Spotify's Strategic Offensive Hits Three Fronts

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Illustration by Jamie Coe
          

The streaming giant is now fighting in India; the Washington, D.C., Copyright Royalty Board; and Brussels' antitrust system. Whatever happens, it could lose the PR war.

Early on March 13, Spotify general counsel Horacio Gutierrez spoke on a call with journalists to explain the antitrust complaint it had just filed with the European Commission about the way Apple sets, and changes, its App Store practices. "We've consistently tried to play by the rules," said Gutierrez, focusing on the fee of up to 30 percent that Apple levies on digital services using the company's payment system for subscriptions and the restrictions it imposes on apps that don't use it. "It's clear why [the rules] changed: Spotify is a competitor to Apple Music. All these actions by Apple have made it untenable as a competitor."

In regulatory terms, this amounted to a declaration of war. So did Spotify's decision in February to launch in India despite a legal injunction from Warner Music Group over songs published by WMG's Warner/Chappell. And, also, the notice it filed March 7 that it intends to appeal -- along with Google, Pandora and Amazon -- the Copyright Royalty Board's February decision that would boost payments to songwriters and publishers by 44 percent between 2018 and 2022.

The CRB appeal sparked an immediate outcry from publishers, and National Music Publishers' Association president/CEO David Israelite said the appeal essentially amounted to the digital services "suing songwriters." (Spotify fired back with a March 11 blog post explaining its decision.) "We will fight with every available resource to protect the CRB's decision," said Israelite in a statement. "Every songwriter and fan of music should stand up and take notice." This arguably leaves Apple, the only major streamer that chose not to appeal the CRB decision -- and, of course, Spotify's opponent in Brussels -- looking like the good guy.

The outcomes of these legal battles, while all unrelated to each other, won't have much to do with public opinion. But publishers and labels are already trying to cast Spotify as Publicly Held Enemy No. 1 -- just a month after the RIAA's report showed subscription streaming services, led by Spotify's paid tier, helping the recorded-music business achieve its third straight year of double-digit growth.

The CRB appeal is especially thorny for Spotify. During the CRB rate negotiations, all the digital services were arguing to keep the rates the same; but of those appealing, Spotify -- the only company whose sole business is streaming music -- has the most at stake. Under the previous CRB formula, Spotify was effectively paying 13 percent of its U.S. revenue to publishers -- which means its music costs 67 percent overall, including the 54 percent it pays to labels -- for its paid tier every month. With Spotify's additional costs, such as selling, general and administrative expenses, accounting for 34 percent of revenue in its last fiscal year, the company doesn't have much wiggle room if it wants to achieve profitability. With rates rising over the next four years -- and labels reluctant to lower their licensing rates -- Wall Street is eyeing the potential repercussions that may occur in the last three years of the rate increase. (Spotify says the per-subscriber discounts it won in the latest rate determination for student and family plans are likely to keep overall publishing payments at the same level for the first two years of the rate increase.)

Spotify's tight margins show the significance of the antitrust complaint against Apple. As the company continues to work at converting free users into subscribers, with the encouragement of the music business, the restrictions on app communication with consumers that it says Apple enforces are so frustrating that in a March 14 speech in Berlin CEO Daniel Ek compared it to playing pingpong blindfolded. Apple is "essentially acting as both player and referee to deliberately disadvantage other app developers," he said.

Apple CEO Tim Cook defended his company's practices in a statement, noting that Spotify's app had been downloaded 300 million times through the App Store and that its 30 percent fee drops to 15 percent after the first year of a subscription. He also took a swipe at Spotify's decision to appeal the CRB rate. "It's not just the App Store that they're trying to squeeze," he said. "It's also artists, musicians and songwriters."

Spotify is "using its particular moment in the marketplace to protect the moat they've built," says one industry executive familiar with both companies. "Why wouldn't they? They're the industry leader and facing an aggressive competitor with a serious advantage in Apple. I think they're trying to be smart and protect a sizable lead in the marketplace, and are rightfully paranoid about who they are competing against."

But fighting in public can be difficult. On March 17, leaked emails obtained by Billboard indicated Spotify was planning a series of town hall meetings with songwriters in Nashville and Los Angeles to explain its reasoning behind appealing the CRB decision. And sources say that further resistance from songwriters is coming; in an era when hits are seldom written by just one person, Spotify's per-stream all-in publishing rates for its U.S. paid subscription tier -- which have dropped from $0.0015 per stream to $0.0011 per stream between 2014 and 2018, according to Billboard's calculations -- have created a disgruntled class of creators.

"Spotify may have underestimated the battle they are now in," says another industry executive who has worked at labels and in distribution. "They are used to flexing their muscles with the labels and [seeing] them sweat, because [labels] don't want to lose real estate in playlists. But now they are fighting with the songwriters, who don't give a shit. They get most of their money from radio, and they aren't worried about losing their real estate [on playlists] because Spotify can't figure out what songs they own to pull down."

Whichever side wins the legal battles, Spotify could lose the public relations war -- and damage its relationships with songwriters, publishers and creators. "It's like a science fiction movie: Man creates a machine, nurtures and falls in love with the machine, and in the end, the machine eats the man," says the second executive. "All that's left in that building are the people who love the machine."

This article originally appeared in the March 23 issue of Billboard.