Cracking Spotify’s Royalty Code

Blog Posts 0 Comments

untitled1spotify

By: Courtney Gilmore,

Gone are the days of purchasing CDs at the record store. Thanks to convenient music streaming services, we have our favorite tunes right at our fingertips. There’s a catch, though. While the online streaming models are favorable to the consumer, they exacerbate the plummeting profit margins for the music industry.[1] First it was vinyl records, then it was cassette tapes, then came CDs, and iTunes followed thereafter. Regrettably, artists are no longer seeing the same returns that they once did with each CD purchase or each iTunes song purchase.[2] Keeping in mind that before an artist can ever see any of that cash flow from a song sale or even a song stream the record label takes its substantial cut, it follows that online streaming puts an even bigger dent in each composer or singer’s revenue.

Spotify is one of these widely used streaming services. To avoid copyright violations, Spotify and similar services are legally obligated to obtain each artist’s permission to stream their songs in addition to agreeing on a royalty fee payment.[3] Under this model, artists are expected to receive a royalty payout per stream (i.e. each time a listener hits the play button on a song).[4] In light of this requirement, Section 115 of the Copyright Act sets out the procedures for coming up with a set rate royalty fee.[5] Spotify obtains this information by filing a formal “notice of intent” form with the Copyright Office.[6] This is meant to avoid the hassle of individually negotiating with each and every artist whose work is available on Spotify. These rates are determined by a board of Copyright Royalty Judges, or CRJs, to which they are commonly referred.[7] When setting these rates, the CRJs must adhere to the following objectives, which are to: (1) maximize the availability of creative works to the public; (2) afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions; (3) reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication; and (4) minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.[8]

The set rate system sounds like an equitable, easy-to-manage system, right? Wrong. Within the last few years, various complaints have arisen from artists alleging that they are not being adequately compensated for each of their songs being streamed on Spotify.[9] Take David Lowery, for example. He is the lead singer and guitarist for the bands Cracker and Camper Van Beethoven.[10] Specifically, Lowery claims that Spotify is failing to identify and locate the owners of these works to provide them with proper notice and payment.[11] While Spotify complains that the company has difficulty identifying who wrote certain songs and how to find those people, others find this difficult to believe.[12] Stephen Carlisle has been an entertainment attorney for more than twenty-six years and has never heard of a record company that has trouble locating artists.[13] Carlisle explains that record companies specifically have employees devoted to just musical licensing on each recording.[14] Thus, the record companies are well aware of who the songwriters are, what the percentage splits of the copyright are, and where to send the royalty payments.[15] It is therefore impossible that Spotify would be unable to track down these artists when all it would take is one phone call to the record company.

Notably, songs that are streamed through a Spotify Free account garner even less royalty payouts per stream than songs that are streamed through a paid subscription Spotify Premium account.[16] Consumers can either elect to have a free subscription or to have a Spotify Premium account, which costs ten dollars per month.[17] The former includes advertisements, while the latter is advertisement free. Depending on which subscription the listener chooses, the artist will see more or less return per stream.[18] To illustrate, in 2014 Spotify’s royalty range was between $0.006 and $0.0084 per stream.[19] Once labels receive their share of the royalties, artists received an estimated $0.001128 per stream on occasions when they were actually paid.[20]

I recently reached out to Spotify to inquire about their policy on royalty fees. This is the response I received:

When we first launched the Spotify Artists website three years ago, the goal of it was to introduce artists to all the facets of streaming, including the royalties model. As we’ve grown, the focus for the site has changed and our new site serves as a resource center for artists, providing practical information and tools to help them grow their fanbases around the world. Nothing has changed with regard to payouts. Our goal is and always has been to pay for every single stream and we pay the vast majority of every dollar we earn to our rights holders.[21]

Spotify’s total streams throughout the entire site and its yearly revenue are both unavailable to the public.[22] Since its inception in 2008, Spotify claims to have paid out more than $2 billion to record labels and publishers.[23] Spotify further claims that seventy percent of its annual gross revenue is paid out in royalties to artists.[24] The mystery remains though whether those royalty fees are actually getting to the individual artists or if they remain in the hands of the record labels, if anything. In light of this suspicion, there are allegations that recording companies, including Sony, Warner, and Universal, reportedly own as much as a twenty percent stake in the Spotify.[25] In particular, this concern has given rise to Sony being sued for breach of good faith and fair dealing.[26]

While Spotify offers quick and easy access to the consumer, the Swedish company seems to ultimately put a damper on the music industry. It is an efficient tool for those up-and-coming artists who are striving to be discovered by the general public; however, when interest turns into profit, artists’ rates of return are scant. The meager attempt by Congress to achieve a fair system through blanket licensing requirements is treated like a suggestion rather than a requirement.[27] The fact of the matter is that royalties and streaming do not match up.[28] Artists are therefore left with the decision of whether to allow their music to be streamed for extremely low profitability rates (if any), or to pull their music from Spotify, thus sacrificing their marketability.

