from the NMPA, on behalf of songwriters and publishers.
Spotify (and Amazon) subsequently appealed this (‘CRB III’) ruling, attempting to drive down the mechanical royalty rate they paid songwriters under US law.
The CRB, though, stood firm – and told the streamers they must increase their rate.
Now, with its ‘bundle’ reclassification under ‘CRB IV’, Spotify is once again attempting to push down the percentage of its revenue that it must, by law, pay to songwriters and publishers in its biggest market.
Will Spotify ultimately get away with it? Stay tuned.
As Israelite confirms on this podcast: “This will likely end up in a legal conflict…”
Read an abridged/edited transcript of Israelite and Ingham’s conversation below, or listen to the full podcast – either above, or on your preferred service…
You must have had a fun couple of weeks. Can I just get an initial reaction RE: Spotify’s new ‘bundle’ categorization and the lowered mechanical rate?
It’s been more than a ‘fun’ couple of weeks; this has been a problem with this company for 13 years.
Spotify launched in the United States in July of 2011. Consistently, this is a company that has treated songwriters, the people that make their business possible, as indentured servants.
“Spotify has treated songwriters, the people that make their business possible, as indentured servants.”
What’s happened just recently is just one in a long list of examples of where this company has been hostile to the songwriters.
This most recent example is an attempt by Spotify to reclassify its service under US law, which would result in a massive deduction in what it pays songwriters. It’s something that we believe is legally questionable.
Regardless of that, is something that demonstrates their hostility to the very songwriters that make their business possible.
Let’s get into it then… I’ll give you my understanding of what’s happening here and hopefully you can correct me if I get anything wrong! The other week, Spotify launched an audiobooks-only subscription app at $9.99 per month in the US. Under the agreement of CRB IV, a ‘bundled’ royalty rate for music would take into account the market value of the thing that music is being ‘bundled’ with. What looks like it’s about to happen: Spotify is going to launch a ‘music-only’ subscription app in the US for $10.99 per month, while raising the price of the standard ‘Premium’ subscription in the territory by $1 or $2 per month; it’s currently at $10.99 per month, so let’s say it goes to $11.99 per month. all current Premium subscribers will then be told: ‘Hey the price has gone up, you’re now subscribing to our music-plus-audiobooks tier. If you’d like to manually demote your subscription to music-only or audiobooks-only, please do so.’ And of course very few people will. What Spotify could then do is claim that audiobooks and music roughly have parity within the value of that subscription – because the standalone ‘audiobooks-only’ app is $9.99 while the standard ‘music-only’ app is $10.99. Which means that songwriters will get paid a percentage of a percentage: A percentage of the portion of your monthly ‘Premium’ subscription that Spotify ascribes to ‘music’ vs. ‘audiobooks’. Just speaking personally, I’ve been a subscriber to Spotify for a very long time, and there is no way I would ascribe nearly 50% of the value of what I pay to audiobooks. I was pushed audiobooks by Spotify last year; it was a nice bonus. I’d be happy with a discussion over what percentage of my ‘bundle’ should be ascribed to audiobooks vs. music. But I’d never say near-50%! Anyway… that’s my rough take understanding, and I’ve been in touch with Spotify who have declined to clarify the detail I’m looking for. What’s your reaction to what I’ve just painted. Am I on the right lines of what they’re trying to do?
Two quick things before I dig into the details. First of all, something that I’ll probably have to repeat often during this conversation: this is likely to end up in a legal conflict. So I need to be cautious as to what I say now, because I certainly don’t want to do anything that compromises what might be the legal position of the songwriting and music publishing community. It’s very unfortunate that we’re headed down that road, but it’s the fact [of the matter].
The second thing: it’s very important that people understand the way that music publishers and songwriters are forced to license these services in the United States. Unlike record labels – who are in a free market; they negotiate the details of every one of their individual contracts with every different [subscription] offering that Spotify may put out – we are forced to live under a compulsory license in the United States, where every five years, three judges [the CRB] hold a trial, decide on a rate structure that is in place for five years, like a menu with set pricing.
What we are now forced to do is watch companies like Spotify try to manipulate that predetermined structure to pay songwriters less. In the most recent [CRB IV] trial, we ended up settling [with Spotify et al], which is a decision you make when you feel like [an ]agreement is better than going through a court process. In that settlement, we were forced to accept certain realities about a structure that we don’t like – one of them being the availability of these things that we call bundles.
“The net result is to drastically slash what they pay songwriters. We think it’s in bad faith. We think it violates both the letter and spirit of what we’ve agreed to. And that’s why it’s likely to be a legal conflict and why I’m limited to what I can say right now. Clearly this is something that seems like it was manipulated to take advantage of what they may think is a loophole in the law.”
