Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth
Business Matters: A $3 Billion Valuation Brings Spotify Expectations Back to Earth

Spotify is lowering its royalty obligation in the U.S. The digital service is now paying webcasting royalties to SoundExchange for the streams on the free Internet radio service on its mobile app it launched in June.

A company spokesperson confirmed to Billboard.biz that Spotify is taking advantage of the statutory license in the U.S. The company was one of many listed on a September 13 SoundExchange blog post citing the most recent digital services to notify the U.S. copyright of their intent to operating under the Section 114 statutory license.

But you won't find the Beatles or other subscription service holdouts on Spotify's mobile app even though most every other webcaster has the band in its catalog. The company spokesperson told Billboard.biz that Spotify's mobile radio service would use the same catalog used by the on-demand service.

Webcasters are legally able to stream any commercially released song. Pandora can buy a CD, rip the songs, stream them to its listeners and pay SoundExchange a statutory royalty. On-demand service must receive permission from rights owners and negotiate a royalty rate before they distribute the songs.

While it may seem counterintuitive for a webcaster not to take full advantage of the statutory license, Spotify is clearly trying to save itself from headaches down the road. Spotify is first and foremost an on-demand service. The radio service on its mobile app is complementary to that on-demand service. The radio service on the on-demand desktop app does not take advantage of the statutory license -- it's more of an on-demand radio service than a Pandora-like, non-interactive radio service. Thus, Spotify could have a poor user experience if different songs were available on different parts of its service.

And since Spotify is marketing its mobile radio as "Radio you can save," its mobile radio can only use the on-demand catalog. Saving or caching tracks for offline listening is not allowed for webcasters using the statutory license. Features like that require permission from the rights owners and cost extra.

Using the statutory licensing for the mobile radio makes good financial sense. Not paying the statutory royalty for radio streams is like throwing money away. The webcaster royalty rate is 0.21 cents per stream in 2012 (Spotify doesn't get the pure-play webcaster rate of 0.11 cents that Pandora enjoys because it's a subscription service). Based on numerous reports from artists and labels, Spotify's per-stream payout from its on-demand service can reach 0.5 cents per stream. Although Spotify's mobile radio service probably constitutes a very small portion of its overall U.S. traffic -- and an even smaller portion of its global listening -- the statutory license allows it to pay less than half when taking into account both master and publishing rights.

Of course, lower royalties means lower payouts to artists for mobile radio streams. That could lead to greater consternation from artists who already feel ripped off from subscription services. On the other hand, if those artists are on record labels, they may take comfort in knowing they will be paid 45% of the mobile radio royalties directly from SoundExchange.

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