A copyright law­suit spooks Spo­tify—and gives stream­ing ser­vices plenty to be ner­vous about

Soft­ware ▶ A gi­ant class-ac­tion claim cen­ters on me­chan­i­cal li­cens­ing ▶ “They’ve been making good-faith ef­forts to ad­dress the is­sue”

Bloomberg Businessweek (North America) - - Contents -

For the past few years, Spo­tify has been the mu­sic in­dus­try’s dream: a pop­u­lar on­line ser­vice that’s also will­ing to pony up for li­cens­ing fees. But a copyright in­fringe­ment suit filed by David Low­ery, the front­man for Cracker and Camper Van Beethoven, says Spo­tify hasn’t fully paid for many of the songs it streams. Low­ery is seek­ing class-ac­tion cer­ti­fi­ca­tion. The im­pli­ca­tion is that the com­pany, which prides it­self on pro­vid­ing a com­pelling al­ter­na­tive to on­line piracy, has built its busi­ness by beg­ging for­give­ness in­stead of ask­ing per­mis­sion.

Low­ery’s suit, filed right be­fore the new year, says Spo­tify’s un­li­censed streams of his and other song­writ­ers’ com­po­si­tions could make the com­pany li­able for up to $150 mil­lion, be­cause statu­tory dam­ages for copyright in­fringe­ment range from $750 per work to $150,000 for will­ful in­fringe­ment. The case could have rip­ple ef­fects far be­yond Spo­tify. Be­cause it turns on a li­cens­ing is­sue shared by most of the stream­ing ser­vices that let users choose which songs they hear, it could af­fect a wide range of on­line mu­sic op­tions, in­clud­ing Ap­ple Mu­sic.

Spo­tify has pretty good re­la­tion­ships with the ma­jor record la­bels, which have eq­uity stakes in the com­pany. But a li­cense for one piece of mu­sic in­volves two dis­tinct copy­rights: the record­ing, usu­ally owned by the per­former’s la­bel; and the un­der­ly­ing com­po­si­tion, owned by the song­writer or his pub­lisher. (Dolly Par­ton col­lects roy­al­ties from Whit­ney Hous­ton’s record­ing of I Will Al­ways Love You, for ex­am­ple, be­cause she wrote the song and con­trols that copyright, sep­a­rate from Hous­ton’s record­ing.) To use a record­ing, stream­ing ser­vices such as Spo­tify need to se­cure what’s known as a me­chan­i­cal li­cense for the un­der­ly­ing song, ei­ther by ne­go­ti­at­ing with the pub­lisher or by send­ing the rights holder a no­tice and pay­ing a roy­alty set by law.

Low­ery, an out­spo­ken ad­vo­cate for cre­ators’ rights, says in the law­suit that Spo­tify of­ten skips the sec­ond part. Spo­tify doesn’t really ar­gue oth­er­wise—it just says some ben­e­fi­cia­ries are hard to track down. “We are com­mit­ted to pay­ing song­writ­ers and pub­lish­ers ev­ery penny,” com­pany spokesman Jonathan Prince said in a state­ment. “Un­for­tu­nately, es­pe­cially in the United States, the data nec­es­sary to con­firm the ap­pro­pri­ate rights hold­ers is of­ten miss­ing, wrong, or in­com­plete.” The com­pany has set aside undis­closed funds to pay cre­ators it hasn’t iden­ti­fied, and has been ne­go­ti­at­ing a set­tle­ment for past in­fringe­ments with the Na­tional Mu­sic Pub­lish­ers As­so­ci­a­tion.

The mu­sic in­dus­try be­gan to take wider no­tice in Oc­to­ber, af­ter the in­de­pen­dent la­bel Vic­tory Records told the Wall Street Jour­nal that Spo­tify paid

only about 79 per­cent of the roy­al­ties due on record­ings for which it also owns the com­po­si­tion. Spo­tify re­sponded by re­mov­ing the la­bel’s mu­sic from its cat­a­log, al­though the songs are now avail­able again. “We came to a good res­o­lu­tion that works for ev­ery­body,” Prince said.

Vic­tory’s data on Spo­tify came from Au­diam, a com­pany that scours stream­ing ser­vices to col­lect roy­al­ties for song­writ­ers like Bob Dy­lan and Me­tal­lica as well as some in­de­pen­dent pub­lish­ers. Au­diam founder Jeff Price says Spo­tify’s pay­ment prob­lems go far be­yond ob­scure song­writ­ers, and he shared in­for­ma­tion that showed even Dy­lan—whose busi­ness rep­re­sen­ta­tives aren’t hard to find—doesn’t get roy­al­ties for all the plays of some of his best­known com­po­si­tions. “We ex­pect they won’t want this to go in front of a jury,” says San­ford Michel­man, chair­man of Michel­man & Robin­son, the law firm rep­re­sent­ing Low­ery.

Henry Grad­stein, a part­ner at law firm Grad­stein & Marzano, says he’s plan­ning to file a sim­i­lar com­plaint, seek­ing class-ac­tion sta­tus, on be­half of ’60s rock band the Tur­tles. If Spo­tify can pre­vent rights hold­ers from su­ing as a class, the ex­pense of fed­eral lit­i­ga­tion would likely dis­cour­age most artists and small pub­lish­ers from seek­ing dam­ages in­de­pen­dently. More likely is a set­tle­ment agree­ment that would re­quire Spo­tify to com­mit to tak­ing spe­cific steps to find rights hold­ers. If the ma­jor stream­ing ser­vices all agreed to a sim­i­lar deal, small com­pa­nies could have trou­ble match­ing their ef­forts, says Mark Mul­li­gan, an an­a­lyst at Midia Re­search. “The eco­nomics of stream­ing are al­ready skewed to­ward a very well-funded com­pany,” he says. “This would tilt that even fur­ther.”

A drawn-out case isn’t in ei­ther side’s in­ter­est. Spo­tify, which isn’t prof­itable, would have an eas­ier time at­tract­ing in­vest­ment with­out the specter of a suit. The ser­vice is pop­u­lar enough that most cre­ators want to be on it, and given that it will al­ways be easy to pi­rate the lat­est mu­sic, rights hold­ers don’t want to dis­cour­age Spo­tify’s rel­a­tive will­ing­ness to com­pen­sate them. “Spo­tify set aside money to make th­ese pay­ments, and they’ve been making good-faith ef­forts to ad­dress the is­sue,” says Dina Lapolt, a lawyer who rep­re­sents mu­si­cians and song­writ­ers. But, she says, com­pa­nies don’t just pay be­cause it makes them feel good. Some­times it takes a law­suit. �Robert Levine

“We are com­mit­ted to pay­ing song­writ­ers and pub­lish­ers ev­ery penny.” ——Spo­tify spokesman Jonathan Prince The bot­tom line Low­ery’s law­suit could prove to be a bell­wether that leads stream­ing ser­vices to pay more for their mu­sic cat­a­logs.

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