Could Spotify lose the crucial ‘bundling’ lawsuit filed by the MLC? It all comes down to these legal arguments…

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Spotify co-founder and CEO Daniel Ek
MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next. Only MBW+ subscribers have unlimited access to these articles.
What’s happened?

Last month, music publishers in the US began raising the alarm about a change to the way Spotify pays out mechanical royalties to songwriters and publishers. The move appears to have significantly reduced songwriters’ and publishers’ earnings in the States.

It all started with Spotify’s royalty payment run for March of this year.

At that point, SPOT told the Mechanical Licensing Collective (MLC) – the nonprofit organization responsible for collecting mechanical royalties – that it had begun treating its Premium plans as “bundles”, rather than ‘pure’ music subscriptions.

Spotify said this was because its Premium subscriptions now included 15 hours of audiobook listening time as part of the subscription. Ergo, it was a ‘bundle’ that included music plus audiobooks.

Spotify’s trick? Under a 2022 agreement between music publishers and streamers in the US, ‘bundle’ services can pay out a lesser royalty rate than ‘pure’ music subscription services.

(Quick bit of context that you’re probably already up to speed on: In 2022, the music publishers and music streaming services, including Spotify, agreed on terms for a license via the Copyright Royalty Board (CRB), covering the years 2023-2027 in the US. This procedure was known as ‘Phonorecords IV’, i.e. the fourth landmark rate-setting process between the parties overseen by the CRB. Under ‘Phonorecords IV’, a ‘bundled’ service – i.e. a service that offers music plus other stuff – gets to pay a materially lower mechanical royalty rate than a standard music service.)

So, how much of a bite is Spotify’s ‘bundle’ switch-up taking out of the royalties paid to songwriters and publishers?

Sony Music Publishing says it’s receiving 20% less than it was before in mechanical royalties from Spotify.

The MLC says it’s losing “almost 50%” of the royalties generated from Spotify’s Premium subscriptions (meaning not including royalties from ad-supported subscriptions.)

Predictably, the reaction from music rightsholders to Spotify’s move has been visceral.

For one, the National Music Publishers’ Association (NMPA) accused Spotify of “attacking the very songwriters who make its business possible.”

In an interview with MBW, NMPA President and CEO David Israelite predicted that the matter would “likely end up in a legal conflict.”

“Spotify unilaterally and unlawfully decided to reduce the Service Provider Revenue reported to the MLC for Premium by almost 50%…”

The MLC, in a legal complaint against Spotify

Last Thursday (May 16), details of that legal conflict arrived.

The MLC filed a lawsuit in US federal court, asking the court to order Spotify to recalculate the royalties it owes songwriters and publishers.

That recalculation would be made according to the previous method, Spotify would pay the difference, and comply with those calculations going forward.

“Spotify unilaterally and unlawfully decided to reduce the Service Provider Revenue reported to the MLC for Premium by almost 50%, by improperly characterizing the service as a different type of Subscription Offering and underpaying royalties, even though there has been no change to the Premium plan and no corresponding reduction to the revenues that Spotify generates from its tens of millions of Premium subscribers,” the MLC’s lawsuit asserts.

So how strong is the MLC’s case against Spotify? Will the MLC, working on behalf of songwriters and publishers, be able to win back the income lost to Spotify’s change?

Based on MBW’s analysis of the case, we think the MLC has a solid chance of winning… in the short run. In the longer run, there may be little that the organization can do to prevent Spotify from switching a good chunk of its customer base over to a bundled offering.

Below, we break down the MLC’s legal arguments, and what Spotify may do to defend itself…

The MLC’s key argument: This isn’t a real ‘bundle’

It’s interesting to note both what the MLC’s lawsuit mentions… and what it barely mentions.

For instance, the MLC doesn’t overtly mention that Spotify made the ‘bundle’ change to its Premium subscription without the consent of its subscribers. The fact that Spotify did this “unilaterally” only gets a passing reference.

