As Spotify eagerly gets ready to go public on the stock market later this year, the music streaming company seems to have an ongoing challenge: Staying out of court.
Last week, a pair of lawsuits was filed against Spotify accusing the company of failing to acquire proper licenses—and thus failing to pay out the necessary royalties to songwriters—for certain songs being streamed on its service. In other words, technically, copyright infringement. If this feels like déjà vu, that’s because the suits come just a few weeks after Spotify dropped $43.4 million to settle another class action lawsuit filed on behalf of songwriters. Last year, Spotify reached a $30 million settlement in a similar dispute with the National Music Publishers Association over unpaid royalties. If successful, these new lawsuits could yield up to $345 million in damages for songwriters.
So what’s going on here? It’s easy to slap a dramatic headline onto a couple of paragraphs summarizing the lawsuits, but that wouldn’t quite do justice to the complex (and admittedly unsexy) music industry controversy at hand: streaming royalties and how artists get paid for their work. Not only are music licensing and royalties a legally (and these days, technologically) complicated affair—based on century-old federal law—but the relationships between streaming companies, rights collection organizations, music publishers and performance rights bodies make it difficult to pin down exactly who is at fault when something goes awry.
Songs generally have two components to their copyrights: One for the sound recording (typically owned by a record label, but not always), and one for the composition itself (typically owned by the songwriter or a music publisher). These two copyrights require two different types of licenses and generate two different royalty payments.
Unlike the direct deals Spotify negotiates with record labels over the rates it pays to stream their sound recordings, the rates paid to songwriters (called mechanical royalties) are determined by U.S. law and can be secured using what’s called a compulsory license, either by negotiating with the publisher directly, or sending a “notice of intent” and committing to pay a legally defined licensing fee.
In other words, a direct deal with songwriters isn’t necessary; streaming services can just start playing a song, give the songwriter a heads up, and start sending royalty checks. The recent lawsuits deal solely with these mechanical royalties that get paid out to songwriters. (The name originates with the advent of turn-of-the-century player pianos; it was in 1909 that Congress passed a law that provided these compulsory licenses, making it easier for anyone to make a mechanical reproduction of a musical composition.)
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In particular, these new suits—filed separately by Nashville music publisher Bluewater Music and songwriter Bob Gaudio—claim that Spotify failed to obtain the mechanical licenses for thousands of songs by artists like Frankie Valli and the Four Seasons (for whom Gaudio wrote several hits, such as “Can’t Take My Eyes Off of You”), Guns N’ Roses (“Yesterdays”), and Miranda Lambert. In both lawsuits, the plaintiffs are represented by Richard Busch, the music industry lawyer who successfully won the controversial copyright infringement case filed by Marvin Gaye’s estate against Pharrell Williams and Robin Thicke over their radio hit “Blurred Lines,” to the eventual tune of $5.3 million, as well as a landmark royalties case against Universal over Eminem tracks. Not a bad choice of attack dog to send after the biggest music subscription service in the world.
Royalty payments to labels, publishers, and songwriters remain by far Spotify’s biggest cost as it gears up to go public. Indeed, the huge expense of licensing music is what makes the streaming business so tough in general, and why none of these companies has managed to turn an enduring profit to date. This is why many people suspect Spotify of sidestepping licensing deals with tracks by so-called “fake artists” (a charge the company denies) and might even be planning to generate its own music in the future using artificial intelligence. For now, it’s beholden to direct licensing deals with labels and compulsory licenses with publishers. But there’s apparently a glitch in the system intended to keep the money flowing.
Bad Record Keeping, Says Spotify
It’s not that Spotify isn’t paying mechanical royalties to songwriters at all. Like the previous two royalty-related settlements, the issue here stems from a discrepancy between the music that’s available on Spotify, and the database of songs administered by the Harry Fox Agency (HFA), the third-party rights management company to whom Spotify has outsourced the job of handling mechanical licenses and songwriter royalties. If a song isn’t covered or properly documented by the HFA, then the HFA or Spotify would need to contact the copyright owner on its own to secure a compulsory license to stream the song. According to the lawsuits, that hasn’t happened in many cases.
Spotify has acknowledged the gap in songwriting attribution data (both explicitly and, one could argue, implicitly, by agreeing to settlements that set aside millions of dollars for unpaid royalties), chalking it up to difficulty identifying all the songwriting credit data, and connecting those dots on the backend.
