Reps. Ted Lieu and Adam Schiff, both Democrats from California and members of the House Judiciary Committee, along with Sen. Marsha Blackburn, Republican of Tennessee sent a letter to U.S. Register of Copyrights Shira Perlmutter last week raising “serious questions” as to whether Spotify is abusing the collective licensing system for mechanical rights by bundling its previously standalone audiobook service into its premium music subscription tier. The bundling arrangement has the effect of lowering the royalty rate Spotify pays to music publishers and songwriters under the terms of the most recent rate-setting agreement adopted by the Copyright Royalty Board.
“As members of the Judiciary Committee, which originated the Music Modernization Act, we want to see the law faithfully implemented and copyright owners protected from harm arising from bad faith exploitation of the compulsory system.,” the letter reads. “Digital service providers should not be permitted to manipulate statutory rates to slash royalties, deeply undercutting copyright protections for songwriters and publishers.”
The letter is part of a multiprong campaign to challenge the bundling strategy orchestrated by the National Music Publishers Association that includes and a lawsuit against Spotify from the Mechanical Licensing Collective.
Whether Spotify’s unilateral bundling move is really an abuse of the compulsory licensing system or simply a cheeky reading of the Phonorecords IV rate agreement negotiated between streamers and music publishers is a question that will probably have to be settled in court, if not by Congress. But the dispute serves as a reminder that a single-product, standalone streaming service is a very hard business to make work.
As noted elsewhere, Spotify’s royalty obligations, whether set by CRB or part of its label deals based on a percentage of revenue, leave it with very little direct control over its gross margin, making for a challenging P&L. Its two main U.S. competitors, Apple Music and Amazon Prime Music, face similar daunting music-streaming economics, but neither operates as a standalone service. Each is embedded in a broader array of other services, devices and e-commerce — that is, part of a bundle. Spotify’s problem is that it does not have those other business lines to bundle with music streaming.
The same problematic economics have now caught up with video streaming services as well. Unless you’re Netflix, with such an overwhelming first-mover advantage you can stand on your own, few would-be competitors have been able to replicate its model. From Disney+ to NBCUniversal’s Peacock, to Paramount+ many studios have tried, only to run into the same hard economics as music streamers.
The cost of programming, whether reckoned in royalties, licensing fees or in-house production costs, is not sustainable on a standalone, direct-to-consumer basis, particularly when reckoned in light of high customer acquisition costs and churn. You simply cannot charge subscribers enough to make the numbers work.
And so, video streamers are now rapidly reassembling the bundled network model, whether with in-house brands or third-party services. Cord-cutters, who sought to flee the high price of cable TV for the promise of low-cost, ala carte programming, now increasingly find themselves paying cable-like prices for an increasingly cable-like service.
Even Netflix has resorted to adopting an ad-supported tier — something founder Reed Hastings vowed it would never do — in order to shift part of the cost of programming onto advertisers.
There’s an old saying in business that there are really only three business models: you pay, I pay, or somebody else pays. For both music and video streamers, somebody else is an increasingly essential option.
That doesn’t mean Spotify should be let off the hook if it is indeed acting in bad faith or violating the legal terms it agreed to. But one way or another, it will have to charge a bundle.