Now, to your specific question, here’s what we know. We know that back in November of last year, Spotify started giving away audiobook[s] as part of your music subscription service; you didn’t ask for it as a customer, you weren’t notified that you are now in some kind of different plan. It just was there. And let’s be clear: there was a limitation on it – 15 hours [maximum] of listening for your audiobook functionality.
Then what Spotify did on March 1, was launched an independent [subscription] product for audiobooks… at $9.99 per month. So their suggestion was that you can pay $9.99, just to get audiobooks with [certain] limitations. Or you can pay $10.99 [for current Spotify ‘Premium’] and get audiobooks plus everything else that came with your music subscription. Importantly [at this point] you’ve been getting audiobooks for free [on Spotify Premium] for basically half a year.
So the offering of this independent audiobook product, which they don’t seem to be promoting, doesn’t seem to be priced at a value proposition that makes any sense to a customer.
Spotify is now claiming that, therefore, their [‘Premium’] music subscription qualifies as a ‘bundle’ and gets paid under different rates. The net result is to drastically slash what they pay songwriters.
We think it’s in bad faith. We think it violates both the letter and spirit of what we’ve agreed to. And that’s why it’s likely to be a legal conflict and why I’m limited to what I can say right now.
Clearly it’s something that seems like it was manipulated to take advantage of what they may think is a loophole in the law.
My confusion with the Spotify thing is they pushed audiobooks on me. I’m happy to have them as a subscriber, but I didn’t ask for them. So you can’t now then say that the value of the audiobooks component of this is the equivalent of $9.99 versus whatever value they put on music. Because there was no point, speaking personally, where I was willing to pay $9.99 for the audiobooks part of that subscription. I’m confused by it.
I don’t think you should be confused. It seems fairly clear to me: this seems to be an attempt to pay songwriters less.
In theory, bundles are not a bad thing. The way that should work is the way it works with record labels: if someone wants to include your music into a business proposition [offered to] a customer, something that bundles your music with something that’s a non-music product, there would be a discussion – there would be an explanation [from the service to the label] why it would be good for the music owner or representative to be bundled at that price point. And you would come to an agreement.
That’s not what happens [for] songwriters. Songwriters are told they must bundle their songs, whether they like it or not. It’s a preset rate structure, whether they like it or not. And it is open for manipulation – so that people can try to take advantage of bundling in a way that would pay songwriters less under a structure that [those songwriters] would not agree to if they were in a free market.
“Songwriters are told they must bundle their songs, whether they like it or not. It’s a preset rate structure, whether they like it or not. And it is open for manipulation – so that people can try to take advantage of bundling in a way that would pay songwriters less under a structure that [those songwriters] would not agree to if they were in a free market.”
You raise a very important point: Who is the audience for audiobooks-only [without music]? Because as a music subscriber to Spotify, you’ve already been getting [audiobooks] for free for half a year. So if you are a subscriber to Spotify, it’s very hard to imagine why you would then subscribe to a $9.99 audiobook product.
[Therefore] they must be trying to sell that [audiobook-only] product to people who don’t have music subscription services… and we will obviously be looking into what they are doing to market that product.
The other thing you brought up that’s very important is that, today, as we have this conversation, you don’t even have an option to subscribe to a music-only subscription service on Spotify that doesn’t have audiobooks embedded into it.
All of these things are important facts that contribute to the conclusion we have about what they’re doing and why they’re doing it [see: “loophole” comments above].
I just want to revisit: Is my understanding of how the payouts will work under the new ‘bundle’ system correct? I know there are three ‘prongs’ to the way that publishers and songwriters get paid from Spotify as part of CRB IV, and that only one of those three ‘prongs’ is the headline mechanical royalty rate; publishers get paid by whichever of the three ‘prongs’ is highest. But to just understand this hypothetically, let’s stick to the headline rate. My understanding is that what Spotify is claiming, or will claim, is that that mechanical rate for songwriters will now be a percentage of a percentage – i.e. a percentage of the part of the subscription you pay that is ascribed to music’s value vs. audiobooks’ value. Have I understood it right?
Yes, that is basically right.
In the United States, we have a very complicated rate structure of how songwriters and music publishers are paid. And the reason it’s complicated is that it’s a cookie-cutter approach, where you have to agree on a structure that applies for five years, and you don’t know exactly what a business is going to do with your music.
So, for example, we would love to get paid every time you stream a song; we’ve asked for that from the court, the court said no. [So] we generally get paid on a percentage of revenue, and that’s the headline rate that people talk about, where [publishers] are entitled to 15.2% of the revenue generated by the services.
“What was not really anticipated is that [a service] would try to avoid the headline rate – the 15.2% revenue rate – by trying to call something that it’s not, by characterizing a service as a different type of category for the purpose of paying less.”
