That’s because what the publishers were asking for would have had a significant impact on the economic model for streaming; and thus likely would have changed the dynamics of the discussion surrounding the issue.
While four of the five big U.S. digital services -- Spotify, Google, Amazon and Pandora, but notably not Apple -- have appealed the rate decision, Spotify is currently being painted as the lead villain in this drama. After all, not only did it appeal the CRB, it also debuted its streaming service in India in February using Warner/Chappell Music’s catalog without a license and despite an injunction filed by the Warner Music Group; if Spotify prevails in court, that move could not only hurt both publishers and songwriters, it might also impact labels and artists, too.
Back in the U.S., the music industry so far has looked at the CRB appeal mainly through the lens of the publishing rights owners. But let’s examine the publishers’ asks through the lens of the digital services.
How Would the Publishers’ Requests Affect Digital Services?
Billboard looked at what the publishers asked for in light of Spotify’s 2018 financials for U.S. revenue on its paid and ad-supported tiers. Of the two revenue buckets, the $1.06 per subscriber rate would have lost out to the $0.0015 per-stream rate for 2018 on the paid tier; on the ad-supported tier, only the per-stream rate would have been considered.
According to Billboard’s calculations, on average, the performance royalty paid to Performance Rights Organizations by Spotify worked out to $0.0005 for its paid tier and $0.0004 on its ad-supported tier for 2018. With the proposed mechanical rate at $0.0015, that would work out to payments of around $0.0020 for the paid tier and nearly $0.0018 for the ad-supported tier.
Spotify’s paid tier generated 222.3 billion streams in the U.S. in 2018, leading to an "all-in" publishing payout of $445.64 million, or 24.4 percent of the paid tier’s revenue of $1.83 billion.
On the ad-supported tier, Spotify generated 96.7 billion streams, leading to an "all-in" publishing payout of $171.5 million, or 40.5 percent of the ad-supported tier’s revenue of $423.2 million in 2018.
Under the old rates, the blended publishing payout from both tiers would have hovered around 13 percent of revenue, according to Billboard calculations. In other words, if the publishers got what they were asking for from the CRB, songwriters and publishers would have seen their payments almost double from the paid tier and more than triple from the ad-supported tier. While that would have been great for creators and publishers, it would have had serious implications for Spotify’s business model.
What If The Digital Services Got Their Way?
On the other hand, the digital services were hoping to keep the old rates the same for the next five years, and for the CRB judges to eliminate the mechanical floor, which equals 50 cents per subscriber -- consistently the largest bucket of revenue for Spotify. (For a full breakdown of the mechanical floor and the rate formula overall, click here.) In fact, the mechanical floor came into play for 44 percent of each month for all digital services, which they referred to as "a windfall" for publishers.
If that mechanical floor was removed, that 13 percent of revenue under the old rates would have dropped to around 11 percent of revenue, using Spotify’s 2018 numbers and Billboard calculations. Not only that, the per-stream rate of $0.0011 for the paid tier would have dropped to $0.0009 -- meaning that even though the digital services were technically asking for rates to stay the same, the removal of the mechanical floor would have actually meant a rate reduction for the streamers.
Okay, But What About Those Implications About Spotify’s Business Model?
Let’s assume the publishers got what they asking for. Adding together that 24.4 percent of revenue Spotify would have paid to publishers for its paid tier to the 54 percent of revenue it pays to labels, Spotify would have been paying 78 percent of its total revenue to rights holders on its paid tier. Adding that 40.5 percent for the ad-supported tier, and Spotify would be paying 87 percent of its total revenue to rights holders each month in the U.S. That’s a lot!
And both of those percentages are before calculating an additional five- to nine-percent of revenue from other expenses that the company also considers part of its cost of goods in its financial reports. Adding in those costs takes the paid tier to at least 83 percent of revenue, and adding in the ad-supported tier, over 90 percent, for its content alone.
But content costs are not Spotify’s only expenses, of course -- it’s also a business that relies on selling, marketing and research and development, and has additional administrative costs, all of which added up to 27 percent of revenue, according to its latest financial filings. That adds up to 117 percent of total revenue -- even before things like taxes and interest payments and other one-time charges and expenses come into play.
So while Spotify has so far been unprofitable on an annual basis, its road to profitability would have gotten a lot longer if the publishers had gotten what they wanted. And eventually that wouldn’t have been good for the overall music industry -- including music publishers.