when Bloomberg reported that Spotify would raise the cost of its premium subscription from $9.99 to $10.99 and, including 15 hours of audiobooks per month in the US, the change looked like a win for songwriters and publishers. Higher subscription prices usually equate to an increase in US engineering royalties — but not this time.
By adding audiobooks to Spotify's premium tier, the streaming service now claims it qualifies to pay a reduced “package” price to songwriters for premium streams, since Spotify now has to pay a license for both books and music. for music from the same price — which will be a dollar higher than when music was the only premium offering. In addition, Spotify will reclassify duo and family subscription plans into bundles.
To determine how large this loss in royalty value would be to the music business, Advertising sign estimated that songwriters and publishers will earn about $150 million less in US engineering rights from premium, duo and family plans for the first 12 months in effect than they would if those three subscriptions were never bundled. Notably, this change will not affect Spotify's premium, duo or family payments for the first two months of 2024. Bundling begins in March, so this figure refers to losses for the first 12 months after the premium was recognized, the family and duo a bundle, not the calendar year 2024.
Billboard The figure was calculated by determining how Spotify's service revenue, label payments, performance royalty rates and other factors affecting mechanical income are expected to grow each month through 2024. These projections for in 2024 are based on actual numbers derived from the Mechanical Licensing Collective's Spotify rate sheets for 2023. Especially for the premium, the streamer will pay about $100 million less in the first 12 months. The bundling is in effect, compared to what Spotify was projected to pay over the next 12 months if it had never reclassified.
To be more conservative with the premium-only estimate, if the lost rights value were calculated purely based on the actual 2023 numbers from MLC, the losses would be about $80 million for the first 12 months, but given all the revenue of Spotify's music service grew an average of 1.1% each month in 2023, according to of Billboard According to estimates, $80 million is almost certainly on the low side. (A Spotify spokesperson declined Billboard request for comment).
As Spotify grows, the gap between payments to songwriters and publishers is expected to widen if the premium is calculated as a regular standalone service versus what it will now be paid as a book bundle. According to Spotify's latest earnings call, the company has been growing steadily, up 14% year-over-year for premium subscribers and 20% year-over-year for premium revenue worldwide.
The lost royalty value for songwriters and publishers could become even greater if Spotify raises the cost of the premium to $11.99, which a source close to the matter believes is likely. It's also possible that this loss could be reduced by how many users switch their subscription from premium, duo and family to Spotify's upcoming music tier, which will pay the way premium paid before the bundling, but that it is unlikely to have a significant impact on the first-year loss estimate, given that tiering has not yet started and users are automatically renewed on their current plans, even after bundling.
Since there are still some unknowns, estimates range for a first-year loss of engineering royalty value. A source close to the matter agrees Billboard Estimate, also independently calculating that the lost rights value will total $150 million in US mechanical rights for premium, duo and family. Another source estimates somewhere between $140-150 million. A third source says their personal valuation totaled around $120-130 million at least.
This change only affects the United States, but there are fears that Spotify's reclassification will have a domino effect worldwide, given that other major markets such as Australia, Canada, Ireland, the United Kingdom and New Zealand also have audiobooks that now included in Spotify premium. Roberto Nerisaid the CEO of UK-based songwriting organization The Ivors Academy Advertising sign that “if Spotify gets away with this in the US, they will no doubt use it in their future negotiations with the Europeans, [Asian-Pacific] and other regions' and that 'what happens in one region can affect others'.
The National Music Publishers' Association, which represents US music publishers, said it would “consider all options” to resist Spotify's premium changes when they were first announced in March and now that the fight between TikTok and UMG has, in conclusion, turned its “full attention” to this matter.
“It looks like Spotify is back to attacking the very songwriters who make their business possible,” he said. David the Israelite, the president and CEO of the NMPA, when the switch to premium was first announced. “Spotify's attempt to radically reduce songwriters' payments by rebranding their music service as an audiobook bundle is a cynical and potentially illegal move that ends a period of relative peace. We will not support the distortion of the settlement we agreed in 2022.”
Phonorecords IV Settlement
So, how did we get here? It all goes back to the Copyright Board (CRB), the panel of judges who set rates for US streaming machines, based on a weighting of the business interests of publishers, songwriters and services. Unlike the recording side of the music business, which decides streaming rates based on private, free-market negotiations, publishing mechanisms are tightly regulated in the US
Every five years, the NMPA, the Nashville Songwriters Association International (NSAI), and members of the Digital Media Association (DiMA), such as Spotify and Apple Music, come together to discuss rates for the next five years. and if no agreement can be reached, then the CRB judges decide after a percentage test. In 2022, the three organizations met for the period 2023-2027, under the name “Phonorecords IV” or “Phono IV” and decided, in an effort to save time and money, to reach a voluntary agreement to present it to the judges of CRB.
Although the Phono IV settlement included changes to the way bundling works (which was seen as a concession to streaming services), many in the music industry hailed the settlement as an overall victory, especially since the previous five-year rate (Phono III) had been fought for about five years. causing confusion about rates in between. When it was announced, the NMPA touted the Phono IV settlement as providing the “highest rates in the history of digital streaming”, due to its win for a larger rate, and many saw it as signaling a new era of collaboration between streaming and 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 Phono 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.” Streaming creates two forms of royalties for music publishing — performance and engineering — so this all-in pool includes both types. (Performance rights are determined by a separate, but also US government-regulated, process.)
The all-in pool is the larger of the headline 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 is now down to around $5.70 per subscriber due to bundling) or total content cost (TCC) percentage, also known as what Spotify pays labels in royalties.
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 the CRB formula determines the pooling of all-in rights based on the percentage of TCC or the base rate, both options are adversely affected by the reclassification of the premium to Spotify as a package. According Billboard According to calculations, each month of 2023 used the base percentage of music revenue as the all-in pool for premium, but after bundling, the next 12 months will use the percentage of TCC as this pool.
After that, the final mechanical rights pool is determined by subtracting the performance money from the all-in pool. This number is weighted against a calculated entitlement floor. Whichever number is higher is the final amount owed to publishers and songwriters for US engineering rights.
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