How Low Will Spotify’s Royalty Payments Go? The Entire Music Industry Is About to Find Out

Image adapted from an illustration by CDD20.
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Image adapted from an illustration by CDD20.
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Image adapted from an illustration by CDD20.

Last week, the music industry learned that Spotify accounts for 42% of all mechanical royalty payments in the US — following Digital Music News’ exhaustive breakdown of one of the most recent reporting months. That market-leading percentage is now likely to take a severe hit — but how low will Spotify go?

Spotify’s ‘bundle-pocalyse’ is nigh, with nervous IP owners pouring through early royalty statements to assess the damage.

One source to Digital Music News noted that the Mechanical Licensing Collective (MLC) has already distributed preliminary reports for March, the month that marks the beginning of Spotify’s massive royalty cuts to music publishers, songwriters, and other compositional IP owners. Apparently, the data isn’t fully baked yet, though rights owners are getting a preview of the carnage.

Spotify’s sudden and massive shift towards bundled offerings—a move that dramatically lowers its publishing payment obligations—is officially barreling forward. DMN understands that MLC’s March statements are now in the final stages of being tallied and distributed.

A working estimate of a $150 million annual drop has been widely bandied about, though let’s see how that ballpark figure holds up. DMN is currently working to obtain preliminary data, with some serious number-crunching on tap for the remainder of this week.

Depending on the exact nature of the drop, it’s possible that Apple Music could surpass Spotify in total mechanical royalty payments. Apple Music is now slightly ahead of Spotify in the all-important individual subscription tally in the US, according to eyebrow-raising market share data exclusively revealed by DMN.

And what about the MLC’s legal battle with Spotify?

The MLC, which oversees mechanical licensing payouts in the US, is now locked in a legal battle with Spotify over allegations that the platform’s bundling reclassifications are illegal. But barring an injunction or sudden shift in that litigation, Spotify will now be doling out its discounted royalties to less-than-thrilled publishers and songwriters.

As first reported by DMN, a federal judge recently granted Spotify’s request to delay its response to the MLC litigation. Judge Analisa Torres signed off on the request, thereby moving the deadline for Spotify’s response from June 10th to July 19th.

Which means Spotify’s attorneys cleverly bought some time while the royalty-chopping carnage gets underway. And the clock is ticking: based on the $150-million-per-year estimate, that comes out to $12.5 million monthly – or north of $20 million between now and the new response deadline.

Meanwhile, there’s little indication that Spotify execs are losing sleep over this.

Music publishers and songwriters are understandably agitated, though Spotify appears less concerned about the pushback. Instead, Wall Street investors seem to be the more critical audience, with profitability representing the critical benchmark for the stock’s performance.

Speaking of Spotify’s SPOT stock, two top Spotify insiders have already cashed out a cool $90 million in Spotify shares this month alone, which ironically represents nearly two-thirds of the estimated annual royalty drop for music publishers. The cash-outs suggest that insiders are hardly fretting about publishing haircuts, with cost-cutting measures like the reduction in Spotify royalty payments handsomely boosting SPOT shares and resulting payouts.

Separately, appeals to ethical considerations seem to be blowing in the wind.

Just recently, a former Spotify executive criticized the company for its move, though Spotify itself seems unswayed. Former Global Head of Publisher Licensing Adam Parness called Spotify’s decision to switch its subscriptions to bundles “misguided and unfair,” describing it as an “ill-informed attempt to deprive songwriters and music publishers of their rightfully earned U.S. mechanical royalties.”

Parness said he framed his critique not as a way to disparage Spotify but as an appeal to the company to honor the spirit of its agreements. A strong appeal indeed, though perhaps that messsage-in-a-bottle didn’t quite make it to Daniel Ek’s superyacht.

Meanwhile, the National Music Publishers’ Association (NMPA) has been pushing for a hybridized direct and compulsory licensing framework for mechanical royalty payments in the United States.

However, we’ve heard little movement on this front, though Israelite is a notorious 3D chess master when it comes to pulling levers on Capitol Hill.

The NMPA has called on Congress to allow direct negotiations between music publishers and streaming platforms alongside existing statutory mechanical rate payouts. This shift would maximize negotiating power and payouts for publishers but faces significant legislative hurdles.

More as this develops.