Spotify Immediately Responds to the MLC’s Lawsuit — And They’re Not Backing Down

Books & Music: So simple, yet so complicated (photo: Andrea Piacquadio)

Late yesterday, Digital Music News first reported on the Mechanical Licensing Collective’s lawsuit against Spotify over allegedly underpaid publishing royalties. Now, Spotify is pushing back and seriously questioning the merits of the MLC’s claims. Here’s what they relayed to DMN early this morning.Spotify is now responding to an aggressive lawsuit filed by the Mechanical Licensing Collective (MLC), and it looks like we may have a fight on our hands. Late yesterday, the MLC filed its complaint against Spotify USA in the United States District Court for the Southern District of New York (here’s the complete 23-page filing). In summary, the MLC alleges that the streaming music platform is illegally undercutting its royalty obligations by bundling its various music, audiobook, and podcast offerings.

Not so fast, Spotify says. In comments issued to Digital Music News this morning, the DSP asserts that everything is above board, fair and square, and by the book. Specifically, Spotify notes that bundling discounts were baked into the most recent royalty agreement approved by the Copyright Royalty Board — dubbed ‘Phonorecords IV’ — and publishers are refusing to follow their own terms.

“The [MLC] lawsuit concerns terms that publishers and streaming services agreed to and celebrated years ago under the Phono IV agreement,” Spotify told DMN, while linking to a ‘celebratory’ announcement issued at the time by the National Music Publishers’ Assocation (NMPA).Everyone signed off on Phonorecords IV and popped the champagne afterward, Spotify says, with bundling terms clearly agreed upon. “Bundles were a critical component of that settlement, and multiple DSPs include bundles as part of their mix of subscription offerings,” the streaming platform continued.

It’s worth noting that other streaming music platforms also bundle, with Apple and Amazon both masters of high-priced bundled offerings that span media, e-commerce, and other perks. Exactly how those platforms employ bundling to their advantage on the royalty front is unclear at this stage, though more details could surface if a court battle ensues.

Further flexing its clout — and this could come into play later — Spotify also pointed to its massive royalty contributions to the music industry overall.“Spotify paid a record amount to publishers and societies in 2023 and is on track to pay out an even larger amount in 2024,” the Spotify executive continued.

That comment was carefully calculated and part of an interesting power dynamic between the platform, the music industry, and music publishers. So far, the recording side of the business has been quiet on the bundling royalty question, with major label toppers like Lucian Grainge (UMG) and Robert Kyncl (WMG) mostly praising Spotify’s bundling strategies. Part of the reason is that Spotify is more intelligently pushing price increases by diversifying its product mix, a strategy likely to spill even more revenues into major label coffers.

DMN Pro Weekly Report: As Spotify Embraces Bundles, Mechanical Royalties Take a Hit — But Are We Missing the Big Picture Here?Despite lingering fears of a streaming subscription plateau, major labels are still posting double-digit quarterly revenue gains, with paid subscriptions a big reason for the uptick. That might explain why publishers are fighting this battle alone, even though major publishers are often subsidiaries of major label conglomerates.

Back to the MLC situation, Spotify hesitated to spell out its next moves.That could include a combative legal response, though some negotiations may be in order first. “We look forward to a swift resolution of this matter,” the company offered.

As for the allegations, the MLC alleges that Spotify has sneakily classified its Premium Individual, Duo, and Family plans as bundled subscriptions by including audiobook access. This classification allegedly reduces the reported service provider revenue for music, leading to lower royalty payments.The MLC argues that Spotify’s bundling approach does not comply with applicable laws and regulations—though Spotify begs to differ on that point. The lawsuit seeks corrected reporting and unpaid royalties from March 2024 onwards, along with future compliance.

The MLC, created by unanimous Congressional mandate in 2018 and designated by the Register of Copyrights, is tasked with collecting and distributing blanket mechanical license royalties and enforcing payment obligations. Since its inception in January 2021, the MLC says it has distributed over $2 billion to songwriters and music publishers.

More as this develops.