Is Spotify’s Bundling Strategy Squeezing Artist Royalties?

Spotify’s share price has surged more than a 150% since the start of this year, with the streaming service seeing the number of its paying subscribers grow to 252 million and total monthly active users to 640 million.

In the third quarter, its gross margin, a measure of profitability, grew to 31.1%, and its operating income climbed to €454 million (A$737.1 8 million). Revenue also increased 19% to €3.99 billion (A$6.48 billion).

While workforce cuts and streamlining its operations have contributed to increasing profitability, Spotify’s bundling strategy also contributed to its increase in revenue – even though it could mean that artists stand to receive reduced royalties.

The bundling strategy involves bundling together different types of content in order to pay less for each piece.

When you subscribe to Spotify Premium, whether Individual, Duo, or Family plan, you now get music, podcasts, and 15 hours of audiobooks all in one package.

While it does make it more convenient for users, it’s also a money-saving strategy for Spotify.

By way of a 2022 agreement called Phonorecords IV (CRB IV), if a service only offers music or podcasts, it must pay higher royalties every year. But, if it bundles music with other things, it can pay less, reports Headphonesty.

Spotify has reportedly saved $100 million (A$153.75 million) in royalty savings since it introduced the bundling offers.

The company reportedly stopped paying for songs that do not reach 1,000 streams within 12 months earlier this year. It says the measure is to streamline royalty distribution, but this policy impacts approximately over 150 million songs on the platform.

In August, Spotify moved to dismiss what it called a ‘nonsensical’ lawsuit over unpaid royalties filed by the Mechanical Licensing Collective.

The National Music Publishers’ Association (NMPA) is also unhappy with the bundling strategy.

“Spotify’s attempt to radically reduce songwriter payments by reclassifying their music service as an audiobook bundle is a cynical, and potentially unlawful, move that ends our period of relative peace,” said NMPA President David Israelite.

Spotify instead sees itself as championing artists. In 2023, more than 80% of all royalties generated by Australian artists on Spotify were from listeners outside of the country, with Brazil, Mexico, and Germany emerging as new export markets for local artists.

The company said that, globally on Spotify, Australian artists were discovered by first-time listeners more than 2.7 billion times last year, and more than 4,000 local artists were added to its editorial playlists.

It added that last year, royalties generated by Australian artists from Spotify reached nearly A$275 million, up almost 10% since 2022. Approximately half of these royalties, it claimed, were generated by independent artists.

“Today on Spotify, listeners are discovering more music than ever before — and Australian artists are right up there on the global stage. Make no mistake, Australia is a music export powerhouse,” said Spotify Australia Managing Director Mikaela Lancaster.