You've probably heard the news by now that Spotify, through an unexpected merger maneuver, has unilaterally decided to give songwriters a significant pay cut. As part of our ongoing efforts to provide the songwriting community with data and details about this incredibly important revenue stream — which at this point must seem like a constant moving target — we've reviewed and analyzed Spotify's first month reports where created this change (March) and compared it to the previous month (February).
What happens?: Spotify has decided to bundle audiobooks into its premium tier offerings (affecting 85% of all Spotify subscribers). In doing so, they now claim that almost half of their total subscriber revenue is attributed to audiobooks, reducing their reported service revenue from music to 52%. This results in a significant reduction in payments to songwriters, which we explain below.
In March, total hardware revenue paid by Spotify fell 33.9% (from $36.7 million in February to $24.3 million). That's where the reported $150 million annual cut comes from — an estimate based on Spotify's previous year's performance and payment reports to the Mechanical Licensing Collective. The twist here is that Spotify reported that performance royalties rose 18.75% from February to March (from $31.2 million to $37 million).
Spotify performance royalties always fluctuate from month to month (up to +/- 10%), but the magnitude of this change is unusual (and inexplicable). Was March's surprise increase in Spotify's performance royalties an anomaly or a harbinger of a new level of royalty payments? Due to the structure of the mechanical royalty payment type, an increase in performance payments leads to a decrease in mechanical payments.
For many songwriters who have deals with music publishers, performance royalties are beneficial because half is paid directly to the songwriter rather than through their publishing deal, while mechanical royalties are available through the publisher.
So while mechanical payments in March were down 33.9%, the overall decline in payments to songwriters was 9.75% ($67.9 million to $61.3 million), which on a year-over-year basis amounts to $80 million .
Historical performance against payment mechanics for CRB III: This goes back to previous reports (and confusion) a few months ago, when streaming services reported growth in performance revenue over the previous five years (2018-2022). While we cannot explain exactly why performance income changed in this historical accounting period, we can assume that it had to do with deals negotiated during that period that were finalized and retroactive to the time the final submission was made. renewed report and required by the final decision of the appeal.
If Spotify cuts revenue in half, why aren't we seeing a 50% cut? The payment structure has several safeguards in place so that Spotify and other similar digital service providers cannot unilaterally adjust their prices to the detriment of songwriters, as Spotify has done here. One of these protections is the obligation to pay songwriters a portion of what they pay record labels, to the extent that amount is greater than the percentage of revenue from the service. This is called the “TCC Prong” or “Total Content Cost Prong”. Because Spotify's deals with the labels apparently don't give them the flexibility to choose what they can mix into deals and make price cuts, what they pay the labels hasn't changed. In fact, in March, this percentage increased by 5.86%, or 13.1 million dollars.
So is the total annual reduction 150 million or 80 million? This will likely fall somewhere in the middle, as it depends on what Spotify reports it's paying for performance (ie, if March's performance royalty increase was an anomaly) and what it's paying labels. Over the next several months, unless Spotify changes its position, we will monitor and report percentage trends and actual results as part of our ongoing effort to provide the songwriting community with factual and up-to-date information about their rights. You can also check your current publishing revenue percentage for yourself at any time with our monthly updated royalty calculator.
Spotify spent five years fighting publishers and songwriters to set prices for 2018-2022. The result was a positive increase, but a significant delay in payment. In total, the mechanical increase from all digital service providers amounted to approximately $250 million during this period. Of that, Spotify contributed $98.6 million more, and that's just from the restated 2021-2022 period. Songwriters didn't get their final rate increase until earlier this year.
When Spotify, NMPA and NSAI reached an agreement for 2023-2027, we thought the race was over. We were wrong.
In late March, Spotify reported annual revenue of $15 billion. This audiobook bundling maneuver, which affects 100% of all music content on its service, represents less than a 1% cost savings for the tech giant. And for a limited time, since the aforementioned settlement expires in 2027. That raises the question for both analysts and Spotify shareholders about whether it's worth it — and leads to the obvious answer: “It's not.” Spotify should immediately reverse course and find the 1% savings somewhere else that isn't working to decimate the income of millions of American songwriters, the lifeblood of our precious American music industry.
Jordan Bromley leads Manatt Entertainment, a legal and consulting firm serving the entertainment industry for over 45 years. He serves on the Board of Directors for the Music Artists Coalition, a first artist advocacy coalition founded in 2019.
Trent Smith is a financial analyst at Manatt Entertainment with extensive experience in the streaming economy.
from our partners at https://www.billboard.com/pro/spotify-audiobook-bundling-strategy-cheats-songwriters-little-gain/