The Israeli music industry is readying for the arrival of Spotify. According to reports in various media in recent months, the music streaming giant plans to start operating its service in Israel this month. The service is the most popular of its kind in the world, thanks to the advanced algorithm behind it that offers subscribers music that matches their preferences. Competing applications Apple Music, Deezer and Tidal already operate in Israel, but, globally, Spotify has more users than those three put together. Its advent in Israel is expected to affect the local music market significantly.
The reports began when in September 2017 an advertisement for an Israeli music editor appeared on Spotify's website. The job location was Berlin, but it was clear from the ad that the job was aimed at the Israeli market. Despite the reports, Spotify has flatly denied any intention of entering the Israeli market. A spokesperson for Spotify in Berlin told "Globes" this week: "We're aware of the coverage of the matter. Spotify is available in 61 markets, but not in Israel. We know how excited Israeli music fans are, and Spotify wants to be available in every country, but we have no immediate plans to launch a service in the Israeli market."
This denial comes against a background of negotiations that have been taking place over the past two years between Spotify and Israeli composers, authors and performers rights organization ACUM. According to sources familiar with the matter, the two sides disagreed over the level of royalties payable in Israel: ACUM generally charges a royalty of 12.5%, but Apple Music pays it just 10%, and Spotify sought to pay a reduced royalty rate as well. Reports were recently leaked of difficulties in the negotiations, which seems to have been resolved, although it is still not clear how. Unlike Spotify, ACUM does not deny the existence of the negotiations, but refuses to respond officially concerning the conclusion of the process, which indicates that it has not reached fruition.
"A possible explanation of Spotify's denial is that it is an attempt to create a bargaining card in its talks with ACUM," a prominent source in the Israeli music industry told "Globes". He said that Spotify did not want to announce officially that it would come to Israel, in order to keep up the threat against ACUM that it might not. "It is in ACUM's interests that Spotify should enter the Israeli market, because that will increase its royalty income. Like any other service, Spotify also has an interest in coming to Israel, especially when Apple is here. But if it is announced that they are coming to Israel, who will take them seriously if they threaten not to?"
The battle over royalties
Spotify's caution over royalty rates is not surprising, in the light of two factors: the prospectus that the company published yesterday for a New York flotation; and the expected rise in the royalty rate it will have to pay in the US.
According to the prospectus, the company's turnover has grown from year to year, but its net loss has grown faster. As a proportion of revenue, the net loss has grown 2.4 times in two years. In 2015, revenue totaled €2 billion, and the net loss was €320 million. In 2016, revenue grew to €3 billion, but the net loss grew to €540 million. And last year? Record revenue of €4.1 billion, but a net loss of €1.2 billion.
It was also reported that, since its launch, Spotify has paid royalties totaling more than €8.2 billion. The royalty expense was 27% higher last year than in 2016, but the level of royalties received by artists was lower. Over the years, there have been many complaints against the platform of harm to artists' income, and it has been sued several times for failing to pay royalties. In January, music company Wixen sued Spotify for $1.6 billion for unlicensed use of songs. In May 2017, the company had to pay over $40 million to settle a claim and compensate musicians who did not receive royalties.
Added to this is a change in the law governing royalties in the US. In January 2017, the US Copyright Royalty Board decided to raise royalty rates from the current level of 10.5% of revenue to 15.1% in 2022. Against this background, it is presumably very important to Spotify to conclude all the details of the royalties it will pay in Israel, and of course to ensure that they will be as low as possible, and not deepen its losses in any way.
May Israelis access Spotify services via a VPN that enables them to open an account in the US. The monthly price of an unlimited, advertisement-free account is $5 for a student, $10 regular, and $15 for a family package. These prices will probably rise to cover the rise in royalties in the US, which may well also be reflected in Spotify's initial pricing in Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on March 1, 2018
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