In our rate structure, we have two other ways [i.e. ‘prongs’] to get paid, that protect us if the revenue [of a service] goes down… potentially artificially. One of [those prongs] is we’re guaranteed a minimum of a percentage of what record labels get paid, which is basically 26.2% [of what record labels are paid, otherwise known as the ‘Total Content Cost’ within CRB IV]. The other [prong] is we’re guaranteed a minimum amount per subscriber, which is 66 cents.
The reason why those two other alternate ways to get paid are important: take a hypothetical where Spotify decides to give away its music subscription for free. Under a percentage of revenue [system], we would get nothing.
So these other two alternate ways to get paid were put into the law to protect us from downward pricing pressure on these types of services.
What was not really anticipated is that [a service] would try to avoid the headline rate – the 15.2% revenue rate – by trying to call something that it’s not, by characterizing a service as a different type of category for the purpose of paying less. That’s what we’re concerned is going on here.
If it was Based off the headline rate – i.e. getting paid a percentage of a percentage within a bundle – I can’t see how songwriters aren’t going to be paid less in the US in 2024 than they were in 2023.
[In terms of] the actual numbers of what Spotify [will pay songwriters in 2024], we don’t know yet. We don’t know what their price increases are going to be; we don’t know how much record labels are going to get paid and thus the percent of that we’re going to get [under the ‘Total Content Cost’ prong].
But let’s be clear: even if it’s true that they will pay songwriters more in 2024 than they did in 2023, what they’re not telling you is they’re not paying songwriters as much as they should, under our new rate structure.
That’s why I find the public statement they put out [about Spotify paying publishers and songwriters more in 2024 vs. 2023] deceiving and intended to fool songwriters about the impact of what they’re doing with this decision.
On Spotify’s latest earnings call Daniel Ek talked about ‘the year of monetization’ and how his company is essentially profit-focused, if not profit-obsessed. That reflects a quarter in which Spotify posted its biggest-ever operating profit. Spotify is saving margin by spending less on marketing and it obviously saved margin by laying off over 1,500 people last year. How much motivation do you think this margin-saving drive at Spotify had on its decision to recategorize ‘Premium’ as a ‘bundle’ and lower songwriter royalty rates?
Well, the timing of this earnings call – not to mention the timing of Daniel Ek cashing out $118.8 million for himself in Spotify stock – while they are trying to slash what they pay songwriters, is terrible for them.
We’ve talked about this before: I don’t begrudge any company from trying to make a profit. The problem with Spotify’s approach to songwriters is that the way that any company should try to make a profit is with business partners who give input with agreed-upon pricing. That’s not what’s happening here.
“the timing of [Spotify’s Q1] earnings call – not to mention the timing of Daniel Ek cashing out $118.8 million for himself in Spotify stock – while they are trying to slash what they pay songwriters, is terrible for them.”
The songwriters are forced to license Spotify in a way that they’re unhappy with. They’re being made to do it when they don’t want to do it.
The other thing from the Spotify earnings call that I found extremely interesting, and I believe MBW reported on this, is that Spotify [appears to] want to expand into offering other types of products to consumers… including short-form video or competing with TikTok.
What’s curious to me about that, is that for those types of business offerings, Spotify will actually need the permission of songwriters and music publishers [i.e. these rights are negotiated in the free market, as opposed to copyright licenses for music streaming]. I don’t understand the strategy of waging an all-out war on what you pay songwriters under the compulsory rate structure for mechanicals, but then saying, ‘In the future, we’re going to ask [you] to be our partners.’
Ultimately what’s the likelihood of the NMPA taking legal action against Spotify over this? And how confident are you that you have a strong case?
This has been an exhausting relationship. And it goes back, as I mentioned, a long time.
Prior to 2016, Spotify was a company that engaged in massive infringement of songwriter rights. We worked with them to fix that problem and clean it up. We did so because we believed that the transition from an era of theft of music to legal music services was important.
And let’s get this out of the way: Spotify deserves credit for helping move consumers into pain streaming models. But that was a long time ago. It doesn’t entitle you now to treat songwriters in the way that they’re treating them.
“There is a real opportunity here for other music streaming services to step in and show that they are better friends to songwriters.”
We then had a [CRB] settlement that they pulled out of in 2018. We then won a massive rate increase [in CRB III], which Spotify – in a ‘scorched earth’ approach – tried to to appeal.
And now, after what we thought was reaching a settlement for this five-year period [2023-2027] where we can actually start working together as business partners, they’re taking this approach.
I’m restricted as to what I should or will say about any legal conflict with the company. But I will just say that it’s extremely unfortunate that we’re back talking about conflict with a company that shouldn’t be trying to build partnerships.
There is a real opportunity here for other music streaming services to step in and show that they are better friends to songwriters. I’m very curious to see what companies like Apple and Amazon will do when they have an opportunity to take a different path than what Spotify has been taking.
All I’ll say is… stay tuned.
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