Spotify No Bundle of Joy for NMPA

Plus: Sony Music Opts Out, and Senators Weigh In, on AI

The National Association of Music Publishers (NMPA) this week launched what is pretty clearly a coordinated, multiprong legal assault on Spotify over the streamer’s move to bundle its previously standalone audiobook subscription tier into its premium music plans.

Spotify’s move has the effect of lowering the royalty rate it pays music publishers for plays on the tier under the terms of the so-called Phonorecords IV rate agreement negotiated between streamers and music publishers and adopted by the Copyright Royalty Board (CRB) in 2022. That deal included a substantial hike in the mechanical royalty rate paid to publishers by digital service providers, but included a carveout for “bundled” services that lowers the rate.

The NMPA blasted the move when it was announced in April, calling it a “cynical, and potentially unlawful” attempt “to radically reduce songwriter payments by reclassifying their music service as an audiobook bundle,” but stopped short of taking immediate legal action.

This week NMPA sent a sternly worded letter to Spotify, this time directly threatening legal action, but over the streamer’s alleged unlicensed display of copyrighted song lyrics owned by its members. Spotify, however, saw an immediate connection with the bundling issue, releasing a statement calling the NMPA’s letter “a press stunt filled with false and misleading claims,” and “an attempt to deflect from the Phono IV deal that the NMPA agreed to and celebrated back in 2022.”

Meanwhile, the Mechanical Licensing Collective, which in large measure is a creature of the NMPA, sued Spotify over its bundling strategy, alleging it violates the compulsory mechanical license the MLC administers, under which Spotify operates. "The MLC believes that Spotify’s position does not comply with applicable law and regulations,” the licensing organization said in a statement. “The MLC has statutory authority to address Spotify’s noncompliance with its royalty payment obligations. The MLC is taking legal action to enforce these obligations and ensure that Spotify pays all royalties due from its use of songs on Premium plans.”

The “bundled service” provision was a ticking time bomb inside the Phonorecords IV settlement that has now gone off. The publishers may have envisioned it as providing flexibility for DSPs to innovate in their music-related offerings, where all the royalty money would still flow to music rights owners, rather than to cover entirely separate product categories with an entirely separate groups of rights owners. But Spotify, for one, has been open for years about its goal of diversifying its audio offerings beyond music.

It has for years also been under obvious pressure from investors to find a way to increase its margins. Under its deals with the record labels and publishers, it pays a fixed (and substantial) percentage of its music-related revenue to rights owners, regardless of its top-line number, leaving the streamer no control over its gross margin and no path to economies of scale. It is imperative that Spotify become less beholden to the music rights owners if it is to achieve sustained profitability.

None of that would have been lost on the NMPA when it negotiated the Phono IV deal with the DSPs. It understand the economics of the business as well as Spotify does. But its members were focused on the headline royalty rate, which dominated the discussions.

That narrow focus may have left the publishers blind to the incentive the new headline rate would create for Spotify (and the other DSPs) to innovate at their expense.

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ICYMI

Sony Music Opts Out

Speaking of sternly worded letters, Sony Music Group this week sent letters to more than 700 AI developers and DSPs, including OpenAI, Microsoft and Google, warning them against unauthorized use of SMG recordings and compositions to train generative AI models. “Due to the nature of your operations and published information about your AI systems, we have reason to believe that you and/or your affiliates may already have made unauthorized uses (including [text and data mining]) of SMG Content in relation to the training, development or commercialization of AI systems,” states the letter. In addition to the letters, Sony issued a public “Declaration of AI Training Opt-Out:

SMG’s affiliates, Sony Music Publishing (SMP) and Sony Music Entertainment (SME), on behalf of themselves and their wholly owned or controlled affiliates, are making this affirmative, public declaration confirming that, except as specifically and explicitly authorized by either SME or SMP, as the case may be, each of them expressly prohibits and opts out of any text or data mining, web scraping or similar reproductions, extractions or uses (“TDM”) of any SME and/or SMP content (including, without limitation, musical compositions, lyrics, audio recordings, audiovisual recordings, artwork, images, data, etc.) for any purposes, including in relation to training, developing or commercializing any Al system.

An AI Roadmap to Nowhere?

After months of information gathering, behind-doors “AI forums” with leading tech executives, academics, labor representative and other stakeholders, the bi-partisan Senate AI Working Group led by majority leader Chuck Schumer (D-NY) has released an AI policy “roadmap” that recommends doing what congressional road maps usually end up recommending: Throw a lot of money at it, but with few concrete legislative proposals. In this case, it recommends spending at least $32 billion annually to support the development of non-defense related AI systems. While some welcomed the report, others found its recommendations to be weak tea. “I don’t know that I read too many legislative proposals in today’s report –– maybe I got that wrong. I did read a lot of ‘send to committee to consider,’” Amba Kak, co-executive director of AI Now, said Wednesday at an AI roundtable discussion with Sen. Cory Booker (D-N.J.). According to Schumer, that was the plan all along. “We’re not kicking the ball down the road. That’s the next logical step,” he said at a news conference. “We’re not deferring or delaying. We always thought the committees should be the next logical step, and I believe a good number of them will come out with bipartisan legislation that we can pass.”