In August, Spotify asked the court to dismiss the lawsuit brought by The MLC over the streaming service’s decision to reclassify its Premium subscriptions as “bundles”.
Spotify first notified Judge Analisa Torres of the US District Court for the Southern District of New York in July that it planned to file a motion to dismiss – a move outright rejected by The MLC at the time.
Now, the MLC has filed a formal response to Spotify’s motion, urging the court to deny “Spotify’s motion to dismiss in its entirety and with prejudice”.
The conflict between the MLC and Spotify began in March when Spotify reclassified its Premium subscription tiers as “bundles,” as they now include 15 hours of audiobook access each month.
The move controversially resulted in Spotify paying a lower mechanical royalty rate to publishers and songwriters in the United States.
That’s because, under a 2022 legal settlement called Phonorecords IV, music publishers and music streaming services agreed that ‘bundle’ services in the United States are permitted to pay a lower mechanical royalty rate to publishers and songwriters than standalone music subscription services.
The Mechanical Licensing Collective is the non-profit organization designated by the US Copyright Office to administer a blanket compulsory license and to ensure that music streaming services like Spotify pay the mechanical royalties they owe to songwriters and music publishers.
The MLC filed a lawsuit against the streaming service in May, alleging that Spotify has underpaid royalties to songwriters and publishers as a result of the bundling move.
In a 32-page document filed with a New York court last week, which you can read in full here, the MLC argued that it originally brought the case because Spotify, “one of the largest music streaming services in the United States — has failed to comply with the Copyright Act and its implementing regulations (collectively, “Section 115”).”
It also suggested that the streaming company hasn’t “[paid] the substantial mechanical royalties Spotify owes to the songwriters and music publishers who create, own and administer the musical works upon which Spotify’s business is based”.
The ‘Section 115’ rules cited by The MLC in its lawsuit refer to the compulsory license in the US, also known as the 115 License (because it is stipulated under section 115 of the Copyright Act), which allows eligible digital services to use copyrighted music for a set fee without having to negotiate directly with rightsholders.
The blanket license covers the reproduction and distribution of “nondramatic compositions” – not sound recordings. Recorded music rightsholders – aka record labels – are able to negotiate directly with digital service providers. (In May, the National Music Publishers Association called on Congress to update the copyright law in the United States to allow Publishers to negotiate in a “free market” just like record labels.)
“Spotify’s decision not to increase the subscription price when it added audiobook content to the Premium service demonstrates that audiobooks have no more than token value.”
MLC response to Spotify motion to dismiss
The MLC argues further that “Spotify’s motion is entirely one-sided in choosing which new facts to include and which to omit”.
For example, argues the MLC, “when attempting to argue that ’15 hours of audiobook streaming a month carries more than token value’, Spotify recites purported facts as to the subscription prices and revenues generated by different providers who offer consumers access to audiobook content without access to any music content”.
The MLC hones in on the ‘token value’ argument in its response.
According to the MLC, “even if the audiobook content offered to Premium subscribers could be considered a separate product, it must have more than ‘token value’ for the service to qualify as a Bundle”.
The MLC argues that “Spotify’s decision not to increase the subscription price when it added audiobook content to the Premium service demonstrates that audiobooks have no more than token value.
Adds the MLC: “Spotify did not raise the price because it recognized that Premium subscribers pay their monthly fees because they want access to tens of millions of musical works on an on-demand ad-free basis, and that the additional audiobook content has only token value to those subscribers.”
Spotify announced this past spring that it now considers all of its Premium plans to be ‘bundles‘ because, in October, it started offering 15 hours worth of audiobooks with its Premium plans for free.
The MLC claims “that, because Premium subscribers continued to get access to exactly the same product before and after the launch of the Audiobooks Access plan, Spotify is not entitled to report Premium revenues and royalties as a Bundle”.
The org adds: “To qualify as a Bundle, Premium would have to be a ‘combination’ of a music service and ‘one or more other products or services’. Here there was no such combination, but rather a single product.”
The original complaint also alleges as the MLC noted in its response last week, “that Spotify’s decision to pay royalties on all of Premium’s revenues prior to the launch of the Audiobooks Access plan (despite providing the same access to audiobook content) is an admission that the addition of that audiobook content did not convert Premium into a Bundle.”
“Spotify’s motion is entirely one-sided in choosing which new facts to include and which to omit.”
MLC response to Spotify motion to dismiss
Elsewhere, in its response to Spotify’s motion to dismiss, the MLC argues that “the financial implications [of the bundling move] are enormous for the creators of the music Spotify has relied on to build its business—with the estimated impact to be about $150 million, just in the next year.”
Spotify estimated in July that it would have to pay out $50 million if the MLC wins its bundling lawsuit.
In a regulatory filing with the US Securities and Exchange Commission in July, under the ‘Contingencies’ section, Spotify noted that “various legal actions, proceedings, and claims are pending or may be instituted or asserted” against the company.
One such claim was, of course, filed by the MLC against Spotify in May, which the streaming company referred to in its SEC filing.
According to Spotify: “If the MLC were entirely successful in this case, the additional royalties that would be due in relation to the period March 1, 2024 to June 30, 2024 would be approximately €46 million, of which approximately €35 million relates to the three months ended June 30, 2024, plus potentially penalties and interest, which we cannot reasonably estimate.”
That EUR €46 million figure cited by Spotify converts to USD $49.52 million at the average quarterly exchange rate published by the European Central Bank.
The €35 million [in royalties alone] for the three months ended June 30, 2024 (i.e the second quarter of 2024) converts to $37.68 million.
If Spotify were to pay around $37.68 million (€35m) less in mechanical royalties per quarter following its bundle change in March, SPOT’s mechanical royalty payments would be cut by approximately $150 million over the course of a year, which correlates with the $150 million estimate cited by the MLC in its filing.Music Business Worldwide
