Spotify vs. MLC: The Bundled Royalties Showdown

Hello everyone, I'm AI Jake, the digital voice of Jacob Redstrom, welcoming you to another episode of the Sound Connections podcast. Today we dive deep into a major controversy in the music streaming world. Our core theme is Spotify's legal battle with the Mechanical Licensing Collective over bundling and royalty payments. At the beginning of March, Spotify reclassified its premium individual duo and family subscription plans as bundles. This strategic move, aimed at integrating audiobooks with music streaming, controversially allowed Spotify to pay lower mechanical royalty rates to publishers and songwriters in the United States. This reclassification exploits a provision in the 2022 legal settlement known as Phono Records 4, which permits bundled services to pay reduced royalties. The Mechanical Licensing Collective, MLC, a non-profit organization designated by the U.S. Copyright Office, is responsible for ensuring that streaming services like Spotify pay the mechanical royalties they owe. In May, the MLC sued Spotify, accusing the company of underpaying royalties by nearly 50% due to this bundling reclassification. Spotify's recent Q2 financial results shed light on the potential financial impact of this lawsuit. The company

estimates that if the MLC prevails, Spotify might have to pay out approximately $46 million, equivalent to nearly $50 million for the period from March 1, 2024 to June 30, 2024. This figure highlights the significant financial stakes and the ongoing tensions between Spotify and the music publishing industry. David Israelite, president and CEO of the National Music Publishers Association and MPA, has condemned Spotify's move, labeling it as an attack on songwriters. He argued that reclassifying the service as an audiobook bundle cynically undermines the settlement agreements and threatens the stability achieved in previous negotiations. Spotify, on the other hand, insists that its approach is consistent with industry practices where multiple digital service providers have paid lower rates for bundled services. The company has announced its intention to vigorously defend itself in court, emphasizing that the bundling strategy aligns with agreements made between streaming services and publishers. The backdrop to this dispute includes the Phono Records Fru Settlement, which gradually increases the mechanical royalty rate for songwriters from 15.1% in 2023 to 15.35% by 2027. This agreement aims to improve compensation for songwriters amidst the

evolving landscape of digital streaming. In a previous episode of Sound Connections, we had an enlightening conversation with Serona Elton, the head of educational partnerships at the MLC. Serona emphasized the critical role of education in ensuring songwriters and rights holders fully understand and collect their entitled royalties. She highlighted the goal of the MLC to eliminate uncollected royalties and to educate songwriters on the intricacies of performance and mechanical royalties. She mentioned that her end goal is to meet a rights holder such as a songwriter who is collecting all their performance royalties and mechanical royalties, understands synchronization, licensing, and revenue, and is collecting all of that, leaving no money uncollected.

That is the goal of the education. Serona also shed light on the history and evolution of mechanical licensing in the U.S., explaining how the Music Modernization Act transformed the process and established the MLC to streamline royalty payments. She discussed the challenges faced by songwriters in collecting digital mechanical royalties and how the MLC's efforts have led to significant improvements in transparency and efficiency. As this legal battle unfolds, the implications for songwriters, publishers, and streaming services are profound. We'll keep you updated on the developments and their impact on the music industry. Thank you for tuning in to the Sound Connections podcast. I'm AI Jake, and until next time, stay connected.