 

 

[1] See Stuart Dredge, Here’s How Much Musicians Make Online from Spotify, iTunes and YouTube, The Guardian (Apr. 3, 2015), http://www.businessinsider.com/heres-how-much-musicians-make-online-from-spotify-itunes-and-youtube-2015-4.

[2] See id. (depicting that an unsigned artist made $0.69 for each iTunes single track download in 2015, which is a 70% cut of the profit; while an unsigned artists made $0.007 per stream on Spotify).

[3] See 17 U.S.C. § 115(a)(1).

[4] See id.

[5] See id.

[6] See id. (“Any person who wishes to obtain a compulsory license under this section shall, before or within thirty days after making, and before distributing any phonorecords of the work, serve notice of intention to do so on the copyright owner.”).

[7] See Caitlin Kowalke, How Spotify Killed the Radio Star: An Analysis on How the Songwriter Equity Act Could Aid the Current Online Music Distribution Market in Failing Artists, 6 Cybaris An Intell. Prop. L. Rev. 193, 203 (Spring 2015).

[8] See 17 U.S.C. § 801(b)(1)(A)-(D).

[9] See Y. Peter Kang, Spotify Hit With $150M Copyright Infringement Suit, Law360 (Jan. 4, 2016), http://www.law360.com/articles/742167; see also Bill Donahue, Tidal, Jay Z Sued Over Unpaid Songwriter Royalties, Law360 (Feb. 29, 2016), http://www.law360.com/articles/764815/tidal-jay-z-sued-over-unpaid-songwriter-royalties.

[10] See Kang, supra note 9.

[11] See id. (Spotify responded, “We are committed to paying songwriters and publishers every penny. Unfortunately, especially in the United States, the data necessary to confirm the appropriate rights-holders is often missing, wrong or incomplete.”).

[12] See Stephen Carlisle, How Spotify Pays (or Doesn’t Pay) Songwriters, NSU (Dec. 18, 2015), http://copyright.nova.edu/spotify/.

[13] See id.

[14] See id.

[15] See id.

[16] See Claire Zillman, Here’s How Much Artists Really Make on Spotify, Fortune (June 4, 2015), http://fortune.com/2015/06/04/heres-how-much-artists-really-make-on-spotify/.

[17] See Spotify, Go Premium. Be Happy. (2016), https://www.spotify.com/us/premium/.

[18] See David Johnson, See How Much Every Top Artist Makes on Spotify, Time (Nov. 18, 2014), http://time.com/3590670/spotify-calculator/.

[19] See id.; see also Dredge, supra note 1.

[20] See Dredge, supra note 1.

[21] Email from The Spotify Team, Spotify, to author (Nov. 3, 2016, 11:27 AM) (on file with author).

[22] See Johnson, supra note 18.

[23] See id.

[24] See Jim Edwards, Here Is the Fantastically Tiny Amount of Money Artists Get When Spotify Plays Their Songs, Business Insider (Dec. 5, 2013), http://www.businessinsider.com/what-spotify-pays-artists-for-songs-in-royalties-2013-12.

[25] See Eriq Gardner, Sony’s Equity Stake in Spotify Challenged in Lawsuit Claiming Artists Are Robbed, Billboard (June 24, 2015), http://www.billboard.com/articles/business/6605841/sonys-spotify-equity-artist-royalties-lawsuit-breakage (“Together, and individually, Sony and the other major record labels therefore have significant power to exert control over Spotify in order to not only dictate how revenue will be paid, but wrongfully and in bad faith divert money from royalties that msut be shared to other forms of revenue that they can keep for themselves.”).

[26] See id.

[27] See Kang, supra note 9.

[28] See Holly Ellyatt, Spotify Reaches ‘Landmark’ Royalties Deal with NMPA, CNBC (Mar. 18, 2016), http://www.cnbc.com/2016/03/18/spotify-reaches-landmark-royalties-deal-with-nmpa.html (“Spotify denies purposefully copying artists’ songs for distribution without their permission but also admits that it sometimes plays songs without knowing who to pay for them, blaming the issue one the lack of accurate data”).

Photo Source:

https://www.theguardian.com/technology/2015/dec/29/spotify-lawsuit-musicians-cracker-alleged-unpaid-royalties