Last week, Bloomberg reported that Spotify will raise prices for its premium subscription in five markets later this month and will do the same in the United States at an unspecified time later this year. For about $1 to $2 more per month, depending on the purchase, premium users will get audiobooks along with podcasts and ad-free music listening in their subscription — but the change will have a negative effect on mechanical royalty rates for songwriters and the publishers.
Once the price increases start, all premium subscribers will automatically be subject to the new offer unless they manually change their subscription level. While the increased price will result in increased revenue for Spotify, a Spotify spokesperson believes it qualifies for the popular premium tier for a discount on the royalty rate on US engineering products because it is now considered a “bundle”, similar to the way Amazon bundles Prime and Amazon Music and Apple bundles Apple Music and Apple News.
“Spotify is on track to pay publishers and communities more in 2024 than in 2023,” a Spotify spokesperson said, citing the company's Loud and Clear report that says the streamer has paid out nearly $4 billion in publishers, professionals and collection companies over the past two years.
“As our industry partners know, changes to our product portfolio mean we pay in different ways based on the terms agreed by both streaming services and publishers. Many DSPs have long paid a lower price for bundles versus a stand-alone music subscription, and our approach is consistent,” the company added. Although Spotify's premium users have already had access to audiobooks on the service since October at no extra charge, the company clarified that Advertising sign that the reclassification of the tier as a “bundle” is not retroactive to when it started testing audiobooks, but only kicks in when the subscription price increases.
Music publishers have made it clear that they are not going to accept the change without a fight. David the Israelite, President/CEO of the National Music Publishers Association (NMPA), called out the service for the move, saying it “seems like Spotify is back to attacking the very songwriters who make their business possible.” He went on to add that the company's attempt to “radically reduce payments” to publishers and songwriters is “a cynical and potentially illegal move.” If Spotify's move is found to be misclassified as a package, the trade body says it will consider “all options”, including the MLC or publishers taking Spotify to court or the Copyright Rights Board (CRB); of the entity that sets mechanical royalty rates for streaming in the United States. “We will not support the distortion of the settlement we agreed in 2022,” he warned.
The Nashville Songwriters Association International (NSAI) took to Instagram, urging fans to cancel their memberships: “NSAI, along with @nmpaorg, is considering our next steps to combat this move. Stay tuned, but in the meantime remember they're doing all of this with the worst possible disrespect for the songwriters who make them billions.”
Songwriters of North America CEO Michelle Lewis shared the songwriters' perspective, saying Advertising sign, “We're disappointed, but not surprised, to see Spotify once again at the forefront of finding ways to pay songwriters less. This reclassification, which we see as a deliberate misclassification, dangerously undermines the good faith of the latest CRB settlement. It is also duly noted that it is always the same company that drives this way.”
Phonorecords IV Settlement
Every five years, the CRB reviews the royalty rate for mechanical items in the United States. It's a complex, multifaceted formula that sets how much each streaming service must pay publishers and songwriters based on a number of potential factors, including the price of the subscription, how much the service pays labels and more. There are other caveats to consider when pricing based on how the user subscribed to the streaming service, including whether the music was streamed on a free, ad-supported tier or a paid, premium tier, and whether the user is subscribe to the service through a bundle of other products.
In late 2022, the NMPA, NSAI and the Digital Media Association (DiMA) jointly announced that they had reached a voluntary agreement on what the US engineering royalty rate would be for 2023-2027 (also called Phonorecords IV or “Phono IV” ).
Although the changes to how bundling works were seen as a concession to streaming services, many in the music industry celebrated the Phono IV settlement as an overall victory, especially since the previous five-year rate (Phono III) had been fought for years. causing confusion about interest rates in the interim. When it was announced, the NMPA touted the Phono IV arrangement as providing the “highest rates in the history of digital streaming” and many saw it as signaling a new era of collaboration between streaming services and the music business. Israelite now says in a statement that Spotify's latest move to bundle audiobooks “ends a period of relative peace.”
How bundling affects mechanical revenue
Although the price of Spotify premium is increasing, this additional revenue does not benefit songwriters and publishers. Now that premium is considered a bundled service with audiobooks, part of the subscription price is owed to book publishers and authors for licensing their works as well.
Mechanical revenue for bundles is calculated by looking at the value of the audiobooks as a stand-alone offering ($9.99) and weighting the price of the premium bundle offering ($10.99), according to Phonorecords IV. The value of the music is found by dividing the total premium price ($10.99) by the two services (audiobooks only and premium) combined ($21), making the music valued at about 52% of the total package, or about 5 $.70 per subscriber.
How bundling affects total content costs
The first step in calculating the mechanical royalty rate a streaming service owes songwriters and publishers is to find the “all-in pool.” This is the greater of either the nominal rate (which ranges from 15.1% for 2023, 15.2% for 2024, 15.25% for 2025, 15.3% for 2026 and 15.35% for 2027) of Spotify's revenue is now lower around $70 (which around $0). per subscriber) or the percentage of the total content cost (TCC), also known as what royalties Spotify pays to the labels.
Previously, Spotify premium met the full rate of the lesser of 26.2% TCC for the period or $1.10 per subscriber. Now, after deciding to change its premium offering to include audiobooks, Spotify argues that it qualifies as a “group subscription offering”, which reduces its rate to 24.5% of TCC for the accounting period.
Regardless of whether Spotify calculates the royalties owed to songwriters and publishers based on the TCC rate or the headline rate, both options are affected by Spotify's reclassification of Premium as a bundle. A source close to the matter says Advertising sign that Spotify recently pays based on TCC.
