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Spotify defends its appeal of the new US songwriter royalty rate

By Chris Cooke | Published on Tuesday 12 March 2019

Spotify has responded to the barrage of criticism that has followed its decision to appeal the ruling made by the US Copyright Royalty Board regarding the royalty rates streaming services should pay to songwriters and music publishers. It insists that it is fine with the top-level revenue share rate increase, but says that the devil is in the detail and there are big problems with the CRB’s detail. Though it doesn’t go into much detail about the detail.

A compulsory licence covers the mechanical copying of songs in the US, of course, which means that the CRB sets the rates anybody mechanically copying songs must pay. That includes digital music services, which both copy and communicate music when they deliver streams of tunes to their subscribers. In recent years the CRB has been reviewing those rates, ultimately concluding that the streaming firms should increase the share of revenues allocated to songs from 10.5% to 15.1%.

At its heart music streaming is a revenue share business, with monies generated by the services being shared between the services themselves and the owners of the separate recording and song copyrights they exploit. Every deal is different, but on average recording rights have traditionally been allocated 50-60% of streaming revenues, song rights 10-15%, and the services themselves somewhere between 25-35%. Spotify says it needs at least 30%.

There has been much debate over the last decade as to whether that split of the money is fair, what has often been dubbed the ‘digital pie debate’.

In the Digital Dollar roundtables organised by the UK’s Music Managers Forum and CMU Insights in 2016 – involving artists, songwriters, labels, publishers and managers – most people agreed that the services taking 30% seemed more or less fair (though partly because advances and minimum guarantees also committed to by the services meant that rarely got to actually keep their 30%).

However, it was generally felt that the split between the recording and song rights – at that point 58% for recordings and 12% for songs was common – was probably not fair. In recent years though, in countries where publishers negotiate deals directly with the streaming services, we’ve seen those companies push their revenue share up closer to the 15% level. Meanwhile, the services have pressured the labels to take a concurrent cut in their share.

In many ways therefore, what the CRB has decided for the compulsory licence in the US pretty much mirrors what has been happening in the open market in countries where judges don’t get involved in rate setting. So why did Spotify and its rivals like Amazon, Pandora and Google take the costly (in terms of legal fees) and risky (in terms of reputation damage) step of appealing the CRB’s decision as soon as it was finalised last month?

“We are supportive of US effective rates rising to 15% between now and 2022”, Spotify insisted in a blog post on its Spotify For Artists website yesterday. But, it then added, only if the licence available to services paying that 15% revenue share rate provides said services with “the right scope of publishing rights”.

As noted above, when music is streamed, songs and recordings are actually both copied and communicated (or ‘made available’). On the songs side of the music business the licensing of copying (mechanical rights) and communicating (performing rights) has traditionally be handled separately. Which is why, in the US, Spotify must get licences from the performing right collecting societies (ASCAP, BMI et al) while also paying publishers mechanical royalties under the compulsory licence.

However, the compulsory licence recognises this, meaning that the 15.1% rate is (more or less) the figure to be paid across both the mechanical rights and the performing rights, some of which goes via the publisher, some via the societies.

So that’s not the problem. However, says Spotify, there are other complications. What about when it streams video? What about when it makes lyrics available? Spotify goes on: “The CRB rate structure is complex and there were significant flaws in how it was set”.

“A key area of focus in our appeal”, it says, “will be the fact that the CRB’s decision makes it very difficult for music services to offer ‘bundles’ of music and non-music offerings. This will hurt consumers who will lose access to them. These bundles are key to attracting first-time music subscribers so we can keep growing the revenue pie for everyone”.

Increased royalty commitments to songwriters and music publishers elsewhere in the world have often been matched by decreases in the revenue share paid to artists and labels. However, Spotify also argues that it’s simplistic to assume that any new obligation on the songs side of music licensing will be always compensated on the recordings side.

It writes: “The CRB judges set the new publishing rates by assuming that record labels would react by reducing their licensing rates, but their assumption is incorrect. However, we are willing to support an increase in songwriter royalties provided the licence encompasses the right scope of publishing rights”.

None of this will placate those organisations representing music publishers and songwriters, which have been scathing about all the streaming services which have decided to appeal the CRB ruling, and of Spotify in particular. They will likely point out that the CRB didn’t just come up with its new rates over lunch one day. There were long drawn out hearings and numerous submissions by all sides as part of the rate review process.

The boss of the National Music Publishers Association, David Israelite, was as scathing about Spotify’s blog post as its decision to appeal. He said on Twitter yesterday that it had been a “big mistake to try to deceive songwriters and artists with this blog post”, before promising to “break down this propaganda blog line by line and expose the truth”.

The CRB appeal will be a major PR headache for Spotify and the other streaming services which are likewise appealing the new rates. Not least because the songwriting and music publishing community in America is more organised now than ever, ironically because writers and publishers came together to work in collaboration with the streaming sector to sort out the process of paying mechanical royalties via the Music Modernization Act.

The fact that Apple isn’t participating in the appeal also means that music industry campaigners can use the line “use Apple Music if you care about songwriters”, which is handy. It’s debatable how many music fans would actually switch streaming services as a result of that kind of campaign, but it certainly creates challenges for Spotify, which has been desperately trying to build bridges with the songwriting community in recent years.

The whole thing also illustrates the issue with compulsory licences, which are usually supported by music users and hated by music makers. But they can be problematic for the former group too, in that they don’t offer the flexibility of bespoke short-term deals between services and rights owners, and any tricky negotiations have to occur in public.

Those on the music industry side might also point out that, while this compulsory licence may be causing Spotify problems in the US, the company is concurrently trying to force some compulsory licensing on the streaming sector in India after it couldn’t agree terms with Warner Music.

So that’s all a big fat mess isn’t it? You can read Spotify’s blog post defending its position here. We await the NMPA’s angry response with interest.

If you want to fully understand the complexities around digital licensing and how streaming royalties are calculated and paid, the ‘Digital Dollar’ book from MMF and CMU is a damn fine place to start, even if we say so ourselves!