Spotify, Joe Rogan and Neil Young – Looking at the Rights and Royalty Issues Behind the Story (Part 1 – Why Spotify Has Been Promoting More Podcasts)

The last two weeks have been filled with stories about Neil Young, Joni Mitchell and other artists pulling their music from Spotify in protest of its carriage of the Joe Rogan podcast.  While the political statements made by these actions generate the news, there are rights and royalty issues behind the story that are worth exploring.  While Washington Post articles here and here touch on some of these issues, looking at them in more depth helps to explain the importance that Spotify places on podcasts and why it would be reluctant to pull a podcast that has so many listeners (reportedly over 10 million per episode), even if the podcast has content that may be objectionable.  The issues raised by this controversy are also tied into two other stories that made the news for broadcasters this last week – Congressional hearings on the Journalism Competition and Preservation Act and on a potential sound recording performance royalty on over-the-air radio – topics we will cover in subsequent articles.

Let’s first look at the question of why Spotify, which started as a music service, has pushed so hard into podcasting.  We will follow up with a discussion of the issues on the artist side of the equation in a second article.  Spotify reportedly paid more than a hundred million dollars for the rights to the Rogan podcast.  It has also invested heavily in other podcast companies – including buying podcast technology companies including Anchor and Megaphone, and podcast content aggregators including Gimlet and the Ringer.  Deals with celebrities for their podcasts include those with former President Obama for his podcast with Bruce Springsteen, as well as an announced content creation deal with Prince Harry and Meghan Markle.  Why would a music service spend so heavily to get into spoken word programming?

First, it is worth noting that Spotify is not the only company that started in music to push into podcasts.  Apple of course historically has been a go-to place for podcasts – probably responsible for the term “podcast” from downloads of the original podcasts to its iPod.  SiriusXM, which also owns Pandora, has acquired companies including Stitcher, a pioneering podcast platform.  Broadcast companies including iHeart (which acquired digital content technology company Triton and several years ago content creator How Stuff Works), Entercom (buying companies including Cadance 13 and Podcorn), and others have all expanded into the spoken word content space.  Why this push by companies known for their music content into this space dominated not by music, but by talk?

One of the biggest reasons is likely the cost of music royalties.  With music royalties reportedly taking up to 70% or more of the revenue of a subscription service like Spotify, paying even a hundred million dollars for programming that provides a major library of content that does not have associated royalty costs can be a bargain.  Some simple math can show how that would work.  Spotify is largely an on-demand platform where listeners can set their own playlists and play songs on demand, so their royalties are negotiated directly with the copyright holders of the music – normally record companies for the sound recording rights (see our articles here and here on the difference between royalties for on-demand platforms versus those for “noninteractive” services where listeners cannot choose the songs they hear, where royalties are set by the Copyright Royalty Board – the CRB).  While royalties for on-demand use of music are higher than those for noninteractive services, those royalties also are arrived at through private negotiations and thus are not public information.  So, for purposes of this analysis, let’s assume that Spotify is paying the lower royalties paid by a noninteractive service as set by the CRB.  For 2022, the royalties for a nonsubscription service are $.0022 per song per listener (a higher rate applies to noninteractive subscription services – see our articles here and here for the current CRB royalties).  Assume that a listener will play 12 songs an hour, for an audience of 10 million listeners (the estimated size of the Rogan audience), for one hour of music programming, Spotify would pay $264,000 ($.0022 times 12 songs times 10,000,000 listeners).  With Rogan’s program coming out daily and often lasting several hours, plus providing archives going back for years, the math shows how quickly this investment would pay for itself.

Obviously, these numbers are not an accurate reflection of the music royalties being paid by Spotify, as there are likely all sorts of deals that change these simplistic calculations.  In complex music royalty deals, there are often many different calculations used to determine the royalties – including a percentage of revenue or of the subscription price that may factor into the calculations.  Spotify may have deals with some music copyright owners for lower royalties for increased promotion or other incentives.  On the other hand, the calculations above are for nonsubscrition, noninteractive music services which comprise but a small part of the Spotify music service.  Subscription, interactive streams are likely compensated at significantly higher rates.  Plus, these calculations look only at the sound recording rights.  The rights to use the underlying musical compositions in these on-demand streams also need to be included in the calculations. These “mechanical” royalty rates for 2022 were set at 15% of revenue in a CRB decision (which we wrote about here) that has been remanded by the courts to the CRB for further consideration. Music industry representatives recently alleged that those royalties are “appallingly” low in anticipation of a new CRB proceeding to set the rights for the mechanical royalties for the use of musical compositions for the next five years.  On top of these rates, the rights to the public performance of those musical compositions (paid to ASCAP, BMI, SESAC and GMR) are added.  So these calculations, while very rough, show that music content is expensive, and help explain why so many digital services that once offered only music are now pushing spoken word content whose costs they can control.

Given the savings over music royalties, the push into podcasting by Spotify and other audio services makes economic sense.  Obviously, talk programs bring their own issues, like those in the recent controversy, but they also pay for themselves through decreased music royalties as a listener cannot be listening to a talk podcast and their own stored playlist of music at the same time.  Instead of listening to music, listening to Rogan, or Obama, or anything from The Ringer, saves Spotify money.

The cost of music programming ties into a story on the arguments over broadcast music royalties, which we will likely publish next week.  Suffice it to say that the more that music costs, the more incentive there is for a music service to find alternative audio programming to provide to its listeners.  So, as long as music royalties remain high, expect talk programming to grow.  Watch in the coming days for our next article on some of the issues that arise for artists from the Spotify controversy.

Courtesy Broadcast Law Blog