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.
Inside Spotify’s Just-Released Financials (Billboard)
Benom’s Take: If finance and accounting is your thing, you may appreciate the crazy detailed financial analysis of the article. Spoiler: All of it can be summed up in one quote from the article. “Without economies of scale kicking in, Spotify will be hard pressed to point a path to profitability. Yet, it so far appears to be trying a different path...negotiating with music rights owners for lower royalties.” My comments here will only focus on the royalty payment figures to the music rights owners and I will address the lower royalties issue in the next article.
First, approximately 70% of Spotify’s revenue goes toward royalty payments to all music rights owners, that’s the record labels and publishers. There are various formulas for how these royalties are paid and these stated percentages are simply “in the ballpark”. For example, some formulas may bring the publishing royalties to 12.5% of Spotify revenue, as opposed to the official statutory rate of 10.5%. As for the recording side, we don’t know (exactly) what the labels and artists are earning due to nondisclosure agreements. It’s reported that Spotify was paying 55% - 60% of revenue, depending on who you ask. We just know that according to these financials, the overall recording side earned about 5x the royalties the publishers did from Spotify.
This royalty gap problem is also a misperception in value between the composition and the recording of a composition. We’ve got to throw the songwriter more bread or we won’t have many songwriters left to compose great music. To remedy this royalty inequity, we should make these royalty negotiations all free market or all government regulation. In other words, both sides play by the same rules when negotiating the royalty rates. It is true that Spotify recently negotiated “lower rates” with Universal Music Group for their recordings and are attempting to do this across the board. Nevertheless, Spotify’s demand for lower rates from record companies still won’t change the royalty inequity gap until there is a uniform process to establish the royalties for both copyrights. Now, on to that “lower royalties” thing...
Benom’s Take: It’s no surprise that after Spotify successfully re-negotiated their licensing deal with Universal Music Group to lower its royalty payments, that other services would follow suit. As the article states, “Apple initially overpaid to placate the labels, who were concerned Apple Music would cripple or cannibalize iTunes, a major source of revenue.” In fact, that goes for Spotify too. Spotify certainly gave up a lot to placate the labels, including a rumored equity share and massive advances that were tied to high(er) royalty rates. Essentially, the labels drove a hard bargain with Spotify in the beginning to hedge their risk on sales revenue vs. streaming revenue.
It’s clear that Apple is certainly in a more secure place than Spotify is, considering how diverse their business is and how long Apple has been an established “blue chip” company. The Apple Music streaming platform is just one of many products, while with Spotify, what you see is what you get. Considering Spotify’s difficult financial situation, the company has more justification in getting a royalty rate reduction than Apple does. But who can blame Apple and others for trying? Any good businessperson that understands the easy math of income - expenses certainly would!
It is possible that lowering the royalty rates in exchange for subscriber growth targets could spark long term royalty growth in the streaming market. Although, allowing royalty rates to be reduced from what they once were could backfire and make it more difficult to raise the rates again in the future. In my professional experience, once a licensee has a “taste” for lower royalty rates, it’s hard to kick the habit.