That’s likely because, in our review of the Phonorecords IV agreement, there is nothing to stop Spotify from exactly this kind of switcheroo.

There is no language that says music streaming providers need the agreement of music publishers, or subscribers, to turn a standalone subscription plan into a ‘bundle’. (You can read the Phonorecords IV agreement in its entirety here.)

Thus, the MLC’s case against Spotify doesn’t focus on these aspects. Instead, it focuses on what may prove to be a much stronger legal argument: That Spotify’s new “bundled” Premium subscription isn’t actually a bundle, and its real purpose is simply to reduce payments made to rightsholders.

The MLC justifies this position with two key arguments:

The MLC’s Argument No.1

The MLC argues that Spotify didn’t actually make any changes to its Premium plans in March of this year, when it changed the payment model.

While Spotify did launch ‘Audiobooks Access around that time — a new subscription tier focused on audiobooks but also purportedly including ad-supported music access — nothing changed with the Premium subscription itself, which had been offering 15 hours of audiobooks included in the price since last November.

Also, nothing changed price-wise: Before Spotify’s ‘bundle’ re-categorization, an individual Spotify Premium subscription in the US would have cost $10.99 a month. It still does today.

“Premium subscribers continue to get the same single product, providing the same on-demand access to tens of millions of musical works (along with other audio content) at the same price.”

The MLC, in a legal complaint against Spotify

“Premium subscribers continue to get the same single product, providing the same on-demand access to tens of millions of musical works (along with other audio content) at the same price,” stated the complaint, which can be read in full here.

“The only change is that Spotify, by erroneously recharacterizing its Premium service as a Bundled Subscription Offering, is violating Section 115 [of the US Code governing copyright law] and its regulations with respect to its reporting of Service Provider Revenue and, as a result, underpaying mechanical royalties.”

The MLC’s Argument No.2

Secondly, the MLC’s legal complaint points to the definition of a “bundle” as set out in the Phonorecords IV agreement. It defines “bundle” as a combination of music streaming and “one or more products or services having more than token value, purchased by end users in a single transaction.”

The key term here is “token value.” The MLC argues that Spotify’s addition of audiobook time to its streaming service offers nothing more than a “token value,” and therefore it can’t be counted as a service or product that’s part of a bundle.

While that argument might ruffle the feathers of some authors, it’s not without some basis.

For one thing, the MLC argues, Spotify’s decision not to raise its Premium subscription price when it launched the ‘bundle’ shows that it doesn’t see much added value to users from the addition of audiobooks.

For another, the legal complaint argues that if Audiobooks Access was indeed a separate, standalone product, Spotify would promote it as such. But Audiobooks Access doesn’t appear on the list of “Spotify Plans” on the service’s home page, and in fact, it seems Spotify is doing everything it can to dissuade people from signing up for it.

“Rather, it appears that a potential subscriber can find Audiobooks Access only by searching for words such as ‘Spotify’ and ‘Audiobooks Access’ on Google or a similar search engine,” the complaint states.

“And even if a would-be subscriber can reach the Audiobooks Access webpage on Spotify’s website, the primary message of that page is to steer subscribers to Premium, not Audiobooks Access. A potential subscriber accessing the Audiobooks Access webpage is immediately presented with multiple promotions for Premium, not the Audiobooks Access standalone plan.”

And there’s more: Spotify describes its Audiobooks Access plan – which costs $9.99 a month, one dollar less than Premium – as including 15 hours of audiobook time (with additional fees beyond that), plus unlimited ad-supported music streaming (i.e. a tier on which you’d have to listen to ads to get to the music).

However, according to the MLC’s complaint, Audiobooks Access actually offers ad-free music access — in which case, it’s really the exact same service as SPOT’s Premium plan.

MBW has confirmed that it’s practically impossible to navigate to the Audiobooks Access page from within the Spotify website and that using a search engine is the only feasible way to find it. (We weren’t able to confirm whether the music service offered via Audiobooks Access is ad-supported or ad-free.)

