“Spotify has made a faulty reading of its family plan discount and without explanation sent music publishers and songwriters the bill,” NMPA president and CEO David Israelite said in a statement. “The service did this while simultaneously launching an unprecedented appeal of the CRB ruling which granted writers their first real raise in decades.
“Meanwhile, Amazon has concocted a scheme where its Prime Music service is priced so low, songwriters will reap almost no royalties from its platform. This violates the law that protects songwriters work from being bundled with other offerings and essentially used for free. These services, which continue to be valued in the billions, must make their calculations and rationale transparent and show how they can justify continuing to undervalue the work that makes their services possible.”
In the case of Spotify, which has already notified publishers it was clawing back overpayments made in 2018 based on the CRB’s mechanical determination, the NMPA is questioning whether Spotify is correctly applying the family discounts. As part of the three-tier formula for paid portable subscription services, after the formula’s first two prongs -- 11.1% of revenue or 22% of the royalties paid to record labels -- have been applied, the largest bucket then subtracts performance royalties paid to ASCAP, BMI and the other performance rights organization. What’s left is next measured against what’s referred to as the “mechanical floor,” which is calculated at 50 cents per subscriber, and whichever is larger becomes the pool for mechanical royalties.
But in its latest rate determination, the CRB allowed for discounts, saying the family plans can count as one and a half subscribers instead of counting all members of the family. Moreover, it said student plans can count as half a subscriber.
Based on that discount, Spotify notified publishers that while it used the old CRB formula during 2018 without the discounts, it had overpaid publishers, and that for 2019 it would clawback that overpayment, dividing it up on a quarterly basis. Music publishing sources don’t exactly agree on how much is being clawbacked by Spotify, with sources citing portions ranging from 12% to 20% of mechanical payments. Based on those percentages, Billboard estimates Spotify is recovering $16 million to $25 million from publishers.
The payouts made in 2018 were based on the 2013-2017 formula, because the CRB rate determination for 2018-2011 wasn’t finalized until November 2018. Under the old formula, there weren’t any family and student plan discounts, so when that component of the new rate determination was applied, it allowed Spotify to claim it overpaid publishers for that year -- or so the service asserted.
Besides the clawback, Spotify is one of four digital services appealing the CRB ruling which will see the headline rate rise from 10.5% to 15.1% through 2022, the last year of the determination. The others services appealing the ruling are Amazon, Google and Pandora.
Meanwhile, the NMPA challenge to Spotify goes to the heart of the service’s clawback. The NMPA wonders if Spotify is correctly applying the family plan discount. Specifically, it wants Spotify to make sure that the family plan only apples to blood relatives, and not to four unrelated people living in the same apartment.
“We are unaware of a Family Plan that Spotify offers that meets the legal requirements to adjust its subscriber counts and Royalty Floor calculations,” the NMPA’s letter to Spotify general counsel and vp Horacio Gutierrez notes. “Our understanding is Spotify offers only a plan that is to be shared by individuals that ‘reside at the same address,’ which is not a definition consistent with the legal requirements limiting Family Plans to “family members.”
The NMPA requests that Spotify provided detailed information to all adjustments made to its subscriber count under the family plan and an explanation of how its plan meets the statutory definition of the CRB’s family plan.
As for Amazon, according to an NMPA letter sent to Amazon’s digital music associate general counsel Stephen Worth, the music publishing trade group is questioning whether the streaming service is correctly following the formula for its Prime Music bundled service, specifically regarding two aspects of the rate formula.
First off, the NMPA letter notes, according to the CRB regulations, bundled services must either have a specified recognized price for the music component; or, if there is no standalone published price for the music component, then “the Service shall use the average standalone published price… [from the most closely comparable product or service in the U.S.]”
While Amazon has been using a $2.99 price point for its Prime Music in calculating mechanical royalties, that is not a “published price,” nor can that service be purchased separately, according to the NMPA letter. Consequently, the NMPA asserts the revenue prong that should be used for the formula is the “average standalone published price for the most closely comparable product or service in the U.S.”
Given that, the NMPA is requesting Amazon either supply NMPA with a list of all offerings that exist in the U.S marketplace that are priced at $2.99 a month. Or, if Amazon can’t provide that, can it offer the names of comparable music services it used to come up with its average pricing, and on what basis does Amazon find that service or those services most comparable?
Secondly, the NMPA notes that while the bundle service offering previously had a mechanical floor of 25 cents per user, the NMPA letter contends that floor is no longer applicable and that Amazon should be using the 50 cents per subscriber floor.
According to the NMPA letter, the trade group came up with that interpretation based on an amended order granting in part and denying in part motions for rehearing dated Jan. 14, 2009. In that communication, the CRB said the royalty floor that would apply to the music component of a bundle is the same as if it were offered on a standalone basis. Since Prime Music is available on a portable basis, therefore it falls under the standalone portable subscription offering formula, which has a 50 cents per subscriber floor.
What that means for the NMPA is that the mechanical floor pool should be calculated at 50 cents per subscriber, which would create a royalty pool twice as large as it was previously. However, the NMPA goes on to note that in its reading of the royalty billing payments it has seen from Amazon, the company has not even been using the royalty floor when calculating mechanical royalties.
“We believe that it is important that all digital services calculate statutory mechanical royalties not only accurately and in accordance with the regulations, but also in a transparent manner and in a manner that is uniformly applied to all copyright owners whose works are licensed on a compulsory basis,” the NMPA letter concludes. “We trust that Amazon shares this belief, and thus will have no issue with providing the information requested in this letter, which information will provide copyright owners with the requisite transparency into Amazon’s Prime Music royalty calculations.”
In both letters, the NMPA request answers to its questions by Sept. 9.
Neither Amazon or Spotify were immediately available for comment. But one executive in the digital services camp wonders whether the letters to the services were sent in the spirit of cooperation, considering the press also received them.