How Should Spotify Compensate Songwriters?
In July 2017, Spotify was sued by songwriter Robert Gaudio and Bluewater Music Services Corporation, a music publisher responsible for ensuring songwriters receive payments when their compositions are used commercially. Gaudio and Bluewater alleged that Spotify committed willful copyright infringement by streaming their songs without acquiring mechanical licenses and paying royalties to the songwriters. Recorded songs involve two separate sets of copyrights: song composition rights owned by songwriters and publishers as well as song recording rights owned by performers and record labels. Within song composition rights are mechanical and public performance rights. Mechanical licenses grant the right to reproduce and sell songs, such as on CDs or digital downloads from the iTunes Store. Public performance licenses grant the right to play a song in public, such as in a retail store or on internet radio services like Pandora.
When Spotify first entered the U.S. market, it streamed every song for which it had obtained recording licenses without securing all of the composition licenses. Gaudio and Bluewater, like most other parties that sue Spotify for copyright infringement, rely on the assumption that Spotify is required to obtain mechanical and public performance licenses for the compositions in order to stream songs legally. This assumption stems from industry-wide consensus on the matter, but there is no definitive statute or case underlying the assumption. Though Spotify previously agreed that it needed to secure mechanical licenses, it is challenging this arrangement in court for the first time, arguing in the Gaudio/Bluewater litigation that it does not need to acquire mechanical licenses. Instead, Spotify states that it is only legally required to obtain public performance licenses. If Spotify succeeds and no longer has to secure mechanical licenses to stream songs legally, it will save a significant amount of money at the expense of songwriters. The stakes of this case extend to the entire music industry, as streaming services such as Spotify have been credited with reviving the music business. Between 1999 and 2014, global music industry revenues decreased by nearly 40%. In 2015, music revenues finally began trending upwards, in large part due to streaming. If songwriters and publishers continue to sue Spotify over mechanical licensing, it could bankrupt the company and set the music industry back significantly. Ultimately, a balance must be struck between protecting songwriters’ rights and ensuring the economic viability of streaming as well as the music business as a whole.
The mechanical/public performance distinction is a legal anachronism created in response to the advent of the self-playing piano in the 1900s. Copyright law has yet to address whether streaming should be covered by the mechanical rights regime, the public performance regime, or both. The music industry has thus far treated on-demand streaming like Spotify as implicating mechanical and public performance rights. Comparatively, digital downloads like buying a song from the iTunes Store only requires a mechanical license and internet radio such as Pandora only requires public performance licenses. Should Spotify need to secure twice as many licenses as Apple’s iTunes Store and Pandora? Spotify has a strong argument that it provides a service more akin to Pandora because Spotify does not purport to transfer any ownership rights to the streamed songs. However, consumers now use Spotify as a replacement for digital downloads, so even though the listener no longer owns a copy of the song, there is little practical difference between ownership and unlimited streaming. As well, Spotify is an interactive service where the user can choose what song plays next as if they were choosing from a music library. Online radio stations like Pandora are not interactive in this sense. Spotify also enables premium users to download songs for offline listening, similar to a digital download except that the song is removed if the user cancels the Spotify subscription. Overall, there are valid arguments on both sides as to whether Spotify should be governed by either the mechanical or the public performance rights regime. Yet it remains unexplained why Spotify should be legally required to pay for both licenses when no other form of music delivery faces the same requirement.
If Spotify succeeds in arguing that it should only be required to obtain public performance licenses, it would drastically reduce the amount of money going to music publishers and songwriters. This amount is very low to begin with: songwriters earn around $0.00075 per stream and The New Yorker recently questioned the viability of songwriting as a career in the streaming era. A judgment in Spotify’s favor would also reduce the number of expensive class action suits filed over the lack of mechanical licenses, which in recent years has cost the company over $73 million. This is especially important given Spotify’s precarious financial position. The company has yet to turn a profit and its losses in 2016 grew to $601 million. If Spotify loses the performance-only argument, it will remain difficult for Spotify to become profitable as licensing fees account for a large proportion of its expenses. Meanwhile, songwriters will continue to sue over the missing mechanical licenses. Statutory damages for failing to secure licenses can be as high as $150,000 per song. As a result of the Gaudio/Bluewater lawsuit alone, which involves 2,445 compositions, Spotify could be forced to pay up to $366 million in damages. From the songwriters’ perspective, a win for Gaudio and Bluewater would serve as an affirmation that Spotify should not be able to profit off songs without paying its fair share to those who created the songs in the first place. The President of the National Music Publishers’ Association declared that as long as Spotify continues to argue that it does not owe mechanical royalties, publishers are “in a state of war with them.”
Courtney Kan is a J.D. Candidate, 2019, at NYU School of Law.