Spotify’s Plans to Demonetize Tracks With the Lowest Royalty Payouts Is ‘Discriminatory and Offensive,’ Says Competition Policy Expert

Spotify plans for a two-tier system are ‘intrinsically unfair, clearly discriminatory, bordering on offensive.'
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Spotify plans for a two-tier system are ‘intrinsically unfair, clearly discriminatory, bordering on offensive.'
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Photo Credit: Kmeron for LeWeb11 / CC by 2.0

Amelia Fletcher, Professor of Competition Policy at Norwich Business School at the University of East Anglia, has sent a personal letter to Spotify boss Daniel Ek. The letter responds to Spotify’s proposal of demonetizing the 0.5% pool of tracks receiving the lowest royalty payouts.

As reported by DMN yesterday, Spotify will stop paying royalties to an estimated two-thirds of its catalog after implementing changes planned for Q1 2024. Fletcher’s letter expresses concern about Spotify’s proposal to withhold payments to the 0.5% of lowest royalty-generating tracks, creating a black box with over $40 million that would then be disbursed to the other 99.5% of the artist pool of what it calls ‘real artists with real fanbases.’

Of course, it has been highlighted that this black box of over $40 million is splintered into micropayments of nickels, sitting idle in bank accounts — reaching no one. Artists can’t even access these payouts because aggregators set a minimum amount to be generated before royalties can be withdrawn. But does that rationale make the royalty revocation fair?

Competition policy expert Fletcher doesn’t think so. Fletcher has been heavily involved in the development of digital platform regulation in the UK and EU. Fletcher is also a musician, songwriter, and cofounder of independent label Skep Wax Records. She expresses how Spotify’s plans for its two-tier system are ‘intrinsically unfair, clearly discriminatory, and bordering on offensive.’

“Spotify claims it ‘exists to connect creators with fans, and empower creators to live off of their art,'” Fletcher begins, adding, “It is also a champion of fair competition, including through its ‘Time To Play Fair.’ But Spotify’s current proposal is at odds with these worthy corporate statements. Not only is it intrinsically unfair, but it is also anticompetitive and seriously risks constituting an abuse of dominance under UK and EU competition law.”

It’s highly likely that Spotify claims a dominant position in the provision of streaming services to music creators, as ‘Spotify has a strong position in that market (with over 50% share in many European countries). Spotify is thus a critical ‘bottleneck’ or ‘gatekeeper’ for music creators seeking to reach streaming consumers. This is important because music streaming now accounts for over 75% of all revenues from recorded music.’

Fletcher also highlights that while plans for demonetization might seem like a small policy change to Spotify, it is akin to Amazon withholding payment to ‘smaller traders accounting for the last 0.5% of its revenues.’

She adds, “It is not only discriminatory and exploitative of music creators, but also creates an unlevel playing field in the market for music creation.”

“In music streaming – as in many markets – there is a huge skew in the streams of tracks, with a relatively small number of tracks by the biggest artists accounting for a very large share of all streams. It is not currently clear what this 0.5% cut-off means in terms of minimum required streams, but it will no doubt affect an extensive ‘long tail’ of smaller artists and independent labels.”

The professor emphasizes that if a precedent is established by Spotify now, it becomes inevitable that the 0.5% cut-off point will increase over time.

The competition policy expert says it is borderline ‘offensive’ that Universal Music Group supports Spotify’s two-tier payout scheme because it will “reward real artists with real fanbases for the platform engagement they drive.”

“It fails to recognize that this ‘long tail’ includes a huge number of ‘real’ emerging artists, emerging genres, and emerging small labels, as well as artists and labels who are culturally important in smaller geographic territories, ethnic groups or genres. It includes many musical seeds that have huge potential to grow into exciting new musical forces and change the future of music and culture. Demonetizing these smaller ‘grassroots’ artists is clearly discriminatory.”

Fletcher points to the ‘risk of discrimination’ between two different sets of rights holders, explaining, “It seems likely that any demonetization of songwriting rights would be illegal under copyright law. If so, this proposal may involve Spotify demonetising only the recording artists and labels releasing the affected tracks while continuing to pay royalties to their songwriters and publishers.”

The professor believes that ‘Spotify’s ability to demonetize this tranche of music is also exploitative and reflects the huge discrepancy in bargaining power between Spotify and these smaller business users.’ She added that a majority of these artists and labels will continue to stream through Spotify in an attempt to establish themselves and ‘will continue to do so even if they receive zero compensation for the economic value they generate.” And as a result, ‘its offering to consumers will not be harmed significantly over the short term.’

Creating this unlevel playing field will be detrimental to the long-term development of music creation, affecting both consumers and the broader culture, Fletcher argues, adding, “Reducing the revenues of smaller creators, genres, and labels will effectively and artificially increase their barriers to entry and expansion, limiting the potential for new and innovative music to emerge outside of the established mainstream.”

“Spotify has provided a number of weak rationales for the proposed change in its royalty model. It is far from clear that these are the true drivers. At the same time, Spotify is currently seeking to expand into the audiobook market. There is clearly a risk that an increased share of the revenue ‘pie’ for audiobooks will reduce the royalties available for music. In this context, the demonetization of the final 0.5% of streams seems more likely to be a sop to the major labels, helping to shore up their own revenues as audiobooks grow.”

Fletcher concludes the letter to Ek by addressing Spotify’s statement that it wants to ‘reward real artists with real fanbases for the platform engagement they drive.’

If the streaming giant wanted to achieve that goal, Fletcher adds, “[Spotify] could simply adopt a user-centric payment system. Under this system, each user’s subscription revenue is split proportionally between the tracks they themselves listen to. This would provide a simple solution to that apparent objective. It would also reduce the potential for streaming fraud. The fact that this option has been repeatedly rejected suggests this is not the true rationale for the proposed change.”