Spotify estimates that it would have to pay out $50m if the MLC wins its bundling lawsuit

At the beginning of March, Spotify reclassified its Premium Individual, Duo, and Family subscription streaming plans as bundles because those plans now offer access to audiobooks.

The move controversially resulted in Spotify paying a lower mechanical royalty rate to publishers and songwriters in the United States.

That’s because, under a 2022 legal settlement called Phonorecords IV, music publishers and music streaming services agreed that ‘bundle’ services in the States are permitted to pay a lower mechanical royalty rate to publishers and songwriters than standalone music subscription services.

The Mechanical Licensing Collective (The MLC) is the non-profit organization designated by the US Copyright Office to administer a blanket compulsory license and to ensure that music streaming services like Spotify pay the mechanical royalties they owe to songwriters and music publishers.

On May 16, the MLC sued Spotify in the United States for allegedly underpaying royalties to songwriters and publishers as a result of its decision to reclassify its Premium tiers as ‘bundles’.

One of the big questions about the dispute is what Spotify’s alleged underreporting of royalties means in dollar terms for songwriters and publishers.

A figure wasn’t given in the lawsuit, but the MLC stated that Spotify “unilaterally and unlawfully decided to reduce the Service Provider Revenue reported to the MLC for Premium by almost 50 percent by improperly characterizing the service as a different type of Subscription Offering and underpaying royalties”.

Now Spotify has provided its own estimate.

Spotify announced its Q2 results on Tuesday (July 23), and filed its official Form 6-K regulatory report with the US Securities and Exchange Commission the following day (July 24).

Within the filing, under the ‘Contingencies’ section, Spotify notes that “various legal actions, proceedings, and claims are pending or may be instituted or asserted” against the company.

One such claim was, of course, filed by the MLC against Spotify in May, which the company refers to in its SEC filing.

According to Spotify: “If the MLC were entirely successful in this case, the additional royalties that would be due in relation to the period March 1, 2024 to June 30, 2024 would be approximately €46 million, of which approximately €35 million relates to the three months ended June 30, 2024, plus potentially penalties and interest, which we cannot reasonably estimate.”

Spotify added: “We intend to vigorously defend this lawsuit.”

That EUR €46 million figure cited by Spotify converts to USD $49.52 million at the average quarterly exchange rate published by the European Central Bank.

The €35 million [in royalties alone] for the three months ended June 30, 2024 (i.e the second quarter of 2024) converts to $37.68 million.

As pointed out by Music Ally, if Spotify were to pay around $37.68 million (€35m) less in mechanical royalties per quarter following its bundle change in March, SPOT’s mechanical royalty payments would be cut by approximately $150 million over the span of a year following the change, which correlates with an estimate reported by Billboard in May.Music Business Worldwide