The issue first came prominently to light in 2015, when Victory Records had its entire catalog pulled by Spotify after its sister publishing company Another Victory notified the company that thousands of its songs were streaming unlicensed. A few months later, Spotify publicly acknowledged the issue with copyright data and vowed to build out a more comprehensive database. Earlier this year, Spotify acquired Mediachain, a New York startup specializing in using blockchain technology to build a peer-to-peer, cryptocurrency-inspired data layer on top of media content—like a comprehensive, up-to-date database about music and its creators, for instance.
Jeff Price, the founder of royalty collection startup Audiam—which helped provide data and insights for these lawsuits—has a simple, blunt retort to Spotify’s claim that it’s a data problem.
“Bullshit,” says Price. “Spotify is lying.”
Audiam, which claims to have tracked down and paid out millions of dollars in unpaid mechanical royalties from streaming services, counts Bob Dylan, Metallica, Red Hot Chili Peppers, and several other recognizable artists and publishers among its clients. He works with these artists and their teams to compare the songs in their own catalogs with royalty statements from services like Spotify, YouTube, Google Play, and others, frequently finding discrepancies and working to get these songwriters paid properly. In many cases, Price says those discrepancies are pretty big.
“For Bob Dylan, we found 7,000 sound recordings,” Price says. “He was getting paid on a couple of hundred. Metallica hadn’t been paid anything on a half a billion streams of their own recordings.” Issues like this were rectified after Audiam’s system identified the gaps and notified the streaming platforms.
The reason Price says he doesn’t believe Spotify’s “missing data” defense is that he has informed the company many times over the years, passing along spreadsheets of metadata about the music in his clients’ repertoires so Spotify can connect the dots and distribute royalty payments accurately. Price says he has even offered to let Spotify use his company’s technology for free to help fix the problem, to no avail.
“Spotify never built the systems to connect the sound recording to the composition,” Price says. “They just threw up the sound recordings in 2011, and never got a license in the first place.”
Estimating approximately 35 billion unpaid streams between June 2011 and the end of 2015, along with an alleged failure to pay approximately $15 million in royalties, one of the new lawsuits asserts that past settlements have done nothing “to resolve the outstanding issues with the Spotify licensing and royalty payment system.”
Meanwhile, it estimates, after class-action lawyers take their cut, “Spotify will be allowed to walk away after paying approximately $4 per infringed composition. Such a settlement is essentially an empty gesture that encourages infringement and is entirely insufficient to remedy years of illegal activity.”
A Problem Bigger Than Spotify
It’s not clear how widespread this apparent disconnect is, but it’s important to note that it’s not a comprehensive, across-the-board issue with Spotify’s catalog. The Harry Fox Agency is the primary mechanical licensing and royalty collection body for songwriters in the United States, with over 48,000 music publishing clients. It handles the mechanical licensing for Google Play, Tidal, and other streaming services.
But even though the HFA is the go-to provider for mechanical licensing, the system is far from perfect; Many songwriters have complained that they haven’t received the legally required notices from HFA seeking a compulsory license for their songs. In some cases, those notice letters have arrived a few years after their music started streaming (U.S. copyright law requires them to be sent within 30 days).
The issue isn’t limited to Spotify. The incomplete picture of who wrote which songs is, as Price puts it, “pretty endemic” across music services and always has been.
Tidal, Deezer, Rdio, and Rhapsody have all been hit with lawsuits for unpaid royalties. For its part, Apple seems to have been more proactive about sending legal notices to songwriters and even filed a proposal with the Copyright Royalty Board calling for a higher, fixed rate for mechanical royalties on streaming services (a move that would double as a sly, competitive one-up against Spotify, which doesn’t have the mountainous cash reserves that Apple generates).
So why gang up on Spotify? After all, most streaming services—some of them owned by much bigger and deeper-pocketed companies—are falling short on the songwriter royalty front as well. And besides, doesn’t liability fall on the Harry Fox Agency, whose job it is to handle mechanical licenses and royalties? The latter question may depend on how the contract between Spotify and HFA is worded, which is something only the lawyers and executives know. But the widespread, multi-service nature of the issue would certainly suggest that HFA may be at fault.
Meanwhile, Spotify is thinking about another set of legal work: That related to a new royalties agreement with Warner Music said to be finalized by September, the last of the big three labels to come to new terms with the streaming service, and to its IPO later this year, which could potentially value the company at $13 billion.
As the biggest music subscription service, and at this critical moment, Spotify makes for an obvious and tempting defendant in such litigation, even if its competitors have more money to throw around. Whatever the barrage of lawsuits means for Spotify’s future prospects and bottom line, they help to amplify a loud message across the music streaming market: Sooner or later, the songwriter royalty problem needs to be fixed.
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