Spotify’s bundle battle with songwriters dampens Reservoir’s earnings forecast for FY 2024

The impact of Spotify’s decision to reclassify its Premium tiers as ‘bundles’ by combining music and audiobooks has already made its way into the earnings forecast of at least one music company.

During its latest earnings call on Thursday (May 30), Reservoir Media said its outlook for revenue and adjusted EBITDA has been dampened by expectations the company will be earning less from mechanical royalties on its publishing catalog.

That’s because, after reclassifying its Premium tiers as ‘bundles’, Spotify is paying a lower mechanical royalty rate in the US to publishers and songwriters for its Premium tiers than standalone music subscription services.

“We have factored that into our guide” for the next fiscal year’s earnings, CFO Jim Heindlmeyer said on the call.

Reservoir didn’t specify how much revenue it expects to lose from the move, but founder and CEO Golnar Khosrowshahi said the company is “focused on the impact of Spotify’s recent accounting change as a result of their bundled subscription reclassification. To that end, we are steadfast in ensuring our roster is compensated both accurately and justly, and we will continue to work toward achieving solutions with all entities that use our assets.”

In Reservoir’s earnings report for fiscal 2024, which ended on March 31, 2024, the company forecast 4% YoY growth in revenue for fiscal 2025, well below the 14% YoY growth it recorded in the year just ended. It also forecast adjusted EBITDA to rise 7% YoY, well below the 20% YoY jump it saw in the past year.

Heindlmeyer noted that Spotify’s move is not the only reason Reservoir is being cautious in its outlook for the coming fiscal year. The company last year released De La Soul’s entire catalog on digital, giving revenue a spike that will make year-on-year comparisons less favorable in the coming quarters. Additionally, the company always takes a “conservative” approach to its forecasts at the start of a fiscal year, Heindlmeyer added.

In March of this year, Spotify notified the Mechanical Licensing Collective (MLC), the organization tasked with collecting mechanical royalties for publishers in the US, that it will be paying out a lower rate as a result of reclassifying its Premium subscription plans as “bundles,” now that they include 15 hours of audiobook time per month.

Under the terms of the Copyright Royalty Board’s Phonorecords IV agreement, digital service providers are able to pay out a lower rate on bundled services than on standalone music subscriptions.

However, the move has angered many in the music industry, including the National Music Publishers’ Association, which described the change as an “attack” on songwriters.

“We are steadfast in ensuring our roster is compensated both accurately and justly, and we will continue to work toward achieving solutions with all entities that use our assets.”

Golnar Khosrowshahi, Reservoir

The MLC has since filed a lawsuit against Spotify, arguing that the streaming service’s Premium subscription plans don’t qualify as bundles because the Phonorecords IV rules require a bundled service to have more than a “token value” – which the MLC argues the audiobook feature doesn’t offer.

Despite the uncertainty surrounding mechanical royalty payments in the US going forward, Reservoir maintained an upbeat outlook on overall revenue from royalties.

“Looking forward, we are poised to benefit from what we believe will become a regular cadence of price increases across streaming platforms.” Khosrowshahi said.

“We have seen user engagement remain high despite recent price increases by global streaming platforms. The market still added 83 million new paid subscribers in 2023, according to the latest IFPI report.”

In fact, just this week it emerged that Spotify is again raising prices for its Premium subscription tiers in the US, marking the second price hike in the world’s largest music market in less than a year. An individual subscription will now rise to $11.99 per month, from $10.99, while the Premium Duo plan will rise to $16.99, from $14.99, and a Family plan will now go for $19.99 per month, up from $16.99.

Reservoir reported $144.86 million in revenue for fiscal 2024, up 14% YoY on an organic basis, or 18% YoY including acquisitions. It registered adjusted EBITDA of $55.6 million, up 20% YoY.

For the fourth quarter of the fiscal year (the first calendar quarter), the company clocked $39.15 million in revenue, up 8% YoY organically, or 12% YoY including acquisitions. Adjusted EBITDA rose 6% YoY, to $16.0 million.

Here are a couple of other notable things we learned on Reservoir’s latest earnings call:

1) Reservoir has cut its deal pipeline estimate from $2 billion to $1 billion

On earnings calls over the past year, Reservoir’s leadership referred to a “$2 billion” pipeline for deals under consideration. However, on its latest call, Khosrowshahi referred to “$1 billion in consideration.”

It’s unclear whether Reservoir has cut back on the number of potential deals it’s looking at, or revised the estimate of the deals’ value downwards.

“We’re very optimistic about the deal flow.”

Golnar Khosrowshahi

“We’re very optimistic about the deal flow,” Khosrowshahi said in response to an analyst’s question about the change.

“The pipeline is quite robust. We have a few very interesting off-market opportunities that are available to us and we’re excited about that.”

She added that “it’s very much business as usual” with respect to future deals, and that she’s “generally quite optimistic about what that pipeline looks like. I think we continue to see assets trading in the mid to high teens, and we are, obviously, executing well below that. And that’s a good position to be in for us.”

2) Reservoir is using AI to increase revenue

Khoswroshahi said Reservoir has been investing into AI as “part of our general operating practice” over the past few years.

According to Khoswroshahi, “to date, [Reservoir has] successfully used AI to increase revenue by tracking and identifying more uses of our copyrights across digital platforms.

“We are now able to detect works that have been covered or altered, and then monetized these songs in a scalable way.”

The company has also deployed AI in more creative ways, including to “rework existing archival audio and repurpose it in new and imaginative ways” Khosrowshahi added.

“Moreover, we are capturing and gleaning insights from large volumes of detailed metadata, thereby improving efficiencies. For example, our synch team is using AI to automatically generate more descriptive metadata to surface new ways to promote our catalog.”

“We are now able to detect works that have been covered or altered, and then monetized these songs in a scalable way.”

Golnar Khosrowshahi, Reservoir

Additionally, Reservoir’s songwriters are using AI technology “to help expedite and enhance their own creative process in the studio.”

Khosrowshahi said Reservoir looks at AI as both a way to capture more revenue from the use of its IP and a way to automate back-office functions.

“There are certainly efficiencies that are created freeing up human resources,” said Khosrowshahi.

“The other side of that is that we become better at licensing. We become better at the content that we are licensing, and mining the catalog. And that certainly is a direct link to revenue generation.”Music Business Worldwide