What The Heck Is Spotify Arguing About?

Spotify did something wrong when it built itself.  It didn’t license all of the songs it was supposed to license that are on its service.  This is potentially millions of songs that, on the publishing end, have been streamed on the service for years.  The company never licensed the songs because, most likely, they didn’t know they were supposed to do this back in its early days.  (Remember – Spotify is really a tech company; it’s not a music company.)

The problems are complicated, even moreso now.  Spotify is a private company, owned by founder Daniel Eck and scores of other investors, both institutional (companies) and individual (people like you and me, but really rich and connected in the investment world).  The company wants to go public, meaning it wants to be listed on the NASDAQ or New York Stock Exchange.  It would sell shares to all of us as a means of raising money so that he can keep growing.  To keep the company valuable in the eyes of potential investors, it has settled a lawsuit brought on by many publishers and songwriters who claimed their songs weren’t licensed properly.  These people wanted to get paid.

The problem here is that the settlement was for just $43 million.  The lawyers got over $14 million of this (more than 30%!).  That means the songwriters and publisher beneficiaries were due $28.7 million. In THIS ARTICLE, you can see how the money breaks down.  It ain’t that much.

“If as few as one-quarter of those songs, 7.5 million, were unlicensed then, taking the $28.7 million left in the Settlement Fund after attorneys’ fees are paid and dividing that number by 7.5 million songs, the result is a settlement payment of $3.82 per infringed song. As the Court is well aware, Spotify faces potential liability of up to $150,000 per infringed composition for willful infringement and $30,000 for nonwillful infringement, plus attorneys’ fees and costs. While a discount of some amount is to be reasonably expected as part of a compromise settlement, the discount potentially afforded Spotify in this case is a 98.7% discount for nonwillful infringement and a discount for willful infringement so close to 100% as to give Spotify a practical free pass on willful infringement.”

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Did you read all of that?  The songwriters and publishers are getting cents on the dollar, which is ironic since a stream on Spotify is worth only a percentage of a cent.  Because the payout is so low, the songwriters and publishers, including Tom Petty, Tom Morello, Rivers Cuomo, and others, don’t want this settlement.  Go deeper with THIS ARTICLE.More lawsuits are being filed.  In the ridiculous category,  Spotify is stating that it, in fact, doesn’t really need to pay a mechanical royalty (the royalty paid to publishers per stream).  What makes this ridiculous is that Spotify has paid mechanical royalties for years PLUS it has been involved in talks with the Copyright Royalty Board, a federal governmental body which sets statutory mechanical rates.  In the past, the company has never brought up that it shouldn’t pay the type of mechanical royalties it had paid and negotiated to pay to publishers.

Here’s another complication: The major labels own some of the top publishers that are complaining about the settlement. The major labels are also equity owners of Spotify.  When it goes public, the labels will reap a large profit.

But if this settlement is blocked and a new lawsuit comes into play, Spotify could be on the hook for hundreds of millions of dollars, or more.  Would you invest in a company that might go broke because of a lawsuit?  No.  You’d put your money in Apple or a mutual fund instead.  So the investor pool could shrink, demand for the shares could go down, and the share price wouldn’t reach the level Spotify would expect.  That means less money for them and less for the labels.  So if the labels, or their parent companies, own the publishers, would they be more inclined to support a new lawsuit or hold back in order to cash in on the public offering?

Where is this going to go?  If you read the initial article above, it closes with this paragraph.  The last line is the most important one.

“If Spotify continues to argue that it has no obligation to license mechanical royalties, the National Music Publishers Association (NMPA) may intervene, says president and chief executive David Israelite, ‘I’ll be shocked if they try to raise that argument again,’ Israelite says, ‘because they’ll be at war with the industry.'”

War is the last thing anyone wants, especially when streaming has become the #1 format in the world.  Ultimately, this is all about money, fairness, and money.  Don’t expect a quick solution.  Watch this space.


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Professor David Philp is Assistant Professor Music & Entertainment Industries and Popular Music Studies at William Paterson University. He is the co-host of the only FREE advice college radio-based music & entertainment industry talk show in America, Music Biz 101 & More, which airs live most Wednesday nights and is available as a podcast HERE every night (days too).  Your favorite professor is also co-author (with Dr. Steve Marcone) of Managing Your Band – 6th Edition.  Reach him at PhilpD@wpunj.edu or find him on LinkedIn HERE.

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