More Trouble For Spotify?

Dec 08, 2017

Benom Plumb, Assistant Professor of Music Industry Studies at the University of Colorado Denver, reviews the biggest stories of the week affecting music royalties. He is a music industry professional, not an attorney. For more info about Benom, visit his website at www.professorplumbmusic.com.

Spotify Attorney Estimates It Infringed 300,000 Songs In Settlement Hearing (Billboard)

Spotify Announces Most Streamed Songs of 2017 (NPR Music)

Benom’s Take:

Last Friday, Dec. 1, a court hearing for final approval of a $43 million settlement announced by Spotify last May was held. The settlement is to compensate songwriters and music publishers for copyright infringement of songs streamed on the service without licensing and royalty payments.

A year earlier, in March of 2016, Spotify also settled another class action lawsuit for $30 million with the NMPA, the music publisher’s trade association. These two class action settlements are also stated as reasons why Bluewater Music initiated its own lawsuit against Spotify.

It’s reported that some of the rights holders are dissatisfied with the $43 million compensation and may try to opt out of the settlement. The court also appears positioned to reject the settlement altogether, which if true, spells trouble for Spotify. Such actions would open up the floodgates for more individual copyright infringement lawsuits against Spotify, just as the streaming giant hopes to launch the long-awaited IPO (or direct listing).

The royalty in question here is the interactive streaming “mechanical royalty”, not the public performance royalty paid via ASCAP, BMI and SESAC. The interactive streaming mechanical royalty is due for paid subscription streams and regulated by the Federal government’s Copyright Royalty Board. The streaming mechanical royalty is currently a statutory rate of 10.5% of streaming revenue, less public performance royalties.

Collectively for public performance and mechanical royalties, this percentage of revenue works out to roughly $0.07 per 100 paid subscription streams. For some perspective, if all 1.4 billion Ed Sheeran Spotify streams of “Shape of You” were paid subscription streams, the six songwriters and six-plus publishers on that song would earn around $980,000 in total publishing streaming royalties. The sound recording royalties would generate between $8 million and $9 million for the same 1.4 billion streams.

Considering this massive “value gap” in streaming royalty payouts from Spotify, the songwriters and publishers have to fight for every fraction of a penny.

Of particular note is an exchange quoted between the judge and Spotify’s attorney. In the reported exchange, the judge asked Spotify’s attorney to give an approximation of the number of songs Spotify had infringed. The attorney answered that an estimated 300,000 songs were infringed. The article goes further to average that out to about $100 per infringed song.

I found this exchange fascinating because of the original Bluewater Music complaint filed over the summer. Bluewater’s attorney, Richard Busch, details some figures that totally dwarf the Spotify attorney’s figure. Here’s what the Bluewater Music complaint says about the $43 million settlement:

“Upon information and belief, there are over 100,000 unique individuals who meet the criteria to be in the class with an interest in approximately 8,000,000
compositions. Upon information and belief, the class attorneys will be taking approximately 25% of the settlement payout, which leaves, approximately, a mere thirty-two million dollars ($32,000,000.00) to be divided between the composition owners. Averaging the payout for each owner, Spotify will be allowed to walk away after paying approximately four dollars ($4.00) per infringed composition. Such a settlement is essentially an empty gesture that encourages infringement and is entirely insufficient to remedy years of illegal activity.”

So either way you slice it--whether it’s 300,000 infringed songs or 8 million; $100 per infringed song or $4--$43 million seems insufficient compensation for willful copyright infringement on this scale. The statutory damages range from $750 to $150,000 per infringed work. That means if the parties get minimum statutory damages, the settlement should be in the ballpark of $225 million by Spotify’s account, and in the billions of dollars by Bluewater’s account.

So, this is the price and consequence for Spotify choosing to stream now and clear publishing licenses later. This is turning into a very expensive choice and one that adds unnecessary risk to its IPO aspirations.

Nevertheless, Spotify is still the future of streaming. I’m hopeful that once a successful IPO has been established, maybe these copyright infringements will eventually be a distant memory of early growing pains, never to be repeated again.

And now for this week’s other headlines: