Spotify Improperly Characterized Premium as Bundled Offering to MLC: Suit

Spotify slashed the reported service provider revenue for its Premium subscription offering to the Mechanical Licensing Collective (MLC) by half on March 1, without advance notice, by “improperly characterizing the service as a different type of Subscription Offering and underpaying royalties,” alleged the MLC's Copyright Act complaint Thursday (docket 1:24-cv-03809) in U.S. District Court for Southern New York in Manhattan.

The streaming music service did so “even though there has been no change to the Premium plan and no corresponding reduction to the revenues that Spotify generates from its tens of millions of Premium subscribers,” alleged the complaint.

In a statement emailed Friday, a Spotify spokesperson said the lawsuit concerns "terms that publishers and streaming services agreed to and celebrated years ago under the Phono IV agreement." Bundles were "a critical component of that settlement," and multiple digital streaming providers include bundles as part of their mix of subscription offerings, she said. Spotify paid "a record amount to publishers and societies in 2023 and is on track to pay out an even larger amount in 2024," she said. Spotify looks forward "to a swift resolution" of the matter.

Spotify’s rationale for reducing the amount of service provider revenue was that Premium became a “bundled subscription offering” when the service launched Audiobooks Access in November, giving subscribers up to 15 hours of audiobooks per month for $9.99, said the complaint. But Section 115 of the Copyright Act outlines how service provider revenue is to be reported when music offerings are sold or "bundled" with "non-music products or services in a single transaction,” the complaint said. Mechanical royalties for a bundled subscription offering “are only paid on the prorata portion of the music-related component” of the offering, it said.

The streaming service’s assertion that Premium is now a bundled subscription offering is “directly at odds” with Section 115 regulations the MLC is responsible for interpreting and applying, said the complaint. “Premium is exactly the same service that Spotify offered to its subscribers before the launch of Audiobooks Access,” and “nothing has been bundled with it,” it said. Prior to the “purported transformation” of Premium into a bundled offering, subscribers could listen to unlimited ad-free music and up to 15 hours of audiobooks each month for $10.99, as well as other non-music audio content such as podcasts, comedy shows and spoken word performances,” it noted.

The launch of Audiobooks Access resulted in “no change at all in Premium,” alleged the complaint. Prior to March 1, Spotify paid mechanical royalties on all Premium revenues, “subject to certain specific reductions identified in Section 115, despite the fact that Premium subscribers also had access to the same number of hours of audiobooks as Audiobooks Access subscribers now have,” it said.

“Nothing changed on the day Audiobooks Access launched: Premium subscribers continue to get the same single product, providing the same on-demand access to tens of millions of musical works (along with other audio content) at the same price,” MLC said. The only change, the complaint said, is that “by erroneously recharacterizing its Premium service” as a bundled subscription offering, Spotify is “violating Section 115 and its regulations” involving reporting of service provider revenue and, as a result, “underpaying mechanical royalties.”

Section 115 qualifies a bundle as requiring at least two products: a subscription offering plus one or more other services “having more than token value,” the complaint said. The “principal value” of Audiobooks Access is to support Spotify’s claim that Premium is now a bundled subscription offering, but that doesn’t satisfy the “more than token value” requirement of Section 115, it said.

Premium didn’t become a bundled subscription offering when Spotify launched Audiobooks Access because it already included unlimited music and access to other audio products, including up to 15 hours of audiobook listening, said the complaint. A bundled subscription offering must include “at least two distinct products or services,” and “Premium does not,” it said.

Another “flaw” in Spotify’s position is that it’s telling potential Audiobooks Access subscribers that, “unlike Premium subscribers, they will not have access to unlimited, ad-free, on-demand music,” said the complaint. But when rolling out Audiobooks Access, Spotify “neglected to create a different product,” it said. “It appears that new Audiobooks Access subscribers are being granted access to 15 hours of audiobooks listening and the same access to unlimited, ad-free, on-demand music that Premium subscribers are provided,” it alleged, with the only difference being Audiobooks Access subscribers are paying $9.99 per month vs. $10.99 for Premium customers “to receive the same product.”

Spotify is obligated to make monthly payments to the MLC, which was designated by the U.S. Copyright Office to ensure that music streaming services accurately and timely pay the mechanical royalties they owe to songwriters and music publishers, the complaint said. The royalty payment amount depends in part on the service provider revenue Spotify earns from music-related subscriptions such as Premium, it said.

The financial consequences of Spotify’s “failure to meet its statutory obligations are enormous” for songwriters and publishers and if unchecked, its “unlawful underreporting could run into the hundreds of millions of dollars,” the complaint alleged.

The MLC seeks recovery of unpaid statutory license royalties and late fees due to Spotify’s Copyright Act violations, said the complaint. It requests an order declaring that Spotify’s characterization of Premium as a bundled subscription offering, and its resulting underpayment of royalties, are in violation of rates and terms set in Section 115, it said. The plaintiff also requests compensatory damages, attorneys’ fees and costs, pre- and post-judgment interest, and preliminary and permanent injunctions barring Spotify from categorizing Premium as a bundled offering.