Is Spotify Challenging Streaming Mechanical Rates?

Sep 05, 2017

The following is a guest piece by Benom Plumb, Assistant Professor of Music Industry Studies at the University of Colorado Denver. He is a music industry professional, not an attorney.

Spotify’s reply to publishing lawsuits reported in July is absolutely absurd. Spotify’s lawyers argue that online interactive streaming does not entail “reproduction” or “distribution” of a musical composition under current U.S. Copyright Law. 

Under this law, the reproduction and commercial public distribution of musical works requires a license and payment for the “mechanical” royalty. Historically, this royalty was for physical product (vinyl, tapes, CD’s) and permanent downloads. This is still true today, currently at $0.091 per song, per copy. Essentially for physical/downloads, we’re talking $9,100 for every 100,000 copies.

A reminder that the publishing industry is heavily regulated by the government (especially the mechanical royalty), in 2008 the Copyright Royalty Board mandated the first ever online streaming mechanical royalty requirements. The regulatory powers that be have made it clear that an interactive stream requires both the public performance royalty (ASCAP, BMI, SESAC) and a mechanical royalty. 

This interactive streaming mechanical royalty was set by the government in 2008 and remains in place today. At its most basic level, the rate is approximately 10.5% of streaming revenue (less the public performance royalty paid to ASCAP, BMI and SESAC).

If interactive streaming doesn’t constitute “reproduction” and “distribution,” as Spotify seems to claim, then why are the publishers regulated by the government for it? Spotify argues that it should only have to pay the public performance royalty. This would reduce costs and increase licensing efficiency, for sure. It also opens the door for the interactive streaming royalty to be regarded as a “new right” with a higher rate. 

Other countries around the world have approached the digital world this way. In the U.S., we’ve typically taken new technology rights and tried to stuff them in dusty old copyright boxes (i.e, it’s a mechanical and it’s a performance). There’s clearly a standard for higher royalty rates on interactive streams. Just ask the record companies. So whatever happens, Spotify will not be able to walk away only paying their current performance royalty for interactive streaming.

For perspective, the average “all-in” interactive streaming royalty from Spotify subscriptions is approximately $0.007 per stream. “All-in” means the royalties paid to both publishing and sound recording. This means the publishers are paid both performance and mechanical royalties, collectively somewhere around $70 every 100,000 interactive streams. Meanwhile, the sound recording side could earn close $630 for the same 100,000 streams, depending on their licensing deal with the streaming giant. Why? Because publishers are regulated by the government, while record companies get free market negotiations on interactive streaming.

So here’s the rub: Spotify has completely contradicted themselves. How? Because they already pay out the interactive mechanical royalty. Maybe not to everyone; maybe not even accurately to everyone. But they do have these licenses in place and mechanical royalty payments on the books. Instead of owning up to its sloppy licensing and royalty practices, the Spotify lawyers are trying to turn back time to a pre-2008 argument of whether or not an interactive stream requires a mechanical royalty. 

Newsflash! Almost 10 years ago the U.S. government regulators made it clear that, yes, it does.