On Sunday (Jan. 26), news broke that Universal Music Group and Spotify had struck a direct deal affecting both the company’s recorded music and publishing royalty payments. The recorded music side of the deal marked an important step forward in UMG’s so-called “Streaming 2.0” plan, but the publishing side of it is even more noteworthy.
This agreement represented the first direct deal between a music publisher and Spotify since the passage of the Music Modernization Act in 2019, and it effectively overrides the government-regulated statutory rate for mechanical royalties in the U.S. with a private deal between the two companies. While the jointly issued press release about it was vague on details, sources close to the deal say it offers better pay to UMPG and its songwriters than before, and it signals that Spotify might be ready to bury the hatchet with U.S. publishers overall. But it’s not over yet.
Trending on Billboard
First, the context: In March 2024, Spotify added audiobooks to its platform and reclassified its premium, duo and family subscription tiers as “bundles” in the U.S., a classification streamers can use to pay discounted mechanical royalty rates for musical works. This means that Spotify started splitting the money it once only paid to U.S. music rights holders to pay for both music and books, leading to a sudden and dramatic drop in mechanical streaming royalties. (At the time, Billboard estimated a decrease of $150 million in U.S. mechanical royalties for songwriters and publishers over the first 12 months of the new classification, compared to what they would have made had the tiers never been reclassified.)
This led to a nearly year-long war between the publishers and Spotify, led vigorously by the National Music Publishers’ Association (NMPA), which launched a multi-pronged retaliation against Spotify. In the months that followed, the NMPA sent Spotify cease and desist notices for podcast and video content on its platform that were allegedly infringing on music IP; submitted a legislative proposal, asking for the overhaul of the statutory license; sent complaints to the FTC and nine state attorneys general; and more. The Mechanical Licensing Collective jumped in too, suing Spotify in May for allegedly “unlawfully” changing its subscriptions to bundles.
Then, in a surprisingly-timed announcement, the MLC’s lawsuit against Spotify was dismissed this morning (Jan. 29) with a federal judge saying that Spotify’s move to bundling was supported by “unambiguous” regulations. This timing was good for Spotify. Had the ruling come down before the direct deal with UMPG, the outcry from publishers about it would have been far worse (not to say there won’t still be some outcry). The judge is not giving the MLC a chance to refile the case, saying the law is clear and that amending the accusations would be futile, although the MLC can challenge the ruling at the federal appeals court.
But since this ruling came after the UMPG news became public, publishers now have hope for another way out of the Spotify bundle: direct deals. Although sources close to the situation say they are not aware of any other negotiations going on between Spotify and other publishers to date, the other major publishers now have precedence to argue for similar deals with Spotify. The bigger question is what happens to the small indie players. Will they be subjected to the original bundle rate while the majors get better terms? Does this further the monetary divide between indie and major publishers? UMG is the world’s largest music company and the world’s second largest publisher, after all. Not everyone has that kind of leverage.
The NMPA told Billboard at the time of the UMG-Spotify deal that it was not making any changes to the moves it had already set in motion against Spotify — and neither was the MLC. (Of course, this all came before the MLC’s lawsuit was dismissed.) The NMPA struck a somewhat hopeful tone in a statement about the UMG-Spotify deal, saying it was “good news for the entire industry” and that “a rising tide lifts all boats, and this signals that Spotify is coming back to the table.”
The question remains, however, why Spotify came back to the table with UMG for a new publishing deal in the first place. Spotify had found a way to pay less for songs. Why did Spotify make this concession?
There are a few possible answers to that. For starters, the NMPA had essentially promised that, until Spotify relented on bundling, it would make any future moves the streamer wanted to make difficult. The NMPA’s cease and desist letter cited a Wall Street Journal report that Spotify eventually wanted to offer a “remix” feature to speed up, mash up and otherwise edit sound recordings; the NMPA warned that if Spotify released “any such feature … without the proper licenses in place from our members” it “may constitute additional direct infringement.” Given the NMPA’s overall tone throughout this letter, it seems clear that this was a warning to Spotify that it needed publishers’ cooperation for remix features.
Spotify has also teased other features that would require the platform to get new, voluntary licensing approval from the publishers. In October, Spotify began hosting music videos in 97 countries — but, notably, not in the United States. In November, Spotify CEO Daniel Ek teased the idea of a higher cost ultra-premium tier, including more offerings for top fans such as high fidelity listening and, vaguely, “a bunch of other things.” A few weeks ago, Spotify partnered with The Weeknd to stream his Billions Club Live show exclusively on the platform. By developing a solution with UMPG, and maybe other publishers in the future, Spotify is signaling that it is ready to make nice so that it can push forward with its plans for new products.
It also must be noted that all of these publishing companies, as well as Spotify, are global.
While the bundling situation is specific to the United States, UMPG and other publishers are negotiating with Spotify for licensing deals in multiple markets worldwide where publishers have room to negotiate. With UMG’s direct deal, UMPG and Spotify can move forward with their plans to grow their income and presence in emerging markets — something both Spotify and UMG shareholders are keen on — without wasting time and resources threatening each other in every new licensing conversation.
It turns out that playing nice is helpful for both parties — and the market is rewarding that. Since the announcement of their new direct deal, the share price of both companies saw a positive bump. Even Warner Music Group saw upward movement, since some analysts believe the UMG deal opens the door for other major music companies to do the same.
Though it constitutes a step in the right direction, only time will tell how, and if, other direct deals between Spotify and publishers develop, and if this might grow the chasm between majors and indies.