Nonetheless, if The MLC’s assertion is correct, this may be the most damning evidence against Spotify in this case: There is no difference between Audiobooks Access and Premium, except that Audiobooks Access costs one dollar less per month. No wonder Spotify doesn’t want people to sign up for Audiobooks Access.

How will Spotify defend itself?

There’s a lot we don’t know about Spotify’s side of the issue. Crucially, we don’t know how Spotify made the new calculations for mechanical royalties. (The MLC knows, but didn’t disclose this in its lawsuit, on the argument that it has to keep this secret under US copyright law, and hinted it will be seeking a protective order to keep it out of the public eye during the trial.)

And because Spotify has yet to file a response to The MLC’s complaint, we don’t know how it will characterize its actions. However, we can make some solid guesses about at least part of Spotify’s argument.

For one, Spotify is likely to argue that it did, in fact, change the Premium plan – it just did so last November, when it added 15 hours of audiobook time, and it only changed its calculations in March of this year. In this instance, ironically, Spotify could argue that it overpaid mechanical royalties for the period between November of last year and March of this year.

Spotify is likely to argue that it didn’t make the royalty switch right away because the audiobooks addition was an “experiment” or a “beta test” to see how subscribers would react.

The company has previously suggested that the launch of audiobooks has been a success and that, as of April 2024, 25% of users were engaging with audiobooks (and royalties paid to independent authors were up 95%). So once Spotify was sure it would be keeping the audiobooks feature, the time came to “make it official” and change the royalty payment.

Further, it could argue that it did change the pricing – it just did so last summer, when Spotify implemented its first-ever price hike to its Premium subscription in the US (from $9.99 to $10.99 a month for the individual plan).

Finally, Spotify could argue that it’s keeping Audiobooks Access off of its home page because this, too, is in experimental phase, and it’s offering ad-free music with it because it’s trying to build a subscriber base – before switching Audiobooks Access users over to an ad-supported music tier at some later point.

Spotify could also argue that charging $9.99 for Audiobooks Access – along with the rapid growth of audiobooks listenership – means that audiobooks aren’t a “token” addition.

While all that may feel like legal acrobatics, it does fit with Spotify’s modus operandi. It has a track record of suppressing prices to grow the subscriber base; it has experimented with products, only to shut them down; and it has changed its royalty payment models. It could point to a long track record of behavior that fits with what has transpired with its audiobooks feature.

The big question, of course, is: Will the courts buy it? Beyond that, there’s another aspect to this, too, which may not be music to the ears of the music industry…

A final thought…

Even if the federal court sides with The MLC and orders Spotify to switch back to its previous royalty payment structure, the music streaming service has a path to making a much stronger, more legitimate claim that its Premium tier has become a “bundled” service. Perhaps ironically, it’s The MLC’s own case against Spotify that provides the roadmap.

If the courts accept The MLC’s arguments, then Spotify will really only need to do a few things to legitimize its Premium tier as a bundled service.

First, it will have to make Audiobooks Access a truly distinct product from Premium. It could eliminate music altogether from the audiobooks product, or at least ensure that the music is ad-supported. Rolling out an audiobooks-free, music-only tier, which the company has already said it would do, would also help.

Second, it could better differentiate the pricing between the Premium bundle and its music-only and audiobook-only tiers. If you’re bundling two distinct products, each with a similar value, it doesn’t make sense to charge $9.99 for the individual products and $10.99 for the bundle. (And if that differentiation were in the form of another price hike on Premium, that might help Spotify earn its way back into the good graces of the music biz).

Whether or not Spotify chooses to do those things will depend on revenue and cost calculations that we can only guess at.

But in the long run, there seems to be little that music publishers and songwriters can do to stop Spotify from turning Premium into a bundle – if Spotify is truly determined to do so.

The real long-term solution here may be to negotiate a different deal for mechanical royalties in the next industry-wide agreement (i.e., Phonorecords V) – one that doesn’t include lower royalty rates for bundled services.

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