Spotify's royalty trick is permissible: US judgment

In the US, Spotify must pay higher royalties for revenue from music-only subscriptions than for bundled services that include other services in addition to music – provided the additional service has more than "token value". Spotify therefore added 15 monthly hours of audiobook usage to each paid subscription in 2023 and then activated the savings clause in March 2024. The US collecting society MLC did not want to accept this. It sued Spotify and has now lost at first instance. This is worth its weight in gold for Spotify's finances.

The US Federal District Court for Southern New York did not find fault with Spotify's royalty maneuver. The judge did not even consider a courtroom trial to be necessary, because even if all the allegations in the lawsuit were true, Spotify could not be legally criticized for them. The audio streamer complied with the requirements of the relevant regulation.

MLC is a collecting society that represents the rights of librettists, composers and music publishers in the USA. Spotify uses a license provided for by law and pays MLC royalties according to formulas from a regulation of the US Library of Congress (37 CFR Paragraph 385 ff)
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The savings clause

A pure music streamer for mobile devices must therefore pay the higher amount of either a good 15% of all relevant sales to MLC, or 26.2% of all royalties to be paid (so-called total cost of content, as other rights holders also have to be remunerated). Details such as minimum fees and smaller deductions do not play a role in the basic principle. However, in the case of a bundled product, the MLC share not only falls from 26.2% to 24.5%, but the basis of calculation also changes, as the "relevant revenues" for music rights are only part of the bundle price for a bundled product.

The streaming provider may calculate the share of the pure music offer based on the sum of the individual components of the bundle. If it does not offer the components separately, it can use the most comparable competitor product. Spotify has included videos and podcasts as well as music in its premium subscriptions for years, but always paid the higher music rate to MLC. After adding audiobooks in November 2023, the streaming provider only activated the savings clause in March 2024.

At that time, Spotify in the USA charged around eleven dollars net per month for the bundled product with audiobooks and ten dollars net for a pure audiobook streaming subscription. This reduced the basis for calculating the MLC royalties for the bundled subscription by almost 48 percent. Spotify then only paid 24.5 percent of the almost halved amount instead of 26.2 percent. MLC saw a loss of revenue of 150 million dollars a year and sued Spotify for violation of the US Copyright Act. Spotify filed a motion to dismiss the case due to a lack of legally relevant allegations.

The ruling

With success: The court found that the "provisions are unambiguous and that the only plausible application of the law supports Spotify's position." According to the plaintiff, audiobook streaming is different from music streaming and has more than symbolic value. The classification as a bundled service is therefore correct.

For the tariff classification, it was irrelevant whether Spotify had only added the 15 hours of audiobook enjoyment per month for savings purposes or that only a few customers used the additional offer. MLC argued that the audiobooks were merely of symbolic value because the audiobook-only offer could not be accessed from the Spotify homepage (you have to use a search engine) and because Spotify had not increased the price of the music subscription when the audiobooks were added.

Spotify countered that the improved offer would attract customers who would then later be hit with price increases – and Spotify did indeed raise its US prices in June. In the court's view, neither price nor motive determine whether a service has more than "symbolic value"; even a heavily discounted loss-leader offer can be valuable to customers.

It also does not help MLC that Spotify only invoked the bundling clause months ago in March 2024. It is likely that Spotify had previously paid unnecessarily high royalties to MLC, which does not prevent the savings clause from being invoked. MLC can appeal against the court decision.

The court case is Mechanical Licensing Collective v Spotify and is pending in the US Federal District Court for the Southern District of New York under case number 1:24-cv-03809.

• The Court decision in the case Mechanical Licensing Collective v Spotify

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